Structured Course

Lesson 7 – Initial

Prof. Riccardo Bruno

Luiss Guido Carli 1. Introduction to Equity Capital Markets Strictly Private and Confidential

Investment banking organization and ECM role

Non-public information Chinese Wall Public information

Clients

Equity Reseach

Equity Capital Brokerage Investors Markets

Trading • Financing through IPO, Follow-on, Convertibles… • Monetisation in cash (Block trade, accelerated bookbuilding) or through derivatives (Mandatory, Equity linked and Derivatives Transactions)

3 Equity market size and trend

4 Global ECM fees and ECM League Table

5 2. Introduction to Initial Public Offering

• INITIAL ... because first time

• PUBLIC ... because any qualified buyer can buy the shares

• OFFERING ... process of selling the shares

• ... into Primary Market

7 Motives to go public

• Regardless of the perspective, the most important reason is “cash”

– Company issues new shares (known as “Primary shares”) to raise finance to fund new projects, improve credit standing, etc.

– Existing shareholders want to sell shares (known as “Secondary shares”) to get liquidity

– Exit strategy for PEs: way to cash out their investment

– For governments, IPOs mean privatization and cash injection

8 PROs & CONs of going public

PROs CONs

• Gives access to alternative • May not get the sources of capital • Public disclosure of previously • Allows existing shareholders to private info exit some or all of their equity • Public scrutiny (pressure on stake management) • Creates “acquisition currency” • Investor short-terminism • Management compensation • Ongoing costs (direct and creates incentives indirect) • Creates liquid equity participation • Risk of unsuccessful IPO and • Enhances financing options required funding not raised • Provides market • Increases public profile / prestige

9 Proceeds of IPO

The shares being sold in the IPO could either be PRIMARY PROCEEDS brand new shares, issued by the company

OR

Existing shares being sold SECONDARY PROCEEDS by the old shareholders

OR BOTH

10 2. IPO Process Overview

An IPO is typically a 4 - 6 months process involving the following key steps: • Understanding the company and its market • Positioning and valuing the company • Conducting business, legal and financial due diligence • Preparing a prospectus • Determining the offer structure • Mobilizing the research community • Setting the price range • Pricing and allocating the offer to ensure a healthy aftermarket • Stabilizing the share price in the initial period following listing

12 Key steps

PREPARATION MARKETING AFTERMARKET

• Preliminary • Investor education • Stabilization positioning (pre-marketing) (, lock-up • Due diligence • Roadshow and period, bonus share) • Syndicate Bookbuilding structuration • • Listing preparation • Pricing and • Investment case allocation review • Offer structure Listing • Marketing preparation

13 Preliminary positioning & Due Diligence

Preliminary positioning • Review company financial projections • Identify company peer group for valuation / marketing purposes • Establish preliminary marketing story

Due Diligence • Conduct business, financial and legal due diligence • Identify crucial investor issues / concerns • Ensure accuracy and completeness of prospectus • Provide detailed materials for marketing

PREPARATION MARKETING AFTERMARKET

14 Syndicate structuration

• A syndicate is a group of investment banks that work together in an IPO to sell the shares to the public • A syndicate is headed by the Global Coordinator (or Lead Manager) and disbanded as soon as the IPO is completed • The size of the syndicate and the number of members is driven by: – Size of offering – Geographic location of investors – Type of investors (retail vs. institutional) – Issuer’s relationship with banks

PREPARATION MARKETING AFTERMARKET

15 Syndicate selection criteria

• Banking – Strenght of banking relationship with the client – Participation at pitch stage – Sector specialisation • Research – Quality and commitment – Ranked publishing analyst • Distribution – Underwriting capacity and primary distribution strenghts – Local presence • Trading – Sales and trading team / aftermarket support

PREPARATION MARKETING AFTERMARKET

16 Typical syndicate structure

• Overall responsibility and Global coordination of the process Coordinator(s) • Appoint(s) and manage(s) syndicate

• Manage bookbuilding process Joint Joint • Organise roadshow Bookrunner • Provide investor feedback

Co-lead / Co-lead / Co-lead / • Global / regional distribution role Co-manager Co-manager Co-manager • Research support

PREPARATION MARKETING AFTERMARKET

17 Fees

• Management fee (~20%): praecipium paid to senior syndicate members as a compensation for structuring the offer, conducting due diligence, drafting the prospectus, dealing with regulators, organizing the syndicate, managing the roadshow, etc.

