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Corporate Financial Strategy

4th edition
Dr Ruth Bender

Chapter 15

Floating a company

Corporate Financial Strategy

Floating a company: contents


Learning objectives
A cash-in float grows the company
A cash-out float gives money to
exiting shareholders
Reasons for floating a company
An IPO is a marketing exercise
Possible regulatory requirements for
listing
Where to list?
Worldwide exchanges, some
statistics
Depository receipts
Price: leave some money on the
table

Corporate Financial Strategy

Positioning
Investor relations
List of people involved in an IPO
Methods of going public
Indicative timetable for a placing
Illustrative contents of listing
particulars
Is it worth it?
Reasons for delisting

Learning objectives
1. Explain why a company might want to float its shares, and differentiate
cash-in and cash-out floats.
2. Analyse the different stages of an IPO in relation to a marketing model
of 7 Ps
3. Understand the process for a listed company to issue further equity.
4. Set out the reasons why a company might delist its shares, and the
potential conflicts of interest this entails.

Corporate Financial Strategy

A cash-in float grows the company

Pre-float

Post-float

Shareholders are
A, B, C

Shareholders are
A, B, C, D, E
and many others

Corporate Financial Strategy

A cash-out float gives money to exiting shareholders

Pre-float

Post-float

Shareholders are
A, B, C, D, E

Shareholders are
A, D and many
others

Corporate Financial Strategy

Reasons for floating a company

Diversification for
shareholders

Shares to act as
currency in
acquisitions

Fundraising
(cash-in)

Diversification of
shareholders

Better
management
incentives

Future financial
flexibility

Desire for prestige

Opportunistic

Exit for investors


(cash-out)

Corporate Financial Strategy

An IPO is a marketing exercise

Product

Are these shares attractive to the market? What does the


market want? Do we need to develop the product (company,
shares?) further?

Place

Which stock exchange(s)? (Or should we float at all?)

Price

How should we set the price of the shares?

Positioning

Which sector? Which competitors? When?

Promotion

Road show and PR as well as the prospectus

People

Who will do the road show? Who will be on the board?

Process

Good project-management skills are required to steer the


company through the detailed regulatory process

Corporate Financial Strategy

Possible regulatory requirements for a listing


Management

Competent people
In depth, with a proper management structure
No conflict of interest with shareholders

Results

Track record of business for more than n years


Audited accounts with unqualified audit reports
Include major acquisitions
Acceptable accounting policies

Business

There is a proper business with a reasonable outlook


Good operating structures
Good capital structure

Size

Lower size limits will apply to market capitalization

Free float

At least a minimum level of shares available to the


public

Corporate Financial Strategy

Where to list?
Where are you doing business?
Where are there likely to be the most
shareholders for your company?
Liquidity
Specialization
Price multiples
Regulatory and reporting requirements
Diversification of investor base
Costs

Corporate Financial Strategy

Worldwide exchanges, some statistics

IPO FUNDRAISING IN MAJOR STOCK


EXCHANGES IN 2011

MARKET CAPITALIZATIONS OF MAJOR STOCK


EXCHANGES AT END 2011

US $ bn
1 Hong Kong 36.1
2 New York 31.4
3 Shenzhen 26.2
4 London
19.2
5 Shanghai 16.3
6 NASDAQ 10.7
7 Singapore 7.6
8 Spain
5.3
9 Brazil
4.4
10 Korea
3.6

US $ bn
1 NYSE Euronext (US)
11 796
2 NASDAQ
3 845
3 Tokyo Stock Exchange Group
3 325
4 London Stock Exchange Group 3 266
5 NYSE Euronext (Europe)
2 447
6 Shanghai Stock Exchange
2 357
7 Hong Kong Exchanges
2 258
8 TMX Group (Toronto)
1 912
9 BM&FBOVESPA (Brazil)
1 229
10 Australian Securities Exch
1 198

Includes REITs. Source: Dealogic data from


http://www.hkex.com.hk/eng/newsconsul/newsltr/201
2/Documents/2012-01-02-E.pdf

Source: http://www.world-exchanges.org/files/file/stats%20and
%20charts/2011%20WFE%20Market%20Highlights.pdf

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Depository receipts
GDR global depository receipt
traded outside the USA
ADR American depository receipt traded inside the USA and
denominated in US$
Different levels issued, depending on whether they represent new shares (effectively an IPO) or existing
shares, and where the shares are traded, and the level of disclosure required.

