IPOs- Process and Pricing.ppt

1、Grobstein, Horwath & Company LLP,1,IPOs: Process and Pricing,Presented to: The Taiwan Stock Exchange Gretai Securities Markets The China Intangible Asset Valuation Association by Daniel L. McConaughy, PhD Partner, Grobstein, Horwath and Company LLP Associate Professor of Finance, California State Un

2、iversity Northridge D 818-501-5200 March 21, 2005,Grobstein, Horwath & Company LLP,2,IPO IS,an Initial Public Offering of a companys stock to the public an orderly sale of shares to the public following rules outlined in the Securities Act of 1933 and enforced by the SEC A mechanism for private comp

3、anies to sell ownership stakes to investors who believe in the companies futures Purposes: Growth Recapitalization Original shareholders diversify,Grobstein, Horwath & Company LLP,3,BENEFITS of being a Public Company,Expand and diversify equity base:Lower cost of capital Public exposure and prestige

4、 Equity-based compensation opportunities for attracting and retaining key management and employees Creation of Currency for acquisitions Facilitates other financing opportunities: equity, convertible debt, cheaper bank loans, etc.,Individuals,Management & Venture Capital Funds,Pension Funds,Mutual F

5、unds,Other Institutions,Grobstein, Horwath & Company LLP,4,COSTS of being a Public Company,Disclosure requirements Scrutiny by and pressure from shareholders and security analysts Shareholder Relations Vulnerability to hostile takeovers Corporate governance Cultural considerations,Grobstein, Horwath

6、 & Company LLP,5,Private vs. Public Company,Public CompanyDisclosure- Public quarterly SEC filings- Detailed review of operating results- Quarterly investor calls, easier for competition to asses strengths and weaknessesAccountability- External shareholders- Research Analysts- Management- Board of D

7、irectorsForecasting- Thorough- Precise- Conservative- Must meet or exceed Street expectations missing a forecast can result in stock price drop,Private Company,Disclosure- Private summary results to shareholders- Management accounting- Hard for competition to monitorAccountability- Management- Share

8、holders- Board of DirectorsForecasting- Primarily for budgeting - Missing budgeted numbers may impact bonus payments but does not necessarily weaken a companys competitive position or value,Grobstein, Horwath & Company LLP,6,Preparation for IPO,Understand and fulfill due diligence requirements Devel

9、op budgeting and reporting processes Develop timely reporting of key metrics Develop investor relations and communication methods to disclose performance changes Identify key persons to provide communications to investors Train investor relations staff for - responses to outsider inquiries- informat

10、ion disclosures,Grobstein, Horwath & Company LLP,7,Follow up after IPO,Manage investors expectations Investor relations activities- Conference calls- Press releases- SEC requirements- Ongoing discussions with investors and analysts Create management credibility Ensure responsiveness to changing mark

11、etplace,Grobstein, Horwath & Company LLP,8,Getting Started,Preliminaries Put together Strategic working group Devise structure of offering Schedule and assign tasks Put together Legal Team Publicity Make sure Accounting Team has credibility and expertise,Grobstein, Horwath & Company LLP,9,Getting St

12、arted,DutiesHire the Outside Team Lead Manager Co-mangers Issuers counsel Underwriters counsel AccountantsPrepare the Internal Team Structure Strategy Due diligence Disclosure Must be able to work effectively with Outside Team,Grobstein, Horwath & Company LLP,10,Getting Started,Structuring the Offer

13、ingSize Number of shares authorized Follow-on issues Status of mezzanine financing- pay in cash- give shares Review existing shareholders Determine lock-up agreements with company, principal shareholders, officers, directors Underwriter distribution objectives/syndication Selection of listing exchan

14、ge Selection of stock symbol Use of proceeds,Grobstein, Horwath & Company LLP,11,Getting Started,To Do List Due diligence making sure things are OK Drafting legal documents and regulatory filings Audited financials Shareholder communications Board meetings Filing with SEC SEC review period Roadshow

15、Pricing and offering size IPO follow up details,Grobstein, Horwath & Company LLP,12,Getting Started,Legal Considerations Outstanding claims Loan agreement restrictions or other consents needed to offer shares Board meetings Disclosure of confidential agreements Request of confidentiality or treatmen

