Class 10 - Choice of financing and relations

Question 1

what are the issues with an ipo

Answer 1

Valuation
Timing

pricing of the ipo, at what price are we gonna price the shares
at what time is the best time to go public. bear market? bull market? is the company ready to sollicit investors?

when u bring a company to market, you establish a liquid market for the shares.

valuation : a quesiton of liquidity if the company is private, the price will not be the same as if it was public

Question 2

what are the 3 outs

Answer 2

Initial Public Offering
Sale to another firm (M&A)
Distribution to investors : when things dont go the way they should, the investment were not successful. u distribute the shares in the investors in the fund
…
Liquidation
« Living Dead » companies that stay in the portfolio to avoid doing a write off

living dead : compagnies que les vc gardent en vie pour pas avoir a faire ed write off

Question 3

explain why the stock market suits some firms better

Answer 3

not all companies belong in the stock market, there are some companies that are better being private

theres an agency problem between the mngt of public companies and the little invesotrs. some companies are best staying private because the managers can do what they want since the investors have litle say, so those companies are better being taken private

we have a tendency to think that all compagnies should seek to go public and thats its the better out but some compagnies are better off begin privatized instead of being listed.

when a comapny is listed on the market and does not have a majority holder, the management can do what it wants so theres an agency problem

the shareholders will have little say in the management of the firm and the board holders so it allows management to be doing whatever they want and not ateaining the max value. in that situation, its better for them to be privatized.

if you need the markets and need to raise capital, you want to be performing the best in order to attract investors

but if you dont need to raise capital and you have a lot of internal cashflows, you may not maximise the value of the firm.

not suitable for companies taht do not need the market tu function

to go to market, you want to maximise the issue price and you want to attract investor so you make sure that you are performing at your very best in order to raise capital
if you dont need to raise capital, you can let go of your discipline
this happens for companies that grow internally and have cash on hand. those companies have a tendency to invest in bad projects or do empire building and over pay for company they purchase. on those instences, its better to take them private

Question 4

The stock market allows to share the risk and diversify

Answer 4

allows the company to finance themselves easily

the public corporatation is a good evention because it allows the company to finance themselves to finance easily

Question 5

The stock market offers capital at a good price : chargent pas cher

Answer 5

vc fund charge much higher costs ,
compared to VC, its a lot more cheap

lowers cost of cpaital because the stock price becomes more liquid
and its fairly accessible.
once your a well performing compagny, if the markets are good,you can easily raise new capital.

Question 6

The stock market is a valid option for growing companies

Answer 6

who need to finance growth with external cash flows and raise equity capital or debt capital o finance its growth

CGI would not hve been able to finance its growth without the capital market

problem of governance. if you have a dispersed public ownership and the managers have not money on the line, their can have problems

if you dont have a contorling shareholder and managers that dont have a lot of equity holdings, theres governacne problems. the board can be influenced bh the management

if you NEED the capital market to raise capital you will self disciplined but its not always the case

Question 7

The technology sector (IT, biotech) lends itself well to the stock market

Answer 7

grow fast
two main industry that are of interest for vc investors and they are good for public markets
have a lot of projects

companies that do not belong to the stock market wil have a lbo and impose a discipline

many companies are better off being private

the fact that the market is at high prices regle le probleme que des compagnies sont sous évaluée

Question 8

Market dynamics and vc motivation

Answer 8

best price to get the highest price for the company pcq liquidity and diversification

liquidity and dviersification that give low return expectations to investors donc ca te coute pas cher te financer

vc funds identify young companies, bring them up to a stage were they can have a ipo and attract buyers that want the normal return
goes dun financement a 75% a un marché a 10% de couts de financement : en soit ca crée de la valeur

dans un bear market les new issues vont down, sur le primary market (new issue market) nothing is happening during a crisis

in a bull market, you can bring companies public

new issue market theres nothing that happens when theres a crisis

question de timing, stock market is cyclical so tu doit bring public au bon moment. les vc prédisent pas mais on une vue retrospective »ca a uagmenté de 20% cette année, go on va publique»

state of the market is imoprtant

$ IPO>$ M&A
In a good stock market, the valuation of the company is often higher than the price paid in a private sale
usually the price paid on the market is hgher with a ipo than a ma

Question 9

what is the timing

Answer 9

stock markets are cyclical
VCs know how to recognize a good market…
… but they cannot predict the market! but they know when its good and if its good to bring public

obviously, no, they dont know if its at the top but they know if in general its good

les vc peuvent vendre leur shareholding quand ils veulent! donc sont pas obligé de vendre durant le ipo, ils peuent vendre quand cest opportun pour eux

VCs are influenced by the stock market : they want to know what sells, what is interesting and make investments on that basis

if the market is good they will make investments more risky

Question 10

When are VCs selling?

