Introduction to ECM and IPOs

Question 1

What are the 6 reasons companies go public?

Answer 1

1. Finance Growth
2. Obtain an Acquisition Currency
3. Crystallise an Objective Valuation
4. Give Liquidity to Existing Shareholders
5. Align Management Incentives with Shareholders’ Objectives
6. Gain Visibility

Question 2

What do investors look for in an IPO?

Answer 2

1. Market Leadership
2. Strong Management
3. Solid Financial Position
4. Corporate Governance
5. High Level of Visibility and Disclosure
6. Liquidity
7. Interesting Valuation

Question 4

What are the 4 major types of investors?

Answer 4

1. Domestic Institutional
2. Foreign Institutional
3. Hedge Funds
4. Retail

Question 5

What separates Retail investors from the other 3 categories in an IPO?

Answer 5

Retail investors are unqualified investors.

Question 6

What separates Hedge Funds from othe Institutional Investors?

Answer 6

They are speculative and as such they do not care about the fundamentals of the company.

Question 7

What are the three main phases of an IPO?

Answer 7

1. Preparation (~4-5 months prior to IPO launch)
   * Selection of Advisors
   * Financials
   * Internal Readiness Assessment
   * Key issues to be addressed
   * Prospectus Drafting
2. Pre-Launce (~2-3 months prior to IPO)
   * Early Look Meetings/Deep Dives
   * Analyst Presentation and interaction with Research Analysts
   * Legal documentation and interaction with Authorities
   * Offering structure
3. Execution (1 month prior to IPO)
   * PDIE
   * Management Roadshow and Bookbuilding
   * Price Discovery

Question 8

What are the 4 frequent roles during an IPO?

Answer 8

1. Global Coordinator:
   * Oversees the entire process, from kick-off to closing. Coordinates the various workstreams
   * Often (but not always) active as bookrunner in the offering
2. Boorkunners:
   * Actively involved in the preparation of the documentation and responsible for the entire marketing effort (analyst pres, roadshow, management of the syndicate)
   * Control the order book, gather feedback from investors, give recommendations on final price, size of the offering and allocations.
   * Important for league tables
3. Co-Lead Managers:
   * Complement the research coverage and overall marketing effort in the transaction
4. Local Lead-Manager:
   * Generally one of the bookrunners with direct responsibility for the retail offering

Question 9

What is the Gross Spread in the IPO process?

Answer 9

Fees = Gross Spread = Price you sell in the market - price you buy from the bookrunner

Including greenshoe

Question 10

What are the three main types of commissions that make up the gross spread?

Answer 10

1. Selling concession (60%): Performance based on actual allocations/designations received. Or based on pre-agreed level
2. Underwriting commission (20%): Shared among banks pro-rate to underwriting commitment (most of the time IPOs are not underwritten).
3. Management Commission:
   * Shared among the banks pro-rata to underwriting commitments
   * Recent precedents have seen fees being structured with a fixed component and a vaiable component (“incentive fee”)
   * In addition to the typical breakdown of the gross spread described above, it has become market practice in large syndicates for the global coordinators to retain a fee out of the gross spread (indicatively 10%)

In the case of underwriting commitment it is in name only. The underwriting happens right before the shares are issued, so there is no risk of the IPO falling through at that point. The underwriters often take on the responsiblity of managing the market post-deal.

Question 11

What is the use of Pre-Deal Investor Educatoin (PDIE) in the IPO process?

Answer 11

1. Standard practise in European IPOs
2. Meetings between the Research Analysts of the Syndicate Banks and institutional investors
3. Supporting Materials: Research Reports drafted and published by the Research Analysts

Question 12

What is the period of the Pre-Deal Investor Education (PDIE) in the IPO process?

Answer 12

1. Official period typically alsts for 7 to 10 business days prior to determination and announcement of price range and offering size
2. Increasing flexiblity to adjust length of the PDIE post Covid-19 onset

Question 13

What are the objectives of the Pre-Deal Investor Education (PDIE) during the IPO process?

Answer 13

1. Familiarise investors with equity story
2. Preliminary demand assessment may be used to fix initial offering size
3. Investors’ views on valuation may be used to determine inital price range
4. Through coverage of target investor base
5. Identify issues to better position story during roadshow
6. Identify investors whom management should see on roadshows

Question 14

What are the factors that determing the price range in the IPO process?

Answer 14

1. Comparable companies
2. DCF Valuation
3. Market Conditions
4. Company Objectives
5. Investor Feedback

Global coordinators try to set a price range which is:
Challengin/close to fully valued at the top end
Attractive at the bottom

Question 15

What doe sprice sensitivity analysis reveal about pricing of an IPO?

Answer 15

At a certain point as the price keeps climbing the institutional investors with a hold strategy will fall out of the book. Instead what will remain are hedge funds, which are speculative and not particularly liked during and IPO as they casue the post-ipo price to fluctuate significantly. As such it is important not to get too greedy when setting shrae price.

Question 16

What are the main reasons for setting an IPO price below the maximum price in the price range?

Answer 16

1. Good quality of investors
2. Healthy after market trading
3. The orders at time of bookbuilding are non-binding: there is settlement risk

Question 17

How is the IPO Price set?

Answer 17

1. Ideal pricing is at a reasonable discount to trading value of the company.
2. Book of demand is the most important tool in discussing pricing.
3. Limits from anchor orders and from investors that have been heavily involved in the process are key.
4. Often a lon adn difficult discussion with the Company and its shareholders.
   Bottom Line: Pricin should achieve the Company’s objectives while ensuring a stable aftermarket.

Question 18

What is the name of the discount applie to shares issued during an IPO?

Answer 18

The shares are under a discount to comparables or peers (IPO discount). This makes shares more lucrative to investors, so they have a reason to buy shares of the newly public company over the already public competitor.

Question 19

What are the IPO allocation Criteria?

Answer 19

1. Allocation is always a difficult process of negotiation with the company.
2. Main objectives are:
   * Create a base of stable shareholders that believe in the stock
   * Provide sufficient liquidity in the market
   * Ensure a positive aftermarket
3. Criteria of allocation:
   * Price limit
   * Timing of order
   * Participation to roadshow
   * Track record in previous IPOs
   * Word done to understand copmany
   * Insight provided during process
   Bottom Line: The Global Coordinator proposes an allocation, the company decides

Question 20

What is the Greenshoe?

Answer 20

It is an over-allocation of shares to investors as part of the IPO. It is a way to ensure a stable market after the IPO.

Question 21

How does the Greenshoe function?

Answer 21

1. The bookrunners “borrow” shares from the issuer. (If the offer is 100% without the greenshoe, and the greenshoe is 15% the total offer becomes 115%)
2. The bookrunners sells the greenshoe shares together with the rest of the offer, keeping the green shoe proceeds.
3. If Prices go up after the IPO, the bookrunners do nothing and let the price rise, they transfer the proceeds from the green shoe to the issuer.
4. If Prices go down after the IPO, the bookrunners will proceed to re-purchase the shares of the company with the funds raised from the greenshoe, raising price through the increased demand. The bookrunners then transfer the repurchased shares to the issuer.