ECM Flashcards
What are some of the most important indices?
- DAX
- MDAX (50 biggest)
- SDAX (50 next biggest)
- TecDax (30 biggest Tech)
- EuroStoxx 50 (biggest 50 companies in Europe)
- S&P 500
- FTSE 100
Average market cap of DAX company? Which one has highest, which one lowest?
€15-30bn on average. Biggest ones are Bayer, Siemens, SAP, Deutsche Telekom, Daimler and Allianz.
Why are DAX and S&P not comparable?
DAX is performance index (assumes constant dividend reinvestment) while SNP is price index (ignores dividends)
What’s a Spin-Off and what’s the difference to an IPO?
IPO offers all public investors to invest in company. Spin-Off extracts subsidiary from holding company and becomes own entity.
When is a Spin-Off an alternative to an IPO?
- Subsidiary wants to be excluded of company, IPO or sale, however, are not possible
- Investors assume negative synergies, i.e. both companies are more valuable as separate companies
What is a dual track?
M&A and IPO process at the same time to increase chances of selling company. Either you find a buyer until preparation of IPO or you do the IPO. Very popular for PEs.
What is a triple track?
Trade Sale (M&A), IPO and Spin-Off at once. Usually when company wants to get rid off small part at all costs. Usually, the company hopes to do M&A deal or IPO and only does Spin-Off if other two are not possible.
Why don’t you always choose a dual track if it means higher chances of selling?
Pros:
- Increased transaction probability
- Usually maximizes value as competition for transaction increases
- Independent of IPO time frame
Cons:
- A lot more work
- More work for management team of company
- Demands more effort
- IPO possibly gets cancelled by Trade Sale
What’s the difference between common and preferred stock?
Common stock are last in value chain but have voting rights. Preferred stock gets paid before common stock but doesn’t have voting rights.
Which pros and cons does IPO have compared to Trade Sale?
Pros:
- Realistic alternative to sale
- Future access to market for new capital
- In good market times, IPO can raise a lot more money
- Previous owner can sell shares regularly and doesn’t have to sell everything at once
- Current owner can possibly also retain majority stake
- DD usually slightly less extensive than in M&A deal
Cons:
- Usually lower valuation than M&A deal (premium)
- Creates new recurring costs (investor relations, compliance,…)
- Success is highly dependent on market
- Not possible for every company; requires particular size
Which topics have to be covered in IPO process?
- Transaction structure (primary and secondary emission etc.)
- Capital structure
- Peer Group selection
- Joint Bookrunners selection
- Preparation of Accounting Materials
- Creation of compliance and investor relations
- Exchange selection
- Legal and IPO fleet preparation
- Approval of fleet by regulatory body
- Preparation of process documents
- Definition of investor universe
- Preparation of pre-deal investor education
A company wants to IPO or spin-off a subsidiary. Which influence does capital structure of the seller have on IPO or Spin-off?
In IPO, mother sells subsidiary and receives cash which can be useful to delever etc. but it also has less EBITDA etc. to fulfill interest payments etc.
That’s the problem with the Spin-off. Company splits spun-off company’s shares from own shares and gives them to current shareholders. It therefore loses EBITDA etc. and also doesn’t receive any cash.
A company shall go public with high leverage. Should an IPO or Spin-off be done?
A Spin-Off. IPO investors don’t want risky level of leverage. During spin-off previous shareholders just get the shares (“if they want or not”).
What’s a Flowback Risk in a Spin-Off and how would you minimize it?
A massive sell-off of stocks after a transaction. Supply of stocks increases drastically which reduces the price. Can be mitigated on supply and demand side through marketing campaign, compelling equity story, Pre Deal Investor Education (PDIE).
What is a Stock Split and why would a company do it?
Increase amount of stock by certain ratio while retaining actual total value. It is done to make it look more feasible for small investors to buy the stock.
Which titles and functions do banks have in an IPO?
Usually split into five roles:
- Global Coordinator: Usually there from the start to plan everything with the company from Equity Story to Marketing Materials, Management and Analystpresentations. Lots of Influence on IPO price, decision which investor gets what. Additionally, sell-side research of the bank prepares IPO research reports. They also do underwriting of IPO (~60-80%) and get big percentage of fees.
- Joint Bookrunner: Banks in second row. Less decisions but important roles in marketing the IPO, creation of IPO research documents for investors and taking in orders.
- Co-Leads: Support function; primarily for marketing of IPO. Often complement others by targeting investors that are not reached by Global Coordinator or Joint Bookrunner. Sometimes take on very small part of Underwriting.
- Co-Manager: rare; Co-Leads without underwriting function and without order intake; just supporting marketing; often only included to have their name on IPO prospect
- Independent Advisors: Independent Corporate Finance advice without underwriting; often first in process and helping to choose Global Coordinator; used to eliminate conflict of interest
What makes a good bank for an IPO?
- High Deal Flow, especially in ECM and more importantly IPOs in target markets
- High Deal Flow in said Industry
- Analysts in Sell-Side Research with good reputation
- Good Equity Sales Ranking
- Lots of trading activity in market
- Good analysis and knowledge on Equity Story
- Good knowledge on investor universe
- Positive but realistic view on price target
What is Free Float?
Company ownership can be separated into three categories: Institutional investors that intend to hold stock long-term, those that hold it for shorter periods and retail investors. Second and third are frequently traded and are therefore called free float (“Streubesitz”).
How is an IPO marketed?
- “Early-Look” and “Pilot-Fishing” Roadshows with investors for early feedback on company and Equity Story
- ~4 weeks before IPO there are roughly 2 weeks of PDIE (Pre-Deal Investor Education) where research analysts meet investors and present research (price target/range etc.)
- Roadshow in last 2 weeks before IPO; management of company meets banks to present company and answer investor questions
What’s the difference of an IPO or Block Trade that is “Fully Underwritten” or placed according to “Best Efforts” rules?
With “Best Effort” IBs place stock during IPO as good as possible but if there is not enough demand, it can also sell less. In a Fully Underwritten deal, all stocks are placed. If there is not enough demand, banks have to take on the rest.
