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The Economist’s IPO Handbook
Israeli Association of Business Economists
Haim Israel September 2017
Table of content
• What is an IPO and why bother?
• Facts and figures
• The IPO process
• The economists roll in the process
• KPI
• Do and do not do
• Case studies
Public offerings
• What? Changing the company ownership base from
private to public ownership.
• Why? Proceeds, change the capital structure of the
company, source of funding, acquisition
currencies or just taking profits..
Why the banks like PO: very high proceeds, reputation,
profile, ongoing banking business
Facts and figures
• 2017: looks like one of the strongest
years ever: 778 IPO, $83bn total
proceeds YTD…
• The biggest IPO YTD: Snapchat, almost
$4bn
• The biggest IPO ever: Alibaba: $25bn,
double than Facebook
• 2Q 2017: record quarter: the highest IPO
proceeds quarter in 10 years. $50bn
raised.
• 3Q 2017 looks even stronger…
0
200
400
600
800
1000
1200
1400
1600
1800
YTD
number of IPOs
0
50
100
150
200
250
300
YTD
Proceeds (US$, bn)
The investment bank
The process (usually one year)
The company - Decision.
- Identification of capital needs,
reasons, market conditions.
- Initial company preparation.
- Request for proposal (RfP)
- Selecting the right syndicate
- Company preparation.
- Setting goals, KPI, targets
- IPO process kicks off
- Congrats… Company is public
The investment bank - Preliminary work – indentifying
needs.
- Proposal. Based on company’s RfP
- Preliminary roadshow.
- Providing commitment
- IPO preparation.
- Research Wall crossing
- IPO officially kicks off
- Congrats… Company is public
The investment bank
How to choose the syndicate?
distribution strength
research strength
relationship
sector specialization
historical track record
balance sheet
syndicate
Who is involved?
ECM
Corp. banking
Sales & trading research
IBK
IPO
IPO process
•
wall crossing
One year 5 weeks 2 weeks
The process: research • Wall crossing. Legal process to ensure no conflict of interests and independence.
• Vetting call. Usually 1-2 days after wall crossing.
• Analyst day with the company’s management. Usually 1 week after vetting call
• Research + model. 2 weeks. Research should be no less than 30 pagers.
• In the mean time:
▫ RRC: Rating & Recommendation Committee (Research management). Usually after 10 days
▫ Valuation and model committee. (research management) 2-3 days after RRC. Allows only Valuation range!
▫ Extended Valuation and Model Committee: (research + banking). Banking to challenge model + valuation
▫ EMC (Equity market committee): research management, banking, legal, global research, ECM)
▫ Launch committee: 24 hours ahead of deal launch. Presentation to everyone that has been wall crossed.
▫ In each strange research or any other side can still pull the plug on the deal!
• Launch and investor education roadshow – 10 days – 2 weeks. Competition with other banks
• Prospectus publication
• Management roadshow
• Pricing and allocation.
• 40 days blackout.
The economic division
The economist challenge:
“creating a functioning, thriving organization that will be able to serve
shareholders by growing returns.”
Lets breakdown this slogan:
• “Once in a lifetime opportunity”: IPO is an opportunity to create a new
corporate structure across the board.
• Company now has to answer new shareholders, new regulators, and new
entities. It has to grow and offer prospects beyond the IPO period.
• The company now needs to grow returns
Company preparation
All involved: management, bankers, lawyers, and CPA. Economist is most important to connect all the dots
6 things economist must do ahead of IPO: 1. First and foremost: Decision – how much money to raise? How to raise and why? Strategic
thinking…
2. Consulting and preparing the platform for top management ahead of the process. Get all the
info, process, analyze to action items, and upstream to top management.
3. Access and upgrade the fiscal, and operating organization
4. Financial planning and analysis system. Prepare the company for religious financial reporting.
Internally and externally.
5. Improve control process: The effective review of a company’s internal controls provides
assurance about the completeness and accuracy of the financial data needed to drive the
business and bolster investor confidence:
Control system:
Preventive control
Revealing control
Fixing control
Compensating control
6. Guidance and business models.
6 things economist must do during an IPO:
In a nutshell – the economic division role is to promise investors the IPO proceeds are put
into good use…and to tell that to the market..
1. Guidance and projections. IPO guidance is very different. Need to drill down into the numbers.
provide all the info to the top management.
2. Build the story. Investors want to buy a story…backed up by vision…backed up by
analysis…backed up by data. The economist is in charge
3. Provide market analysis. Internally and externally.
4. Build an IR division. First interaction with the market is an opportunity to build a functioning IR
division, relationships est. use external experts.
5. Prepare management for a first market interaction
6. To make sure the new structure is up and running and communicate that to the market.
KPI: Key Performance Indicators
• IPO success is based on its financials…not the vision, not the dream.
• IPO is a “show me the money” event!
• KPI is different in each and every sector, however an IPO success will come down to
conviction the proceeds are put into work to achieve 3 things:
▫ Quality of growth
▫ Quality of cash flow
▫ Quality of returns
Denominator numerator Name Indicator
Total Assets – current
liabilities- ST debt +
Accumulated goodwill D&A
NOPAT (EBIT+ interest
income)*(1-tax rate) +
Goodwill D&A)
Return on Capital Employed RoCE
(Total Assets) - (Excess Cash)
- (Non-Interest-Bearing
Current Liabilities)
(Net Operating Profit After
Taxes: NOPAT)
Return on Invested Capital RoIC
Market cap Total cash dividend paid + buy
backs
Dividend yield DY
Market cap - net cash and
equivalents + liabilities in cash
EBITDA (Operating Profits +
D&A )– cash Capital
Expenditure
Operating CF yield OpCFY
Do and not do
do - Simplify holding structure
- Simplify capital structure
- Simplify tax structure
- Simplify debt structure
- Provide all the information needed
- Put top management in front of the market
- Be available!
Not do - shareholders loans or
transactions
- Restructure the BS
- Come with unrealistic projections
- “Fall in love” with the company
- Come with material information post the prospectus publication
- “miss numbers” post IPO.
- Limit communication
Do and not do – holding structure
Do and not do – shareholders interest
Do and not do - debt
conclusion
For the economic division it is an opportunity:
• to shape up the company
• To build the story
• To galvanize the strategy
It is in charge:
• To lead the process with the top management: CEO, CFO, BOD
• To make sure the proceeds will put into work
• To set the targets
• To own the relationship with the capital market
Thank you!