Any company that decides to go into the stock exchange must exude extra caution before making the bold step to go public. Initial public Offer (IPO) of a company mostly can tell how that company is going to do in the stock markets depending on the number of subscriptions received. It is worthy to note that stock prices keep fluctuating and that the price of a company’s share represents the financial position of the company. Companies with a higher share price in the stock exchange are taken by the public and other stake holders to be doing well.
In addition to that, the company’s affairs become public as they are now prone to analyst reports and public shareholders criticism. In this study, Banco de Compartamos, a micro finance bank offers its shares in the Mexico Stock Exchange which arouses a lot of controversies among major shareholders. Can Compartamos still perform their duties to the poor? Is it possible for them to combine these two without deviating from the purpose for which the bank was originally established? Can they handle the pressures presenting themselves to it as a public company?
This is a thorough review and analysis of Compartamos’ decision to make the bank a public entity and how it has affected their performance. Banco Compartamos IPO Going public for a micro finance company and in particular Compartamos may prove to be a good thing as well as a bad thing. In the eyes of the public, it may seem like Compartamos is getting too business oriented and that it may lose its focus on helping the low income group that it has been serving. Going public is also a risky endevour because it exposes the business to a lot of external forces.
The bank’s performance must now be published and analyst’s comments go far into exposing the company’s weak points which the competitors may take advantage of. Every quarter shareholders, analysts, fund managers and competitors will be waiting to see the financial outcome of the period. This means that the company must work extra hard to maintain positive image or otherwise cause their own downfall. Another note is that Compartamos was doing quite well financially with return on equity (ROE) increasing from 47. 7% to 56. 1% between 2004 and 2006 as compared to others who were averaging at 21.
2% in 2006. In fact, Daniel confirmed that from the operational point of view there was no need to sell the shares. They were only doing it as a secondary offering. Compartamos IPO on the other hand proves to be a good venture from the look of its performance in the stock exchange. As a matter of fact, interest by investors was so high that there had to be several revisions of the share price up to P$40 per share. Compartamos market capitalization was $1. 56 billion dollars which is so much to go for hence my agreement that it was the right choice for them to go public.
Most impressive was the high interest investors had in the bank which saw them register thirteen times over subscription. From my point of view, a private sale would have been even worse in terms of catering to the customers’ needs. This is because the buyers may not have the welfare of the low income group at heart which was the largest target for the bank. The choice was also better than taking debts being offered to them by non-financial debtor which were being offered at the investor’s rates.
The other thing is that activities of the bank are not going to change as it will continue providing services to the Popular Financial Sector (PFS) which was the main purpose of its introduction back in 1990. Serving the poor and the capital markets demand. It seems like Banco Compartamos has deviated from its objective of serving the poor by getting into the stock exchange. This is according to several stakeholders and analysts such as Richardson of World Council of Credit unions and Chuck Waterfield who thinks the decision is untimely.
The question however lies on Compartamos. Can they manage both serving the poor and meeting the capital market demands? So far, Compartamos has been doing very well in the stock market with its the book value of shares rising to $126 million in 2006 from $6 million at the time of the IPO and an internal rate of return of over 100% in only eight years! Most analysts recommended it because of its prospects for growth and high profitability. The co-CEO of Compartamos seems concerned about the clients.
They discuss how they can offer better services and hence improve their lives. Apart from GDI (Generadora de Ingresos) or ‘the income generator loan’, they are considering coming up with new products for the people. This means that Compartamos is still committed in its duties improve the lives of the poor. According to ACCION international, Compartamos IPO sent a message that service to the poor can go hand in hand with profits. “The two Carlos” Strategic options for the future The future of Compartamos looks bright but challenges are never ending in the world of business.
The strategies put forth by the “two Carlos” will have to be met by the end of the year. Client base must be increased to one million, they have to preserve the social mission and at the same time cope with the daily pressures of becoming a public company. The Charlies surely have a great role ahead of them. In order to attain new markets to increase their client base and defend their leading position in the sector coordinated planning is essential. First of all they should lay a good strategy and make plans on how they are going to accomplish their goals.