Answer 10

At the IPO
Preferably …
In the secondary market, once the stock price reaches its “equilibrium level”

they dont sell necessarily at the ipo

by design, underwriters will bring the company at a discount so that it attracts investors. you never try to bring the company at its full market value pcq tu veux quils apprenennt sur lentreprise donc va pricer un discount

hence vc will not sell at the issue, they will wait for the stock to pop up pcq ils savent que les ib price a un prix plus faible pr que les gens lachetent

les vc gardent vrm le amkret en tete pcq ils peuvent get out a ce moment la donc ca a un impact pur eux!

the stock market anticipates the value of compagnies in 5 years time, the prices are based on forcasted price

Question 11

what do the stock market favor

Answer 11

Companies that dominate their market … or that create a new market

will favor some companies over others
favorie companies are the ones that dominate their market, the ones that have a good position in their market

the better candidates are the one that dominates their makret. the one that are very competitive.

Companies that have an undeniable competitive advantage

Companies that demonstrate an ability to generate profits in the short-term
can you generate profit in the short term (time to market)
if a company cna demonstrate its ability to bring a profitable busines,s they will want to demonstrate it in the short term. its hard to say «we will be profitable eventually» you hae to show it in the short term

Companies with strong growth potential …
… and who can finance this growth from their own internal cash flow
especially if they can finance internally

high growth and internal financing : receipe for value creation

Question 12

success factors of listed companies

Answer 12

Success factors

• Growth potential and high return on capital
• Decisive influence on its market
• Multitude of clients
• Strongly motivated management team

they are not continuallly reacting to competitors, they are not at the mercy of clients of competitive so you have many clients and decisve influence on the market

Question 13

vc and stock market

Answer 13

The presence of VC promotes (facilitates) access to the capital market

the better way to access the market if to go through a vc fund because the presence of the vc facilitages because they impose discipline and have exposure. they will meet the expectations of the investors in the stock market avnd vc will impose the discipline so they will be attractive

presence of vc facilitates the access to makret pcq vont deja etre discipliné et ca a une bonne perception! post-ipo performance

Question 14

vc and firm performance

Answer 14

vcs have an impact with the post ipo performance
larger vc fund have an impact because they impose discipline

corrélation entre la post performance et la comapgnie qui a bring public
vc fund qui sont performant on un impact sur la perf des netepirses apres

The interests of the partners
(VC and entrepreneurs) diverge
the founders and the vcs have conflicted interests

when they reach market, vc need to let go in order to attract public market shareholders. sinon les petits ivnestisseurs vont etre reticents

public shareholders are gonna be reluctant if theres shareholders treated differently than they are. they will clean the ablance sheet and have only un type de shareholder

Question 15

benefit of ipo for vc

Answer 15

Bringing a company on the stock market (IPO) establishes the notoriety of the VC

 « Grandstanding »

demonstration of success, if vc want to raise funds they have to show success

best way to prove that you are able to realize the value of your investments is through an ipo

Question 16

benefit of ipo for the founders

Answer 16

The managers of the firm free themselves from the “grip” of the VC

when they go public the managers free themselves. they have to deal with public investors mais els vc sont pu la.
public investors are generally passive
that can be a problem tho if the managers are not focused on creating value

much less control form the vc after the ipo
public market allows flexibility : its a problem if the management is not focused on creating value!

