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!