I particularly like that they have set a time limit. This acts as a goal by itself and a motivating factor. With the high rise in competition due to many entrants in the micro finance sector, their strategy should include expanding by coming up with new products that are unique to compliment GDI. A new product will always appeal to customers especially if it comes with an attractive package. Maybe they should consider lowering their interest rates so as to attract new clients and keep the current ones.
This would also mean they are helping the poor socially because now they can take cheaper loans hence develop themselves. Compartamos has no market penetration in Mexico as much as it has wide branch coverage. New products will definitely help it in overcoming this challenge. As long as you are a public company, there will always be politics and attacks mostly aimed at breaking the company by presenting a bad name about it. The Charlies know that their bank has not deviated from their original mission. What remains as the challenge is proving it to the public.
This can be done by constantly reminding people that they are still committed to serving them while at the same time showing it through action. The best thing for the Charlies is to increase their efforts of serving the poor so that the bad image portrayed by the attackers can be dissolved in the face of the good work that they are doing. It’s about playing with the psychology of the shareholders and its clients to avoid the negative effect that would otherwise result. Before deciding to set up new branches, it should consider the viability of the area and whether the market is promising.
Areas outside the country especially if micro finance is not well established in the market are a good opportunity though care should be taken to properly establish expected risks and returns. This can be done through conducting researches before investing there. Mergers and acquisitions should also be performed with extra caution to maintain the quality of services offered. The advantage of mergers is that they add to a company’s competitiveness. If not well calculated though it may lead to the downfall of an otherwise good businesses.
The future of micro finance industry. The IPO will undoubtedly attract more players into the micro finance sector and probably other market-led approaches to poverty. For now, Compartamos remains the lead among them all. There is a possibility of new models coming up that may pose a challenge to Compartamos. Compartamos should be the future of the micro finance sector. This is because most junior micro finance organizations will want to emulate its success and in doing so they may consider copying some of its policies.
In the past, most micro finance organizations in Mexico have only concentrated on giving soft loans to regular customers as their only business. Compartamos is more advanced giving insurance policies and also engaging in normal bank business activities. The structure of the market however is that it is always dynamic and one can never tell what tomorrow may bring. Mergers may be forged leading to bigger organizations that would overtake Compartamos. Conclusion and Recommendations Banco de Compartamos has led by example.
In the hands of Carlos Labarthe and Carlos Danel, it is bound to spring even higher in the micro finance sector after going public. During the IPO shareholders presented the organization with a cheap source of finance that is barely available to other companies of its nature therefore placing them at an absolute advantage. It becomes one of the largest companies in the Mexican Stock Exchange with over $2 billion in market capitalization. I do believe that their bold step into going public has a lot in the benefit package which if used well could see the bank grow outside its boundaries.
On the side of helping the poor, they have not failed in that area yet. As a matter of fact, it is a case of logic to see that by they use the obtained finance to expand their business activities and to offer more loans. It is like giving the financially stable a chance to be owners of the bank an in return making them bring their billions to the poor. Furthermore, if more loans are given out, development of the poor is enhanced. Now that Compartamos have entered the league of companies listed in the stock exchange, a lot is expected to change which calls for extra caution.
We have already seen them suffering their first challenge with attacks from various shareholders about their decision to enter the stock exchange. However, should their shares in the stock exchange do well; the good public image will work to ensure they always do well financially. It is worthwhile to note that the visibility of the IPO will showcase the superior financial performance of the micro finance sector. This is bound to cause an increase in competition in Mexico. Challenges are more forthcoming now but they should not treat them as problems but as stepping stones to higher grounds.
Since Compartamos is confident that it can serve both their clients and the financial sector as well, they should come up with well defined policies to make sure that they do not deviate from their course. It is quite normal for businesses to concentrate more on what is bringing in the most cash but they should always remember the sole objective for which they were set up; to help the poor grow financially. Word Count (1887) References Cuellar, R. G. & Chu, M. (2008) Banco Compartamos: Life after the IPO. Harvard: Harvard Business School
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