Company outside USA

Bank in USA

Issues certificate
denoting multiple
underlying shares to

Issues certificates to

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Investors in USA

Price: leave some money on the table

Graph taken (with permission) from: Initial Public Offerings: Updated Statistics
Jay R. Ritter, 2013
http://bear.warrington.ufl.edu/ritter/ipodata.htm
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Positioning
IPOs are commonly valued using market multiples, so price will be higher
if comparators are highly priced
Chose a time to float when markets are trading at high multiples
Choose an exchange that values your sector
Try to be allocated into a highly rated sector

Corporate Financial Strategy

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Investor relations
Aims of an investor relations
programme

Main external audiences for


whom IR is intended
(plus the internal audiences)

Types of IR activity

(all governed by various parts of the


law)

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A fair market value for the shares


Liquidity in the market for the shares
Easier access to capital in the future
Investors who will be supportive
Institutional investors
Retail investors
Financial media
Analysts: buy-side and sell-side
The adviser community
Other stakeholders increasingly important, esp. re
CSR
Publication of prelims, annual and half-yearly and
quarterly results
AGM
Regular meetings with key shareholders and
analysts
Conference calls, webcasts
News releases
Crisis management
Media briefings,
Roadshows
Website, etc.

List of people involved in an IPO


1. Company and its directors
2. Sponsor
3. Broker / bookrunner
4. Underwriters
5. Reporting accountants
6. Lawyers
7. Financial public relations
8. Registrar
9. Receiving bankers
10. Security printers

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Methods of going public

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Indicative timetable for a placing


Up to 3 years pre-float

Pre-float grooming

1224 weeks

Project planning
Appoint advisers

612 weeks

Draft documents (incl. PR)


Initial pricing review
First drafting meetings

16 weeks

More drafting meetings


Due diligence and review forecasts
Submit documents to UKLA

Admission week

Document approvals from UKLA


Pricing meeting
Final prospectus is printed

Impact day

Announce flotation
Sub-underwriting completed
Shares start trading
Sourced from London Stock Exchange publications

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Illustrative contents of listing particulars


Details of the shares to be issued, and full details of the share capital of the company,
including the rights of different types of share.
Information about the business of the company, its performance, risk factors affecting
it, and the markets in which it trades.
Information about the directors and key personnel, and on governance policies and
procedures.
Confirmation that the company will have sufficient funds in the foreseeable future.
Information about any unusual contracts entered into by the company of which
shareholders should be aware.
Details of any ongoing or potential litigation.
An indication of the companys dividend policy after flotation.
Accountants report on previous years financial results, and other relevant financial
information.
Anything else that might be of interest or relevance to the potential shareholders.

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Is it worth it?

Advantages of IPO
Marketability of shares
Source of cash
Increased profile company
and directors
Exit for institutions
Chance to make acquisitions
for paper
Management incentives

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Disadvantages of IPO
Lose control of the co.
Hassle factor (incl. governance
regs)
Time consuming who runs the
business?
Unwelcome public
accountability
Short-term emphasis?
Susceptible to market
conditions
Threat of takeover
Cost

Reasons for delisting

Directors feel the


market is undervaluing the company
Little liquidity
No need to raise
more funds
Fear of hostile
takeover
Wish to restructure
out of the public eye

Shareholders need to be satisfied that the directors are treating them fairly,
and not buying the company at an under-value
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