Case Study of Fashion Brand Prada

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Prada decision to officially begin floating its shares on the Hong Kong Stock exchange is a huge deal because there are many other large public luxury companies such as Richemont, LVMH and PPR and because it chose Hong Kong Stock Exchange as its favorable market to stage its IPO. Initial public offer may sound as a great idea, and quick way to raise capital and value of the company for big public companies owners but if not well planned it may blow on their faces. Initially, the company has been raising finances from bank borrowings, issuing domestic and international market bonds and bringing in new investors.
Considering that the company is a family held company, going public means the stake will be diluted. However, a company ought to take several factors into considerations. The first and the most important thing to consider is time. Timing is crucial for a successful IPO. Market conditions are crucial factors that affect IPO timing because they help in determination of IPOs amounts and variability and the number of successful offerings. IPOs should take place during active periods when there is a possibility of a strong investor interest. Many firms not only tend to go public when the market conditions are favorable, but also when their competitors. Prada timing may not have been perfect considering that the economy was recovering an earthquake. However, the successful Glencore International PLC IPO motivated them to go ahead with its plan. Although, this may seem as a bold step, it was also risky for the business to take the step.
Secondly, choice of an IPO market is crucial before a company decides to go public. Hong Kong was ideal for Prada because of its ability to attract big international companies, its close proximity to China, a key luxury goods consumer with huge number of potential investors willing to invest in luxury goods companies, and because of its less IPO market rules and regulations.
Finally, valuation is important for a company to raise the desired amount of funding. Many companies conduct timely IPOs to take advantage of share valuations. Prada set its IPO price at HK$36.50 to HK$48.00 targeting to sell approximately 423 million shares to raise 20 billion and if the demand was strong to float an additional 63 million shares. This valuation was a test by Prada to determine how much willing and able investors would pay to tap into Hong Kong, the projected world biggest IPO market. IPO is a mean of placing a price to a company and if the potential investors disagree with the valuation, the company may not be able to raise the targeted amount of capital. Valuation is a volatile process that can make or break a company’s listing because it depends on prediction of future cash flows which are difficult to predict with certainty. Prada’s valuation worked against it because they were higher for high-end retailers.
However, I feel that the company had not adequately addressed the internal company factors before deciding on going public. IPOs are expensive and the market is unforgiving. Going public requires calculated strategies. Going public is not a one person decision. It requires getting the right analysts who adequately understand the business and what the IPO is trying to achieve. It requires having the right management structure and team with experience and strong personalities and influence to win investors confidence. Failure of retail investors to meet Prada’s expectations raises a question of the effectiveness of the company’s strategies to reach out to the investors?