Members of First Active (formerly First National Building Society) - have been wondering whether they should borrow up to £5,000 to buy the maximum entitlement of additional shares once First Active goes on the stock market early next month. Ms S, who probably voices the concerns of many, wonders whether the recent slump in the stock market means that First Active members like herself should content themselves with the free shares - worth between £1,170 and £1,710 depending on the final flotation price - or whether it would be worthwhile to buy additional shares.
Family Money admits to a certain amount of scepticism about building society demutualisations and conversions to public companies and reckons that the long-term interests of mortgage holders in particular are better served by building societies remaining mutual societies. The sort of mortgage and deposit rates offered by EBS is one strong argument in favour of remaining mutual and providing the benefits to members rather than shareholders. That said, First Active members have voted to go public, so the deed is done.
Unlike previous flotations such as Irish Permanent and Norwich Union, where qualifying shareholders could seek to buy as many extra shares as they wanted, First Active has put a cap of £5,000 (£10,000 if you qualify for two free allocations of shares as a result of having both mortgage and savings accounts) on applications for additional shares. The recent turmoil in the stock market has had a pretty devastating effect on share prices, and particularly on the share prices of financials like AIB, Bank of Ireland, Irish Life and Irish Permanent. Given that a host of factors have driven the markets down - the economic crises in the Far East, Russia and Latin America and not least the political situation in the US - has had Wall Street quivering, it seems likely that market instability will continue for some time to come. On that basis, anybody buying First Active shares in the hope of making an instant big profit might be disappointed. These shares are more likely to be a better long-term investment than an instant windfall gain. But by going ahead with the flotation in the face of stock market weakness, First Active and its army of brokers and investment bankers are confident that the flotation will be a success. And one can be sure that the flotation will be priced to ensure that the shares rise in the first few days. The last thing that First Active wants is for the shares to flop when they begin trading on October 6th.
Whether you should borrow money to buy additional shares is a moot point. Certainly the cost of borrowing is low and is likely to be lower in the months ahead - so any money borrowed is not going to be expensive in terms of interest rates. If you can afford the extra loan repayments, then a modest investment in additional First Active shares is unlikely to be a financial disaster and could produce good medium- to long-term profits.
And as for First Active itself, the usual stock market parlance is that shares like this - and indeed most domestic banking shares - are "solid defensive investments", unlikely to suffer in the market the way that industrial shares in cyclical businesses, like Smurfit, do.
Whether they will produce instant windfalls once they begin trading will depend on a host of variables - not least the decision of US Federal Reserve chairman Alan Greenspan and his colleagues when they meet on September 29th to decide on US interest rates.
If the Fed cuts rates, and the odds are going in that direction, then the First Active flotation a week later could move towards the upper end of the 265p-380p price range rather than the lower end, as current market circumstances are indicating.
And while on the stock market, another reader has wondered whether he should be thinking long-term about the Telecom Eireann flotation next year. It will be the biggest in the history of the State and will dwarf the likes of Irish Permanent, Norwich Union and First Active. And the expectations are that there will be very heavy demand for the shares.
Telecom might have been a bit of an albatross a few years ago, but by the time the shares are floated next June, it will be in very good financial shape and will have a huge share of the Irish telecommunications market. Telecom stocks are "in" right now all over Europe, and if the situation is the same in nine months time, then the flotation should be a major success, both for the Government and the investor.
Details of the flotation are a long way off - the Government has only recently appointed its financial advisers - but the indications are that about a quarter of the company, roughly half the Government's 51 per cent stake, will be floated on the stock market. Part of this will be earmarked for Irish and international institutional investors, but a sizeable portion (possibly more than one-third) is expected to be offered openly on the market.
At this early stage, barring a total meltdown on international stock markets, it is hard to see the Telecom flotation not being an overwhelming success. Telecommunication stocks worldwide are in huge demand and Telecom Eireann shares should be no different with heavy demand from institutional investors who won't get as much as they want.
That pent-up demand is likely to result in a strong market for the shares when they begin trading. The high demand from the institutions can only be good news for private investors who buy shares in the flotation.
Another factor acting in favour of the Telecom Eireann flotation is the determination by the Government that it will be a success. As with First Active, the last thing that the Government and Telecom itself will want is for the shares to fall in the first days and weeks of trading. As a result, it is likely that they will be priced conservatively to ensure a good premium when they do appear on the market. The Telecom flotation is still a long way off, but at this stage, most stockbrokers and analysts believe that it represents a golden opportunity for the man and woman in the street to become shareholders in a public company.