16、t of confidential information Possible lawsuits Possible acquisitions, divestitures, restructuring, management changes,Grobstein, Horwath & Company LLP,13,Getting Started,Investor Relations Quiet period Industry presentations Press releases/other corporate announcements Interviews or articles on com

17、pany to be published,Grobstein, Horwath & Company LLP,14,Getting Started,Financial and Accounting Matters Prepare historical and pro forma audited financial statements Identify unusual items requiring advance discussion with SEC Auditors comfort letter to the underwriter,Grobstein, Horwath & Company

18、 LLP,15,Time Line,Prior to filing- Due diligenceValuation - Choose co-managers - Documentation - Positioning - File registration statement,2 months,SEC Review- Prepare for roadshow presentation - Respond to SEC Comments,Marketing the Issue- “Red herrings” print and distribute - Stock Analysts presen

19、t to underwriters sales forces - Target key investors - Create underwriting syndicate - Presentations to sell-side analyst - Roadshow presentations - Develop the “Book” i.e.,institutional and retail demand,Pricing, Trading and Follow-on Support - Analyze pricing issues and investor feedback - Determ

20、ine allocation to retail & institution - Begin aftermarket trading - Closing details - On-going research - Investor relations begins and continues in earnest,2 3 months,1 month,Continuing,Getting Started,Grobstein, Horwath & Company LLP,16,Due Diligence Process,Corporate Level Company History Missio

21、n statement/vision SWOT (Strength Weaknesses Opportunity Threats) analysis Objectives and key challenges Management team/organizational chart Key investment highlights Strategic position in the industry Industry size/growth rates Market drivers Major industry trends(spending, commissions, etc.) Cons

22、olidation Segmentation/target markets Cyclicality Regulatory environment,Grobstein, Horwath & Company LLP,17,Due Diligence Process (contd) At the Corporate Level,Products/Services- Description of each major product/service category- Market size by category- Sales and margins by product/service categ

23、ory Customers- Breakdown of total customers/subscribers(business vs. consumer, small vs. large, etc.)- Historical growth in customer/subscribers Suppliers- List of key suppliers(number, sourcing policy, relationships, price volatility) Growth Strategy and Projections- Organic growth opportunities- S

24、trategy for growing below-the-line business- Key areas for new development Acquisitions/Ventures- Any planned or pending acquisitions Legal Human resources- Retention of key employees after the IPO THERE MUST BE A COMPELLING STORY,Grobstein, Horwath & Company LLP,18,Due Diligence Process (contd) At

25、the Business Unit Level,Business Units Business Unit Strategy Review Major Business Units- Competitive strengths/points of differentiation/areas of weakness- Growth strategy- Employees (breakdown, hiring, turnover, retention plans)- Pricing trends/margin trends- Significant threats/opportunities Fin

26、ancial Reviews- Reconciliation of budget vs. actual results- Annual historical/pro forma financial data and key operating statistics- 3-year projected financial results- detailed model including income statement, balance sheet, cashflow- Sales and profitability breakdown between traditional and belo

27、w the line sales - Financial objectives (revenue growth, operating margin, leverage statistics, etc.)- Major accounting issues (revenue recognition, receivables, write-off policies, reserves, etc.)- Exposure to exchange rates and how foreign currency exposure is managed- Internal auditing procedures

28、- Tax position, current and future,Grobstein, Horwath & Company LLP,19,Due Diligence Process (contd) At the Business Unit Level,Budgeting and Forecasting Personnel- Recent and planned management changes- Compensation philosophy (salary vs. bonus, how bonuses are determined, share ownership, etc.)- E

29、mployee recruitment and retention strategy- Significant employee agreements Customer Review- Concentration last 3 yrs and projected- Revenue breakdown (by service, customer, industry, geography)- Recent major wins/losses and reasons- Customers at risk- Summary of contract terms for key customers,Gro

30、bstein, Horwath & Company LLP,20,Preparing the Registration Statement,Typical contents Prospectus summary Risk Factors Use of Proceeds Capitalization Selected Financial Data MD&A Business- Overview - R & D - Environment- Industry - Manufacturing - Properties- Competitive strengths/ - Sales & Marketi

