Presentation on the Initial Public Offering Process by Joel Dibeton, Johan Hellman, Jean Lemercier. GIves an overview of the different steps, stakeholders and regulatory constraints, as well as a real life example with the Facebook case.

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Initial Public Offering – Logics and processes
Corporate Finance class – IFI 2013
Joel Dibeton – Johan Hellman – Jean Lemercier

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What are the main goals of an IPO and the stock
market?
 To guarantee access to capital market
 Externalize the debt
 To ensure investors are willing to buy stocks at the highest possible value
Do these statements agree with your company’s IPO
decisions
Important or very
important (%)
The IPO acts as advertising for the
company and increases its
reputation/image
83,11
Making the IPO, we believed it was
the best time to do it
72,73
The IPO is a normal « stage »in the
growth of a company
68,83
The IPO has allowed your company
Important of very
important (%)
To increase financial flexibility 75,32
To make the firm’s share more liquid and
to increase the firm value
75,32
To finance investment opportunities 73,33
BancelF., Mittoo U., « Why do European firms go public? », European Financial Management september 2009, vol. 15

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Pros and cons of an IPO
Advantages of an IPO
 For the company :
 Attractiveness of new partners
 Financial gains (capital raising, new
debt management possibilities …)
 Quality label, reassures investors
 For minority shareholders
 Access to liquidity and to information
 Protection of its interests
 Dividend policy
 For majority shareholders
 Benefits from liquidity without loosing
power
 Can bring out undesirable minority
shareholder
Disadvantages of an IPO
 The strategy has to take into account
financial parameters
 More transparency and communication
constraints
 Public companies tend to invest less than
unlisted companies. They are less reactive
to new investment opportunities

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Regulatory constraints
Financial transparency
 Mandatory and voluntary disclosures
 End of business confidentiality
Accounting constraints
 Consolidated financial statements under IFRS rules
 Impairment tests
Questions from the market
 Activity, results, perspectives, management, shareholder compensation
Lock-up for historical shareholders
 Reduces risk of overhang

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Reorganization

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Advisory Banks
Goal
 Structuring of the operation
 Link between the market and the company
Reputation and assessment
 Relationship of trust between the investors and the bank
 Credibility of price
Banking syndicate
 Each advisory bank has it own role
 Global co-ordinator, bookrunner, co-lead managers, co-managers

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Choosing a listing market
 Natural place : country of origin
 Presence on different markets

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Different listing markets (France)
Euronext Eurolist Alternext Marché libre
Types Blue chips and
average values
SMB / SMI Small companies
Nature of the
market
Regulated Non-regulated /
« Régulé »
Non-regulated /
Organized
Application Issuer Issuer Issuer or
shareholder
Size box (Millions €) A : Capi>1000 ; B :
150 <Capi<1000 ; C
: Capi<150
None None
Nature of the
introduction
IPO IPO, private
placement, direct
admission
IPO, private
placement

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Choice of the operation
Primary transaction
 Capital increase
Secondary transaction
 Transfer of shares
Mix
How to choose :
 Will to monetize all or a part of their participation
 Need of funds to finance growth or to reduce the debt
 Need to offer enough share to ensure liquidity

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Other forms of IPO
Dual track
 Same process as an IPO but enables the possibility to stop the process and
replace it with a private divestment
 Permits to choose the best solution in terms of price
 Mainly done for LBO or family companies
Equity carve out
 Parent company decides the pricing of an subsidiary
 Refocusing on core activity. Externalize the hidden value of the subsidiary

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Costs incurred during an IPO
 Costs from structural factors (size, method used, type of market…) and from
subjective factors (communication, providers…)
 Legal costs (AMF fees, admission and publication costs…)
 Roadshows (hotel, plane), meetings
 Estimated between 2% and 4% of the total cost (without banks)

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The stakeholders in the IPO process
Investment banks : acting as underwriters, they price the security and market it to
investors
The Security Exchange Commission (SEC, AMF for France) : Monitors the IPO
(legal aspects, compliance and accuracy of statements)
Lawyers : Due diligence work, prepare the documents for the legal authorities (SEC,
NASD..)
Auditors : Help the CFO address accounting issues, prepare the financial disclosures
needed in the prospectus

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The IPO process – Preparatory work phase
The Kick-Off meeting (auditors,bankers,lawyers and company management)
Determining the roles of each party (lead manager,co-manager..) as well as the timing
Beginning of the due diligence – Customer Calls/Suppliers, Industry/market, Legal
(registration and contracts), Financial due diligence
Decide between underwriting and best effort basis
IPO pitch
In depth analysis of the company and its position within the market, competitive advantage(s)
Valuation (DCF,comparables..)
 S-1 Filling for the SEC (AMF prospectus)

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The IPO process – Pre-Marketing phase
The pre-IPO analyst meeting (Warm-Up meetings)
The team highlights the strengths of the company to analysts and other banks/institutions
Issue a red-herring (preliminary prospectus, usually without pricing) and present the “Equity
Story”
The team compiles feedback from Investors and the price they are prepared to pay for the
company
SEC (AMF) gives feedback regarding the S-1/AMF prospectus previously sent

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The IPO process – Marketing phase
Road-shows and One to One meetings
Management travels to major financial cities and market the company for 1-2 weeks
S-1 form is amended and the final marketing documents are ready (forecasts, statements)
The lead manager begins the book running (5 to 15 days) – taking orders from clients to
estimate demand – with a fluctuation of +/-20% from the company’s estimated value
Official announcement for the closing of the order book

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The IPO process – Share Allocation phase
Fixation of the price (given investors’ demand)
If the deal is over-subscribed (“too much” demand), the banks will price the company at the
high end of the range (opposite for under-subscribed IPOs)
Tend to leave “some money on the table” for the stock to rise on its first days of trading
The book runner and the company allocate shares to investors
Favour investors based on geographical location/investment objectives (repartition between
short/medium and long term)
The objective is to keep the share price stable for the post IPO period (1month)
Banks tends pushes to favour its most profitable clients to maximize profits
At this point, 80 to 90% of the company floating is allocated in the market

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The IPO process – Trading phase
The 10 to 20% capital remaining is allocated to individual investors on the market :
Floating price (Banks fixes the price after registering orders on the trading system)
Fixed price (same as the previously fixed price)
Trading begins..

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IPO risks
The underwriters :
Counterparty risk (if the investors don’t want the security any longer after their order)
Losing their clients if the security is overvalued
The company
Raising less capital than expected in an adverse market situation
The Investors
Buying an overvalued security

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Greenshoe/Over-allotment Option
 Aim is to stabilize the price during the post IPO period (<30days)
 This gives the underwriter the right to sell 15% more shares than planned (the
company lends 15% to the underwriter)
Two scenarios :
 The price of the security falls
The underwriter does not exercise the option – buys the securities (15% max) in the
market to limit the decrease – and gives back the shares to the company.
 The price of the security increases
The underwriter exercise the option – buys the securities (15% max) from the company

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Key Features of the deal
 Deal size: $18bn  valuing FB at close $104bn
 Advising banks & Fee pool

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The Story

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“Pre-Deal”
 Reluctant Zuckerberg
 Poised to be one of the hottest deal of the
century (both in terms of size and hype)
 The race:
Michael Grimes vs George Lee

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The Deal… a flop
The earnings guidance and disclosure issues
Morgan Stanley achieved full value for FB
 Price range: [$34-$38] High end
 First day support to stock: estimated $2bn
 Spectacular demand due the to secrecy

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The Post-Deal
 Crashing Stock Price
 Massachusetts Investigation

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Just our two cents’
Thank you