The Impact of Initial Public Offering (Ipo) on the Financial Performance of Algerian Companies: Case Study – Biopharm

The fundamental research questions are as follows:

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  What is the impact of the IPO on the turnover evolution?

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  What is the impact of the IPO on the Return on Assets (ROA)?

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  What is the impact of the IPO on the Return on Equity (ROE)?

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  What is the impact of the IPO on the debt ratio?

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  What is the impact of the IPO on the cost of debt?

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  What is the impact of the IPO on the dividend payout ratio?

To answer these research questions, we will test the following hypotheses:

• H1: The IPO leads to an increase in the turnover evolution.

• H2: The IPO has a positive impact on the Return on Assets (ROA).

• H3: The IPO has a positive impact on the Return on Equity (ROE).

• H4: The IPO contributes to a reduction in the debt ratio.

• H5: The IPO helps reduce the cost of debt.

• H6: The IPO supports a better dividend distribution policy.

This study aims to analyze the impact of the IPO on the financial performance of the company BIOPHARM, through a quantitative approach, using financial analysis tools to compare indicators before and after the IPO.

According to Olivier Picon (2000), “ The stock market is a place of exchange. There are two types of stock exchange: the labor exchange and the commodities and raw materials exchange, but the term ‘stock exchange ’ designates the place where exchanges and negotiations of securities take place. In an abstract definition, stock exchange means: the market for these securities irrespective of any particular location ”.

The stock exchange refers to the market for issuing and trading securities. As a part of the capital market, it provides companies with a mechanism to access savings by facilitating the interaction between economic agents with surplus funds and those in need of financing. In doing so, the stock exchange contributes to the economic development (Labed, 2022).

The primary market: includes all public offerings for savings, the issuance of financial instruments for distribution to a wide range of investors. Its role is to finance investment: to raise funds, the issuer sells a business project on the market, offering investors a share in the company’s anticipated future cash flows (Fleuriet & Simon, 2003).

The secondary market or stock market: the secondary market is a resale and trading market that organizes transactions involving securities that have already been created and placed via the primary market (Elaarem & Halima, 2016).

Conceptually, the primary market differs from the secondary market. The former is the market for issuing new securities, while the latter is the market for trading securities that have already been issued. In other words, the primary market is the ‘new’ market and the secondary market is the ‘second-hand’ market (Fleuriet & Simon, 2003).

Initial Public Offerings (IPO) is considered as an important perspective for any company, as it helps it to raise its capital and attracts much attention from investors, both existing and potential (Khadim & Babar, 2021). There are many reasons for listing a company.

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  The widening of share ownership is one of the major contributions of an initial public offering (IPO). It allows institutional investors to enter the company’s capital with an investment-oriented approach and the potential to provide valuable financial support (Beztouh & Boulahouat, 2023). As a result, the company shifts from debt-based and/or selffinancing to equity-based financing, which may lead to a reduction in its debt and financing costs (Lalali, 2020). This implies a strengthening of equity capital, which often results in increased borrowing capacity and a greater ability to negotiate new financing at lower costs (Mahieux, 2016; Fan, 2019; Fadil, 2016).

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  An Initial Public Offering (IPO) requires a minimum level of reliability and transparency in the company’s financial statements, as well as broader efforts in financial communication aimed at current or potential external investors. This leads to the implementation of a modern corporate governance system, involving internal control mechanisms and the professionalization of the company’s administrative and management bodies.

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  An Initial Public Offering (IPO) is often a key first step in an external growth strategy. By increasing their capital during this operation, companies have the financial resources they need to acquire existing entities. Furthermore, the shares of a listed company constitute a tradable currency, enabling acquisitions to be made, in whole or in part, through an exchange of shares. This approach enables the company to avoid excessive indebtedness or drawing on its cash reserves (Ravaz, 2003).

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  The Initial Public Offering (IPO) helps to enhance a company’s reputation and strengthening its credibility with its partners on the national and international levels. It can also enhance company’s credibility and recognition among customers, suppliers, and employees (Canina & Gibson, 2003).

Certainly, an Initial Public Offering (IPO) offers many advantages, but going public can also involve several unintended costs for the company, such as:

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  An IPO imposes a transparency requirement on companies, particularly through the regular publication of their financial statements. While this strengthens investor confidence, it also exposes the company to the risk of losing confidentiality, as competitors may gain access to sensitive information that could weaken its competitive position.

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  An Initial Public Offering (IPO) represents a significant workload for all parties involved in the operation, including financial intermediaries, auditors, regulatory authorities, communication advisors, and legal advisors. The company itself must mobilize not only its executives but also certain employees and shareholders (Ravaz, 2003).

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  The undervaluation of securities at the time of listing refers to the gap between the offer price set by the company and what the market would consider a fair, equilibrium price.

Many studies have shown that companies often underestimate the issue price of their securities. This usually leads to a positive difference between the offer price and the stock’s initial trading price.

Researchers like Aggrawal & Rivoli (1990) examined the long-term performance of newly listed securities and found persistent underperformance over time.

As Ritter points out, “the issue price may not be as low as we think; rather, it’s the initial trading price that tends to be overestimated” (Ritter, 1991).

