THE INITIAL PUBLIC

OFFERING (IPO)
Initial Public Offering (IPO)

• Definition: A company’s first equity issue made available to the

public.
• This issue occurs when a privately held company decides to go public
• Also called an “unseasoned new issue.”
Why Do Companies Go
Public?
• New capital
– Almost all companies go public primarily because they need money
to expand the business
• Future capital
– Once public, firms have greater and easier access to capital in the
future
• Mergers and acquisitions
– Its easier for other companies to notice and evaluate a public firm for
potential synergies
– IPOs are often used to finance acquisitions
Disadvantages Of The IPO

• Expensive
– A typical firm may spend about 15-25% of the money raised on direct
expenses
• Reporting responsibilities
– Public companies must continuously file reports with the SEC and the
stock exchange they list on
• Loss of control
– Ownership is transferred to outsiders who can take control and even fire
the entrepreneur
Is It A Good Time To Do An
IPO?
• There are clear “windows of opportunity” that open and close for IPO
issuers
• Determinants of suitability:
– The general stock market condition
– The industry market condition
– The frequency and size of all IPO’s in the financial cycle
Outline Of The IPO Process:

1. Select an underwriter
2. Register IPO with the SEC
3. Print prospectus
4. Present roadshow
5. Price the securities
6. Sell the securities
1. Select An Underwriter

• An underwriter is an investment firm that acts as an intermediary

between a company selling securities and the investing public
• The underwriter is the principal player in the IPO
• Typically, the underwriter buys the securities for less than the offering
price and accepts the risk of not being able to sell them
Types Of Underwriting

• Firm commitment underwriting:

– The underwriter buys the entire issue, assuming full financial
responsibility for any unsold shares
– Most prevalent type of underwriting in the U. S.
• Best efforts underwriting:
– The underwriter sells as much of the issue as possible, but can return any
unsold shares to the issuer without financial responsibility
Leading IPO Underwriters

1. Goldman Sachs
2. Morgan Stanley
3. Merrill Lynch
2. Register IPO With SEC

• The firm must prepare a registration statement and file it with the SEC
• The registration statement discloses all material information
concerning the corporation making a public offering
3. Print Prospectus

• The prospectus is a legal document describing details of the issuing

corporation and the proposed offering to potential investors
• Contains much of the information in the registration statement
• The preliminary prospectus is sometimes called a “red herring”
4. Present Road-show

• The road-show is presented to institutional investors around the

country
• The road-show allows firms to raise interest in the company and thus
the price
• Allows the firm and its underwriters to gather information from
potential purchasers
5. Price The Securities

• How much to charge for giving away a part of the firm is very
important to the issuers
• The securities are priced based on the value of the company and
expected demand for the securities
• Examples of valuation methods:
– Net Present Value
– Earnings/Price ratios
6. Sell The Securities

• A full-fledged selling effort gets under way on the effective date of

the registration statement
• A final prospectus must accompany the delivery of securities
THE IPO PROCESS
Why Do Companies Go
Public?
• Fund Growth Plans
• Currency for M&A
• Recap (retire debt)
• Liquidity
• Employee compensation
• Enhanced Image
– Landlords
– Creditors/Suppliers
– Recruiting/Retention
Underwriter’s Criteria
Company Characteristics

• Growth Prospects
• Predictability of Results
• Management Team
• Historical Track Record – Size;Profitability
• First Mover Advantage
• Sponsorship
Underwriter’s Criteria
Sector/Market Characteristics

• Overall Size
• Growth Rate
• Competitive Dynamics
• Comparable Companies’ Performance
• Institutional Appetite
Underwriter’s Criteria
IPO Market Conditions

• Backlog
• Cash Inflows to Mutual Funds
• Deals Pricing Below/Within/Above Range
• Withdrawn vs. Completed Offerings
• Market Performance of Recent IPOs
• Stable Economic Climate
Underwriter’s Criteria
Firm Focus

