ECM Flashcards
What does ECM stand for?
Equity Capital Markets
What doe IPO stand for?
Initial Public Offering
What does the IPO enable?
It enables a company’s shares to be listed on a stock market.
What is a private company?
Its a company whose shares are only available to investors involved from the outset.
What is a Public company?
Its a company whose shares can be purchased by the general public in listed stock exchanges.
What are the ECM responsibilities when helping a company undergo an IPO?
Guiding them the entire process:
Preparing for the IPO
Due diligence to meet regulatory standards.
Conducting market research
Making sure Investors know about the companies IPO
Determining an offering share price
The distribution of shares
How does the ECM department do to complete due diligence?
This process involves examining the company’s financial statements, business model, and overall corporate governance
Why is the ECM determining the share price so important?
This is a critical task as it directly affects the amount of capital the company raises and the investors’ perception of the offering’s value
Why is so important that ECM conduct market research before the IPO?
To help clients make informed decisions about when to go public and how to structure their offerings
For example:
What are the important factors when ECM department conduct market research?
They look at market conditions, investor sentiment, and
industry trends
How does the ECM department complete their syndication duties?
They organize roadshows & presentations investors and make matches with companies
They manage the book building process
They follow legal and compliance teams closely doublechecking everything is aligned.
They also prepare the necessary documentation for regulatory filings.
What are the important factors to chose your bank for the IPO?
- Relationship quality
- Geographical presence
- Industry knowledge
- Subscription commitment
- IPO price
How does the ECM department manage the book building process? and what are their purpose?
It involves compiling and managing the list of investors interested in purchasing shares in the offering.
This process helps determine the demand for the shares
What are the ECM department duties when underwriting the IPO?
ECM teams work closely with the underwriting department to secure commitments from underwriters to purchase shares that aren’t immediately sold to investors.
What are the effects of underwriting the IPO?
This underwriting commitment provides a level of assurance to the company going public.
What are the different stages of the IPO?
Agreement
Audit
Preparation
Filing
Quiet period
What happens on the “Agreement” stage of an IPO?
A company decides to go public and agrees terms with one or more investment banks to “lead” the deal.
A group of other banks to support the deal by syndicating to their own network of investors.
We call these banks bookrunners.
- The banks also decide on which exchange(s) to register
What happens on the “Audit” stage of an IPO?
To ensure that the company is legitimate, its financial history is checked by an auditing firm.
What happens on the “Preparation” stage of an IPO?
Valuation models are created by bookrunners to support the idea that the company should be valued in a range between $X and $Y when listed. Banks also contact their investor base to gauge the general appetite to participate in an IPO of the company
What happens on the “Filing” stage of an IPO?
If the market seems ready for listing, we file our intention to list the company with the AMF or the SEC in the USA.
What happens on the “Quiet period” stage of an IPO?
After filing, the company’s directors can say nothing publicly about the company’s status, except through filings with the authority
What is the float of the company?
The number of shares on a
stock exchange to raise capital
What are the factors to take into consideration when deciding the float of an IPO? (8)
- The company’s capital needs
- The company’s valuation
- The offering price per share
- The level of demand from investors
- Dilution Concerns
- Market Conditions
- Underwriter Recommendations
- Legal and Regulatory Requirements
What are the advantages of an IPO?
Can raise a lot of capital
Being listed brings visibility & prestige.
It increases market liquidity.
For investors is a good way to get ownership rights.
A more fair share price
Transparency for investors.
What are the disadvantages of an IPO?
Listed companies are subject to government regulations: like financial disclosures.
Financial disclosures can easily be obtained by competitors.
IPOs can be costly, and if the market rejects the issue price the company will incur even more costs.
Who is the Lead underwriter or Lead manager on an IPO?
The investment bank
What are the means through which the bank can earn money on an IPO?
Underwriting fees
Issue price differential
Placement commission
Additional services
How do banks conducting IPOs earn money with Underwriting fees ?
The investment bank charges the company an underwriting fee, generally based on a percentage of the total value of the shares issued in the IPO.
These fees can be substantial, and often represent a significant proportion of the bank’s revenues.
How do banks conducting IPOs earn money with Issue price differential ?
The bank buys the company’s shares before the IPO at an agreed price, called the issue price.
It then resells these shares to investors during the IPO at a potentially higher price, generally set by the market.
How do banks conducting IPOs earn money with Placement commissions ?
The bank may also receive a placement commission on shares sold to investors during the IPO.
This commission is generally a percentage of the total amount of shares sold.
How do banks conducting IPOs earn money with Additional services ?
In addition to direct IPO revenues, the bank may offer additional services, such as strategic advice, research services, mergers and acquisitions, bond issues, etc.
Recent IPOs: Facebook (2012)
It offered 421.2 million shares to the public at an initial offering price of $38 per share.
It raised approximately $16 billion for the company, making it one of the biggest at the time.
Recent IPOs: Alibaba Group (2014)
The company initially planned to offer 123 million shares, but due to strong demand, it increased the offering to 320.1 million shares.
The initial offering price was $68 per share, and the IPO raised over $25 billion
Recent IPOs: Snowflake Inc. (2020)
Snowflake, a cloud data warehousing company, initially planned to offer 28 million shares at a price range of $75 to $85 per share.
Due to strong demand, the offering was increased to 31 million shares, and the IPO raised over $3 billion
Recent IPOs: Aramco (2019)
Aramco’s IPO began with a listing on the Saudi Arabian stock exchange. This was a domestic listing and allowed Saudi investors to purchase shares of the company.
They wanted to list it on the US or another strong market, but the market conditions were not favourable so it has been postponed until further notice.
When did Facebook do their IPO?
2012
When did Alibaba Group do their IPO?
2014
When did Aramco do their IPO?
2019
When did Snowflake do their IPO?
2020
When did Google do their IPO?
2004
When did WeWork do their IPO?
2019