• Underwriting fee (~20%): paid to syndicate members pro-rata to underwriting commitment as a compensation for the underwriting risk

• Selling concession (~60%): paid to syndicate members selling shares to investors

PREPARATION MARKETING AFTERMARKET

18 Listing preparation

• Select Exchange(s) – Home market – Foreign market – Dual/multiple listing • Prospectus – Best practice disclosure of all material facts – Consistency with marketing materials is essential – A dual-listing would mean satisfying different (and sometimes conflicting) standards

PREPARATION MARKETING AFTERMARKET

19 Prospectus

• Offer document which includes everything a potential investor needs to know in order to make an investment decision • Typical contents: – Risk factors – Business summary and – Company strategy analysis – Use of proceeds – Industry and other data – Dividend policy – Legal matters – Financial data and analysis – Management description – – Principal and selling stockholders – Dilution – Underwriting arrangements

PREPARATION MARKETING AFTERMARKET

20 Investment case review & Offer structure

Investment case review • Conduct “” valuation and prove business model • Focus on key strenghts of the economy, industry and business • Actively identify and address investors concerns • Refine the marketing story based on due diligence findings

Offer structure • Access all pools of potential demand (across regions, institutional / retail / employee offering) • Focused syndicate structure to maximize research and distribution • Ensure local regulations permit effective deal management (e.g. over- allotment option, stabilization)

PREPARATION MARKETING AFTERMARKET

21 Marketing preparation

• Establishment of key selling messages – analyst presentation to form basis of all research – During the analyst meeting the issuer presents detailed financial and strategic information to syndicate analyst, to enable them to prepare pre-IPO research report • Sales force briefing – to enable the set-up of the pre-marketing meetings and the kick-off of the investor education process • Detailed Q&A preparation and rehearsal for management team • Roadshow slides and script • Pilot-fishing – pre-marketing activity of testing investor sentiment on market expected reaction and feedback on the IPO

PREPARATION MARKETING AFTERMARKET

22 Investor education

• Investor targeting (50-100 investors) • Initial warm-up of key target accounts – educate investors about investment story and valuation, identify and address any areas of concern • Preliminary market feedback • Price range determined

PREPARATION MARKETING AFTERMARKET

23 Roadshow

• Roadshow is a key marketing event to promote IPO and introduce the company to potential investors • Presentations are made by the management in the form of group meetings or one-on-one individual meetings with key investors • 1 or 2 week period, depending on the size of the issue and location of the listing • The aim is to approach all potential investors and build demand for offering

PREPARATION MARKETING AFTERMARKET

24 Bookbuilding

• Throughout the roadshow, a book of demand is build up • Create scarcity – Early momentum – Cross-market competition – Daily updates • Initial phase of “soft circling” – Solicit bids that are not legally binding – Investor interest at indicated price range – Ideally want to oversubscribe issuance • Second phase translates – Turn “soft” bids into “hard” buy orders (binding bids)

PREPARATION MARKETING AFTERMARKET

25 Institutional investors’ demand

PREPARATION MARKETING AFTERMARKET

26 Underwriting

• Process whereby the lead investment bank(s) of the syndicate guarantee(s) a set price for the irrespective of final demand

• Can take place early (hard) or later (soft) in the IPO process

• Hard underwriting could take place a number of weeks before pricing, whilst soft underwriting typically occurs after the close of the bookbuilding period and the pricing

• The later the underwriting takes place, the less risk the underwriters face and the cheaper it is for the issuer