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  In addition to the listing fees charged by market institutions (COSOB, SGBV, IOB, Algérie Clearing), an IPO also incurs a number of additional costs, including:

  • Fees for the second statutory auditor.

  • Costs related to financial reporting and the publication of financial information,

  • Costs of convening shareholders’ general meetings.

  • Placement commissions paid to the lead financial intermediary and the banks forming the underwriting syndicate.

Financial performance analysis is the technique of evaluating the financial health of a company by establishing proper relationships between the items of financial statements. The financial information of a company is primarily provided in its financial statements i.e., Profit and Loss Account and Balance Sheets (Konwar, 2023).

In other words, it is the process of identifying the financial strengths and weaknesses of the firm by establishing a proper connection between recorded items and the profit and loss account. It also helps with short-term and long-term forecasting, and growth is identified with the assistance of monetary performance analysis (Srinivasan, Rathika & Nivedha, 2020).

Turnover analysis – Turnover is the total of all sales made by the company over a specific period, generally the calendar year. This indicator is very important as it reflects customer satisfaction. Any increase in turnover indicates higher customer satisfaction, a growing market share for the company, greater wealth creation, and economic development.

Economic return (return on assets ROA) – The ROA measures the company’s ability to generate profits from its sales or available assets (Mesrati, 2021). When a company’s assets are used effectively, its profit margin increases. A higher return on assets ratio is a positive sign, as it indicates that the company is generating profits efficiently. This can encourage investors to engage in stock transactions, as they will perceive the company’s performance as stronger and its level of uncertainty as lower (Ramadhan, Ediano & Leon, 2023) ROA can be calculated as follows: 1ROA= Net Income Total Assets{\rm{ROA}} = {{{\rm{ Net Income }}} \over {{\rm{ Total Assets }}}}

Financial return (Return on Equity ROE) – The ROE measures the common shareholders’ return on investment in the company. The higher this return, the better off is the owners (Al-Nsour, 2019). The ROE can be calculated as follows: 2ROE= Net Income Sharholder’sEquity{\rm{ROE}} = {{{\rm{ Net Income }}} \over {{\rm{Sharholder's}}\;{\rm{Equity}}}}

Analysis of the Debt Ratio – The debt ratio represents the share of assets financed by debt. This ratio may be high if the company finances a significant portion of its assets through borrowing. In such a case, the company is considered not financially independent, as it is over-indebted. Conversely, if the ratio is low, the company is considered to have low debt and therefore to be more financially independent. This cost of debt is calculated as follows: 3Debt Ratio = Bank Debt Total Balance Sheet{\rm{Debt Ratio }} = {{{\rm{ Bank Debt }}} \over {{\rm{ Total Balance Sheet }}}}

Analysis of the Cost of Debt – The cost of debt is mainly composed of the borrowing interest rates. Going public allows a company to diversify its sources of financing and strengthen the upper structure of its balance sheet. These two factors help reduce the borrowing rates of various loans, which in turn lowers the overall average cost of debt. This cost of debt is calculated as follows: 4Cost of debt = Financial expenses Total debt{\rm{Cost of debt }} = {{{\rm{ Financial expenses }}} \over {{\rm{ Total debt }}}}

Analysis of the dividend payout ratio (DPR) – The dividend payout ratio is the proportion of earnings made available to the company’s shareholders. It is considered an outflow of resources for the company. This ratio helps determine whether a company is “generous” or not. It consists of comparing the amount of dividends distributed to the company’s net profit (Elaarem & Halima, 2016). 5Payout Ratio = Dividends Net Profit{\rm{Payout Ratio }} = {{{\rm{ Dividends }}} \over {{\rm{ Net Profit }}}}

Biopharm was founded in 1992 by its visionary founder, Abdelmadjid KERRAR, who took on the ambitious challenge of investing in Algeria’s pharmaceutical industry. With determination and perseverance, he embarked on a remarkable journey that has driven the company’s growth. Through strategic investments, Biopharm laboratories have become one of the leading players in the Algerian pharmaceutical sector.

Biopharm SPA present in different trades of the pharmaceutical industry, opens its capital to public saving by offering for sale 5 104 375 shares, representing 20% of its capital, at a price of 1 225 dinars per share. Biopharm SPA aims through this listing operation to continue the restructuring and diversification of company shareholding’s by associating new domestic investors (general public, institutional investors, employees…) and allowing it to ensure the sustainability of the company and facilitate its development.

Based on the following hypotheses, we complete the summary table that will show the impact of listing for Biopharm company:

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  If the Turnover variation increases, we will say that there is a positive impact.

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  If the ROA increases, we will say that there is a positive impact.

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  If the ROE increases, we will say that there is a positive impact.

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  If the Debt Ratio increases, we will say that there is a positive impact

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  If the Cost of debt increases, we will say that there is a negative impact.

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  If the Dividend payout ratio increases, we will say that there is a negative impact.

The Initial Public Offering (IPO) had an overall negative impact on Biopharm. Most performance indicators (turnover, ROE, ROA, and DPR) declined. It also led to an increase in debt and its cost, which represents financial constraints.