Raising capital for Finnish IT SMEs through IPOs Linh Tran Bachelor’s Thesis DP in International Business 2015 Abstract International Business Author or authors Group or year of Linh Tran entry GLOB12S2 Title of report Number of Raising capital for Finnish IT SMEs through IPOs pages and appendices 57 + 10 Teacher(s) or supervisor(s) Mika Mustikainen, Arto Talmo This is a research-based thesis that aims to point out the possibilities for Finnish IT SMEs to generate capital through an initial public offering, i.e. IPO. Information technology companies usually need a significant amount of capital, e.g. for their R&D, so that they can improve their products or services and satisfy customers. In addition, European Union has encouraged companies, especially SMEs, to join the public equity market. The research consists of theoretical knowledge regarding different kinds of equity financing, especially regarding IPO, and general overview of recent development of Finnish stock market, i.e. NASDAQ OMX Helsinki, as well as of Finnish IT SMEs. In addition, the research also provides two case studies of two public Finnish IT companies: one is listing on the Main Market of NASDAQ OMX Helsinki, and another one is listing on First North in Helsinki. The final result of this research suggests that only later-stage SMEs that already have attractive products or services and an excellent management team should consider an IPO. Furthermore, a promising market condition is also necessary. NASDAQ OMX Helsinki has not been so active but First North in Helsinki has recently developed and attracted new listings since 2014. In order to succesfully transform to a public company, a SME should pay attention to a variety of risks, including compliance, operational, strategic, and financial ones. In Finland, there are approximately 51 potential IT SMEs that can engage in public equity market. If they think of IPO as a method to generate more capital, they should initially evaluate their business and consider the advantages and disadvantages of the IPO. Post-IPO operations are also very important because they strongly affect company’s credibility and investors’ attitude. Keywords IPO, Finnish IT SMEs, NASDAQ OMX Helsinki, First North Helsinki, capital structure Table of contents 1 Introduction ................................................................................................................... 1 1.1 Research question and investigative questions ..................................................... 2 1.2 Demarcation ......................................................................................................... 2 1.3 International aspect and anticipated benefits ........................................................ 3 1.4 Key concepts ........................................................................................................ 3 2 Research Methodology ................................................................................................. 5 2.1 Research Design .................................................................................................. 5 2.2 Data collection ...................................................................................................... 5 2.3 Data analysis ........................................................................................................ 6 3 Initial Public Offering (IPO) ............................................................................................ 7 3.1 Private equity ........................................................................................................ 7 3.2 IPO as a method to generate capital ................................................................... 10 3.3 Important issues concern an IPO ........................................................................ 13 3.3.1 Corporate governance and ownership structure ....................................... 13 3.3.2 Capital structure ....................................................................................... 15 3.3.3 Other important financial figures and financial ratios ................................ 17 3.3.4 Taxation of dividends ............................................................................... 18 3.3.5 Post-IPO operation ................................................................................... 20 4 Finnish IT SMEs .......................................................................................................... 22 5 Finnish stock market ................................................................................................... 25 5.1 Stock market and stock market analysis ............................................................. 25 5.2 Origin and characteristics of NASDAQ OMX Helsinki.......................................... 26 5.3 NASDAQ OMX Helsinki’s performance ............................................................... 27 6 Case studies ............................................................................................................... 32 6.1 Affecto ................................................................................................................ 32 6.2 Siili Solutions ...................................................................................................... 41 6.3 Conclusions ........................................................................................................ 46 7 Conclusions ................................................................................................................ 48 7.1 An IPO-decision and associated risks ................................................................. 48 7.2 Finnish IT SMEs and Finnish stock market ......................................................... 49 7.3 Raising capital through an IPO ............................................................................ 50 7.4 Research limitations and further researches ....................................................... 52 7.5 Self-assessment and learnings ........................................................................... 52 References ...................................................................................................................... 53 Attachments ..................................................................................................................... 58 Attachment 1. List of 51 potential Finnish IT SMEs ..................................................... 58 Attachment 2. Listings and de-listings on NASDAQ OMX Nordic and First North ........ 61 Attachment 3. Attachments of Affecto’s case study ..................................................... 63 Attachment 4. Attachments of Siili Solutions’s case study ........................................... 65 Attachment 5. NASDAQ OMX Nordic Surveillance Reports References ..................... 66 Attachment 6. Annual Reports and Financial Statements References ......................... 67 1 Introduction Mostly all companies in all industries need to have a substantial amount of capital in order to maintain and develop the business, and entrepreneurs can generate capital by many differ- ent ways such as borrowing money from banks, buying bonds issued by government, by lo- cal municipality, or by corporations, etc. One alternative for companies to acquire capital is utilizing the stock market, specifically by selling part of the ownership to the public. This alter- native is known as public equity financing and the very first time in which a company sells its parts of ownership to the public is called initial public offering, or IPO. Many well-known or- ganizations adapted this practice, for example Facebook and Twitter. According to an article written by John McDuling (8 November 2013), Facebook raised $16 billion after its IPO in May 2012, Twitter and Google earned about $2 billion, and other companies like LinkedIn or Amazon.com also profited from an IPO. Recognizing the ability to raise capital through going public, the author considers applying this alternative in Finnish SMEs (i.e. small and medium enterprises) that operate in technol- ogy industry and provide IT solution for business services. According to the market quotes from Kauppalehti (2 March 2015), there are 134 shares listed in different sectors: Oil & Gas, Basic Materials, Industrials, Consumer Goods, Health Care, Consumer Services, Telecom- munications, Utilities, Financials, and Technology. Among those 134 shares, some of which belong to the same company. For example, Orion group has two classes of share listed there: Orion A and Orion B. The Technology sector consists of 19 shares listed that special- ize in different professions but many of which focus on providing business services solution to organization’s divisions (e.g. marketing, logistics, finance, human resources). In addition to these technology public companies, there are other Finnish companies working in the same field but not engage in public trading. These non-public companies can consider an IPO in Finnish stock market to generate capital for further development. Now, this chapter continues by presenting the thesis topic with the research question (RQ) and the investigative questions (IQs), the demarcation process, international aspect of the research, the anticipated benefits for potential stakeholders, and key concepts with defini- tions. After that, the author presents her research methodology in chapter 2. Chapter 3 de- scribes theories that relate to public equity financing, initial public offering, and IPO’s