PREPARATION MARKETING AFTERMARKET

27 Pricing

• Pricing takes place at the close of the bookbuilding period • Pricing will depend on many variables – Quality of the book (book of demand analysis by price, date, geography and manager) – Amount of demand – Market conditions (bullish vs. bearish) – etc. • IPO price determined – At discount (underpricing) – To create positive aftermarket – Ensuring the full subscription of the offer (2-3x coverage of the deal size)

PREPARATION MARKETING AFTERMARKET

28 Price Setting Mechanisms

• Open price (Bookbuilding): syndicate banks solicits orders from investors and sets the price once the book is closed. Investors can submit different types of bids: – Strike bid: # of shares / amount of money regardless of price – Limit bid: maximum price the bidder is willing to pay – Step bid: demand schedule as a step function • Fixed price: the price is set before bids are submitted, based on information about market demand • Auction: investors are invited to bid for shares, and once the offering is covered, shares are allocated. After bids are submitted, the price is set: – Uniform price – Discriminatory

PREPARATION MARKETING AFTERMARKET

29 Allocation

• Shares are allocated to investors, with preference towards – Longer term and important investors – Early orders – Degree of price sensitivity that order generates – Involvement of the investor in the offer process • Typical ranking – Important investor – Long term investor – Medium term investor / Specialist fund – Short term investors – “Flippers” • Ultimately, a diverse investor base is preferrable

PREPARATION MARKETING AFTERMARKET

30 Stabilisation

• A successful issue is one where the share price enjoys a steady growth in the days and weeks following the issue • Stabilisation is a key process aimed at ensuring an orderly aftermarket by supporting the market price of the equity offered • Shares are initially over allocated (overallotment) to investors, taking up a short position, settled with borrowed from the issuer or repurchased from the market – Global Coordinator (or other syndicate bank) has an option to buy additional shares from issuer at IPO price (greenshoe) • Over allocation limited to c. 15% of initial offering • Subject to regulatory restrictions • Exercising the greenshoe sends a positive signal

PREPARATION MARKETING AFTERMARKET

31 Stabilisation

If share price rises If share price falls

• Global Coordinator (or other • Global Coordinator buys back syndicate bank) exercises the over allocation from the market to greenshoe and buys shares from cover the short position, issuer at IPO price supporting the share price • Issuer issues overallocation • Greenshoe not exercised • Company raises additional • Issuer does not issue proceeds overallocation • Bank makes no gain • No additional proceeds raised – Sold shares at issue price • Bank makes gain – Buy shares at issue price – Sold shares at issue price – Buy shares at lower price

PREPARATION MARKETING AFTERMARKET

32 Stabilisation: an example

• # of shares: 1,000,000 • Green Shoe: 100,000 • IPO price: € 10 • Fee: 5% (of the total proceeds) If share price rises to € 11 If share price falls to € 9

• Greenshoe exercised: 100,000 • Buyback of overallotment of 100,000 shares x € 10 per share = € shares 1,000,000 • Syndicate bank profit: (€ 10 - € 9) x • Total proceeds for the issuer: 100,000 = € 100,000 1,100,000 shares x € 10 per share = • Total proceeds for the issuer: € 11,000,000 1,000,000 shares x € 10 per share = • Fee: € 11,000,000 x 5% = € 550,000 € 10,000,000 • Fee: € 10,000,000 x 5% = € 500,000

PREPARATION MARKETING AFTERMARKET

33 Lock Up & Bonus Share

• Lock up: contractual agreements restricting shareholders from selling their share for a specified period of time (usually 180 days), designed to support the price of an offering in the months after closing

• Bonus share: shares awarded on the expiry of fixed intervals (e.g., each year), based upon the number of shares already owned. The aim is to attract retail investors and reduce selling pressure in the after market

PREPARATION MARKETING AFTERMARKET

34 3. IPO Pitch IPO Pitch preparation

• Understanding the investment case • Addressing investor concerns • Valuation • Listing forum • Syndicate formation / incentivization and bookrunning skills • Marketing strategy and (global) distribution reach • Pricing and aftermarket performance • Allocation skills • Credentials

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