• Research Expertise
• Distribution Capabilities
• Corporate Finance Focus
• Chemistry
• Geography (retail offices)
Selecting Underwriters

• Types of Investment Banks

• Lead vs. Co-managers
• Distribution Capabilities – Institutional, Retail, International
• After Market Support
– Research
– Trading
• Ongoing Corporate Finance Support
• Culture of Firm
Lead Manager

• Orchestrates Drafting, Due Diligence, Syndicate, Sales, After Market

• Negotiates Fee Split
• Allocates Shares
• Leads Pricing Call
• 15% Over Allotment Option
FEE Structure

• Gross Spread - 7%
– Management Fee
– Underwriting Fee
– Selling Consession
• Jump Ball
• Fixed Fee
Pitch Book

• Executive Summary
• Capital Markets Update
• Company Positioning
• Valuation
• Structure and Timing of IPO Process
• Track Record of Investment Bank
• Team Members…Commitment
• References
Organizational Meeting

• Participants
– Company
– Company Counsel
– Underwriters (two or more)
– Underwriter’s Counsel
– Company’s Accountants
Organizational Meeting

• Transaction Issues
• Due Diligence Interviews
• Document Request List
• Facility and/or Store Tours
• Initial Drafting
– Outline Story
– Position the Company
• Schedule of Key Dates
 Transactional Issues

• Size of Offering
– Not More Than a Third
– Company vs Secondary Shares
– Over Allotment Option
– Split
• Lock-ups – Who and How Long
• Use of Proceeds
– Debt Retirement
– Working Capital
– Growth
 Transactional Issues

• Legal
– Corporate Status
– Quiet Period and Ordinary Course Announcements
– Anti-Takeover Provisions
• Misc
– Comfort Letter
– Selection of Printer
– Transfer Agent
– Bank Note Company
– Reservation of Stock Symbol
– Authorized Shares
– S-8 for the Employees Option Plan
– Directed Stock
Prospectus “Selling
Document”
• Five to Eight Drafting Sessions
• File Registration Statement with SEC
• SEC Review (30 days)
• SEC Comments
• File Amendment 1 with SEC
• Print and Distribute “Red Herring”
Prospectus

• Cover
• Summary
• The Compnay
• Risk Factors
• Use of Proceeds
• Dividend Policy
• Capitalization
• Dilution
• Selected Financial Data
• MD&A
• The Business-Management and Security Holders
• Description of Securities
Registration Statement

• Prospectus
• Exhibits
– Underwriting Agreement
– Articles of Incorporation
– Opinion of Company Counsel
– Stock Option Plan(s); 401(k) Plan
– Employment Agreements
– Registration Rights Agreements
– Material Contracts
– Computation of Earnings per Share
– Consents
Marketing Process

• Marketing Documents
– Prospectus
– Roadshow Presentation
– Insitutional Sales Teach In
– Retail Broker Fact Sheet
• Distribution Strategy
– Mix of Institutional and Retail
– Directed Shares
– Syndicate Structure
– Roadshow
– Share Allocation
Marketing Strategy

• Institutions with history of buying, holding and increasing positions

• Institutions which own comparable companies
• Build momentum before NY and Boston
• Create perception of scarcity
The Road Show

• Two to Three Weeks

• Organized and paid for by underwriter
• Provides info about the company in one-on-one meetings with
prospective investors
• Build the book
Going Effective

• Acceleration Request
• Pricing the Offering
• Final Prospectus Printed
After Market Support

• Timely, Accurate and Insightful Research

– Coverage begins after a 25 day quiet period
• Follow up Road Shows
• Investor Conferences
• Active Market Making
Life As A Public Company

• Reporting
– Qs, Ks, Press Releases, Conference Calls, Reg FD, Forward-looking
Statements,
• Trading Blackouts
• Proxys
• BOD Liability
• Investor Relations
• Secondary Offerings
– Additional Cash
– Enhance the Float
– Orderly Exit for Large Holders
THE END…