31、ng - Employeessolution - Strategy - Competition - Legal- Products - Customers Management Principal Stockholders Related Party Transactions Underwriters Financial Statements,Grobstein, Horwath & Company LLP,21,Roadshow Presentation,The companys opportunity to sell itself to investors- Domestic roadsh

32、ow- 8 10 days (typical in U.S.)- Approximately 100+ face-to-face meetings- International roadshows usually shorter than domestic Prior to meeting management investors read prospectus, discuss company with research analysts and securities salespeople Group and individual meetings “Makes or Breaks” th

33、e deal- Investors will ask everything- Demanding and stressful on top management- Distracts from running the company- Must have a compelling story to tell,Grobstein, Horwath & Company LLP,22,Roadshow Formats,Group Presentations- company tells its story in detail generally during a meal: can be lunch

34、es with hundreds of investors to smaller groups- generally conducted by two teams but sometimes they will combine when necessary One-on-One Presentations- expected to generate the majority of quality institutional demand- range from meetings with a single portfolio manager/buyside analyst to small g

35、roup sessions with multiple portfolio managers and buyside analysts- will take place in cities throughout the United States and Europe- will be conducted by the two teams separately with the exception of certain key accounts where the teams will combine for maximum impactConference Calls- on as-need

36、ed basis with select investors who cannot attend roadshow meeting- maybe group calls as well as one-on-one,Grobstein, Horwath & Company LLP,23,Pricing Overview,Teams meet, share feedback and ascertain demand and pricing When final pricing date has been determined investors are told the deadline for

37、submitting indications of interest and the closing of the book After closing the book the lead manager and co-managers assess:- Demand- Price sensitivity- Allocation issues- Aftermarket behavior The lead manager meets the co-management and recommends an offering price that maximizes the offering pro

38、ceeds to company and favorable aftermarket performance Company and the underwriter agree on offering price, and sign underwriting and syndicate agreements,Grobstein, Horwath & Company LLP,24,Typical Pricing Process,Pricing Process Last Days of Roadshow Pricing Day,Bookof Demand Size Quality Price Se

39、nsitivity Likely aftermarket demand,External Factors Recent Developments- Stock Price levels- Market in general- Industry- Comparables- New Issues,Analysis,Agreement on Price/Size,Allocations to investors at agreed initial price,Market determines price,Trading begins,Price Support Activity Green Sho

40、e Option Exercised,Grobstein, Horwath & Company LLP,25,After the IPO,Regulation FD Fair Disclosure- The SEC is adopting new rules to address three issues: the selective disclosure by issuers of material non public information; when insider trading liability arises in connection with a traders “use”

41、or “known possession” of material non public information; and when breach of a family or other non-business relationship may give rise to liability under the misappropriation theory of insider trading. The rules are designed to promote the full and fair disclosure of information by issuers, and to c

42、larify and enhance existing prohibitions against insider trading. Regular filings with the SEC Earnings announcements Quarterly and annual financial statements Material corporate events Manage expectations Meet or exceed investors expectations,Grobstein, Horwath & Company LLP,26,IPO Dutch Auction: I

43、nnovation in IPO Pricing,Dutch Auction is an auction method that uses a bidding process to find an optimal market price for the stock, the lowest price at which an issuing company can sell all the available shares. An alternative to the traditional negotiated pricing process used by underwriters to

44、set IPO prices, this auction format was most recently employed by Google and is used for US Treasury auctions. Also called a descending price auction, it was named after the famous auctions of Dutch tulip bulbs in the 17th century. http:/ Horwath & Company LLP,27,Dutch Auction Case Study: Google,The

45、 ABCs of a Unique IPO IPO Dutch Auctions vs. Traditional Allocation Case Study: Google IPO Prospectus Lifting the Google Lid Another View of the Google IPO,Grobstein, Horwath & Company LLP,28,Conclusion,Improved investor feedback into the pricing mechanism. Will the Dutch Auction gain wider acceptance? Will this reduce the short-term price increases that often follow the IPO? What are the implications for underwriters? What are the implications for investors?,