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  Positioning
 A cash-out float gives money to  Investor relations
exiting shareholders  List of people involved in an IPO
 Reasons for floating a company  Methods of going public
 An IPO is a marketing exercise  Indicative timetable for a placing
 Possible regulatory requirements for  Illustrative contents of listing
listing particulars
 Where to list?  Is it worth it?
 Worldwide exchanges, some  Reasons for delisting
statistics
 Depository receipts
 Price: leave some money on the
table

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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.

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A cash-in float grows the company

Pre-float Post-float

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

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A cash-out float gives money to exiting shareholders

Pre-float Post-float

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

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Reasons for floating a company

Shares to act as
Exit for investors Diversification for
currency in
(cash-out) shareholders
acquisitions

Better
Fundraising Diversification of
management
(cash-in) shareholders
incentives

Future financial
Desire for prestige Opportunistic
flexibility

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An IPO is a marketing exercise

Are these shares attractive to the market? What does the

Product 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?

Good project-management skills are required to steer the

Process company through the detailed regulatory process

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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

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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

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Worldwide exchanges, some statistics

IPO FUNDRAISING IN MAJOR STOCK MARKET CAPITALIZATIONS OF MAJOR STOCK

EXCHANGES IN 2011 EXCHANGES AT END 2011

US $ bn US $ bn
1 Hong Kong 36.1 1 NYSE Euronext (US) 11 796
2 New York 31.4 2 NASDAQ 3 845
3 Shenzhen 26.2 3 Tokyo Stock Exchange Group 3 325
4 London 19.2 4 London Stock Exchange Group 3 266
5 Shanghai 16.3 5 NYSE Euronext (Europe) 2 447
6 NASDAQ 10.7 6 Shanghai Stock Exchange 2 357
7 Singapore 7.6 7 Hong Kong Exchanges 2 258
8 Spain 5.3 8 TMX Group (Toronto) 1 912
9 Brazil 4.4 9 BM&FBOVESPA (Brazil) 1 229
10 Korea 3.6 10 Australian Securities Exch 1 198
Includes REITs. Source: Dealogic data from
http://www.hkex.com.hk/eng/newsconsul/newsltr/201 Source: http://www.world-exchanges.org/files/file/stats%20and
2/Documents/2012-01-02-E.pdf %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 Investors in USA

Issues certificate Issues certificates to

denoting multiple
underlying shares to

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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

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Investor relations

Aims of an investor relations  A fair market value for the shares

 Liquidity in the market for the shares
programme  Easier access to capital in the future
 Investors who will be supportive

Main external audiences for  Institutional investors

 Retail investors
whom IR is intended  Financial media
(plus the internal audiences)  Analysts: buy-side and sell-side
 The adviser community
 Other stakeholders – increasingly important, esp. re
CSR

Types of IR activity  Publication of prelims, annual and half-yearly and

quarterly results
(all governed by various parts of the  AGM
law)  Regular meetings with key shareholders and
analysts
 Conference calls, webcasts
 News releases
 Crisis management
 Media briefings,
 Roadshows
 Website, etc. …

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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

12–24 weeks Project planning
Appoint advisers
6–12 weeks Draft documents (incl. PR)
Initial pricing review
First drafting meetings
1–6 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 company’s 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 Disadvantages of IPO

Marketability of shares ×Lose control of the co.
Source of cash ×Hassle factor (incl. governance
Increased profile – company regs)
and directors ×Time consuming – who runs the
Exit for institutions business?
Chance to make acquisitions ×Unwelcome public
for paper accountability
Management incentives ×Short-term emphasis?
×Susceptible to market
conditions
×Threat of takeover
×Cost

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Reasons for delisting

 Directors feel the

market is under-
valuing 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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