Question 17

describe the process of an ipo

Answer 17

Process
Choice of a lead underwriter
Selection of a syndicate of dealers / underwriters
Drafting and filing of a prospectus
Marketing and pricing : provide a range of prices and pf mng will tell you if they are interested and at what price
Stock exchange listing

a company is never brought to market by only one investment bank

once the prospectus is written, you can sollicit investors. to solicit many people, you need a prospectus

once you have your book of orders, you can establish your price

si un ptf manager dit quil est interessé a acheter le stock, il va le faire

pricing and value are two different things

Question 18

advantages of ipo

Answer 18

(Typical IPO « pitch »)
Access to the capital market
Valuation of the firm
Employee incentive plan
Visibility / notoriety / respectability
Liquidity of securities / portfolio diversification

value vs pricing. the price is undervalued in order to attract the investors

Management can take advantage of stock volatility
if option plans

visibility : attracts potential buyers important for smaller companies becasue they want to attract larger companies and potential buyers

notoriety : An open society reassures customers, suppliers … regulators
public compagnies have to be transparant avec plein de requirements de gouvernance

Question 19

disadvantages of ipo

Answer 19

Governance requirements (costly ?)
Presence of independent directors on the board
Imposed organizational structure (appointment and remuneration of directors)
Holding of annual meetings

if the company is well established you wont mind having to pay for good governance practices

compagny has to publish the results and what they are doing

Disclosure obligations
Financial reporting / Press releases
Important contracts / important clients rendered  public
R&D results
Trade secret disadvantage!!

Loss
of control
Less managerial flexibility
Subject to public scrutiny : out in the open
Subject to the vagaries of the stock market, if the stock market is good, youll do good (or better). if you need to raise stocks during bad market conditions, not good for you
Subject to unsolicited takeoversif you dont have a controlling shareholder, may be the proie a un unsolicited takeover

generally youre transported by the stock makret, if the stock market is good, you will probably do good

Question 20

choice of underwriter

Answer 20

you want a well known underwriter, you want a big reach in the market. you want your dealer to reach a lot of investors, you want the better known lead underwriter

Key factors
Notoriety of the lead underwriter
Better access to capital markets
Better access to M&A market

key factor : access to the market and m n a

Research analyst reputation

Question 21

selection of stock market

Answer 21

Criteria
Maximum visibility
Maximum liquidity
Maximum value

All North American companies want to be listed on the NYSE or Nasdaq!
select the nmakret where youre gonna attain the liquidut, value and visibility.

A “local” market can be more favorable
Better visibility
Familiarity of “local” investors

investors are more familiar with companies that are around them, vc firms have a tendency to invest in companies close to them
explains why a lot of companies in sillicon valley pcq bc de vc funds la bas
par contre pour les marchés publics ca sapplique moins
vc fund can invest in compagnies that are near them pcq tu dois les visiter donc cest plus facile

Constraints
High registration requirements (share price, market capitalization, profitability)
(very) High competition to attract the attention of investors

difficile de te lister sur certains marché pcq tu dois avoir une market cap élevée
bcp de competition

NYSE is the hardest market to list your stock on

Question 22

pricing of an ipo

Answer 22

Price ≠ value
Lead underwriter can be selected based on  preliminary “pricing” indications
Pricing is (most often) based on comparables

price is different from the value. tu mets le prix basé sur une certaine valeur mais le prix est déterminé dun point de bue tactique
in an ipo, you leave money on the table. you price it at a discount pour attirer les investisseurs which is called the ipo discount

les founders veulent le prix le plus élevé mais dans la mesure de ce qui va attirer les gens!

youre gonna go with the underwriter that can give you the highest price for you stock (price is based on comparables)

Valuation methods most often used
Comparables
In particular: P/E

vc et ib trouent la valeur avec les comparables pcq vc et ib sont complémentaires.

they both price the stock on the same basis

« Companies are bought, not sold » : the lead underwriter is not paid for selling, they give you access to the investors and then the investors will chose to invest or not
its a question of access mais vont pas te convaincre a lacheter. its not sold pcq les ib essaie pas de vendre, ils font juste mettre lacces
investors make up their mind on their own

lead underwriter make sure that you have a competitive market, mais vont pas tordre le bras a personne pour quils lachetent. thats why we say its bought and not sold

Demand determines price
largest influence on the pricing.
il va decider quel prix il veut acheter et il sera un influenceur

will have the largest influence on the pricing of the issue. invesotr that is really interested in buying the stock and will decide for himself what price he is willing to pay

Question 23

ipo discount

Answer 23

« IPO Discount »
A liquid market is established …
… then VCs liquidate

ipo discount when you price an issue. you dont want the stock to list and for it to trade at a lower price thats why you always price it at a discount (15% generalement)

ex : tu issues a 20$, il trade a 36 a la fin de la journée
discount 16-36