Role of the investment bank


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Role of the investment bank

  1. 1. 2 Role of the investment bank Daniel H Klausner, UBS Investment Bank UBS has a wealth of knowledge regarding all aspects of listing on the US securities markets and can provide ongoing advisory services throughout the entire process
  2. 2. Role of the investment bank Perhaps more than any other participant in the funding and more favorable borrowing • increased recognition of the company may initial public offering (IPO) process (with the terms; and stimulate greater interest in the company’s exception of the issuer), the investment bank is • by tapping the vast pool of capital available shares; and an essential player in the success of the IPO. through the US securities markets, a • the rigorous disclosures mandated by The investment bank assists the issuer with a company can build up a broad investor base, US regulatory agencies further ensure number of critical functions: thus ensuring a diverse and balanced transparency and public access to all ownership structure. This may help to significant information about US listed • analyzing the industry and company to stabilize the share price, especially during companies, thereby promoting investor determine whether there is investor demand market downcycles. confidence. for such a company; • structuring the offering and valuing and After the first year of listing the issuer may Greater employee commitment and positioning the company; and become eligible to access the capital markets on recruiting ability • developing the ‘story’ to market the offering. demand through shelf or well-known seasoned Incentives such as stock options, directed issuer registrations. share programs and stock purchase plans In a sense, the investment bank (generally unavailable to employees of private ‘quarterbacks’ the deal, leading the issuer’s Enhanced profile and marketing leverage firms) align employees’ interests with those of team of professional advisors and coordinating Public companies and their products attract the company. By allowing employees to benefit their roles to ensure that all business objectives greater media attention than private companies. financially from the company’s success, these are met and the company successfully A company going public may use the process as programs foster increased loyalty, commitment completes the IPO process. a branding opportunity. and productivity and serve as a strong incentive National and international financial media The advantages of going public in attracting talent. (e.g., CNN, Bloomberg, CNBC, the Wall Street An investment bank’s first order of business in Journal, the Financial Times) provide up-to-the- Shares as acquisition currency an IPO is to help the company sort out the second coverage of the markets and profiles of Once a company has gone public, it can use its relevant issues and determine whether an IPO public companies. Online media are also an common shares to finance acquisitions of other makes sense and is feasible. Some of the main instant source of information. In addition, public or private companies in order to gain advantages of going public are outlined below. opening-day listing events can be used to access to new plants or expand into new Access to increased funding generate company publicity. Broader media markets – without taking on additional debt or A successful IPO creates access to the public coverage invariably translates into enhanced liquidating assets. equity market, potentially the deepest source of visibility, market share and competitive position. Liquidity for shareholders corporate funds for any company. In addition: Increased appeal to institutional investors It is generally difficult to sell shares in a private • going forward, the company will have access in the United States and internationally company reliably and efficiently because no to worldwide capital markets through A US listing generally leads to broader exposure public market exists. Thus, large blocks of secondary equity offerings and debt issues; to a larger investor base, including retail and shares in private companies (or in closely held • by balancing equity and debt, listed institutional investors. In turn, this generates key public companies) cannot easily be bought, companies can enjoy greater flexibility in advantages - for example: sold or converted into cash in an organized and A guide for North American companies to listing on the US securities markets 15
  3. 3. Role of the investment bank efficient manner. The relative liquidity of publicly Sarbanes-Oxley compliance assesses its growth prospects (i.e., its products, owned shares is a major advantage for retail and Passed in 2002 in the wake of corporate markets, competitive arena, business strategies, institutional investors alike. accounting scandals, the Sarbanes-Oxley Act capabilities and growth objectives) credibly, imposes a vast array of reporting and procedural clearly and quantifiably, and in terms that will be The case for remaining private obligations on a public company and its officers. meaningful to investors. Companies engaging in Notwithstanding the arguments for taking a Compliance with the law’s provisions, which successful IPOs tend to have a clearly defined company public, the following caveats should affect virtually every aspect of a company’s vision for future performance and have also be kept in mind. operations, governance and financial disclosure, accomplished several significant milestones Cost can be particularly costly and time consuming. prior to the IPO. IPOs are expensive. Collectively, the one-off and Loss of privacy A credible earnings projection model that ongoing costs associated with going public are Securities laws compel public companies to details future growth likely to be high, covering legal counsel, share many types of potentially sensitive Before investing in a company, most individuals accounting and auditing services, underwriting, information with competitors and regulatory and institutions want to feel confident about the printing, additional personnel to handle agencies. Private companies are under no such company’s future growth prospects. Thus, the expanded reporting and compliance activities obligation to disclose proprietary information. company should be built on a product or and investor relations. In addition, planning and service with proven market appeal, a broad executing an IPO is a time-consuming process Impact of stock price on business strategy customer base and the potential for continued that can distract management from the As a matter of practical necessity, the acceptance. Companies that are in mature or company’s core business and may conceivably management of a public company must shrinking industries, operate within small hamper financial performance. consider the likely impact of business decisions markets or provide a narrow range of products on the price of the company’s shares. As a Reporting requirements to a small and highly specialized customer base result, they may be constrained from making Unlike privately held companies, public may be unsuited for an IPO. strategic decisions that will strengthen the corporations must file a variety of reports with company over the long term but may risk A plan for using the proceeds the Securities and Exchange Commission (SEC) temporarily lowering the price of the stock. By definition, a successful IPO is one that raises and other regulators on a regular basis. a significant amount of new capital. It is critical These include: Questions every IPO candidate should that: ask before going public • Forms 10-K, 10-Q and 8-K; • the company’s need for new capital justifies • proxy statements; and When is a company ready to go public? relinquishing private ownership of the • individual reporting for officers, directors The following prerequisites should be business and bringing in hundreds, perhaps and principal shareholders. considered by any privately held company that thousands, of shareholders; is seriously contemplating an IPO. • the company has a carefully thought-out plan Compliance with disclosure requirements Execution of a business plan for using that capital; and often necessitates a comprehensive and costly Most businesses already have a business plan. • the company communicates that plan clearly expansion - or outright replacement - of existing For the purposes of an IPO, a company needs a and convincingly to the investing public. corporate information systems. comprehensive roadmap that defines and 16 A guide for North American companies to listing on the US securities markets
  4. 4. Role of the investment bank A strong management team Select advisors • three years of changes in stockholders’ equity The company’s leadership should be sufficiently The company should carefully consider the (plus reviews of any interim period, if skilled and experienced in the operations and qualifications of the law firms and accountants applicable); and finances of the company and sector to win an that it hires to guide and provide advice to the • two additional years of income statements investor’s confidence and to fulfill its mission as company during the IPO process. As the and two additional years of balance sheet a public corporation. Similar principles, as well successful execution of an IPO can be data, which will appear in the selected as independence standards, will also apply to complicated and time consuming, the issuer financials and may be unaudited. the board of directors. Furthermore, officers and should select legal and accounting advisors that directors should understand the accountability have a national practice and significant Develop and refine financial projections that is attached to the leadership of a public experience in IPOs. The company should develop a ‘grounds up’ company. Unlike their private company financial model that quantifies the company’s Prepare audited financial statements counterparts, they must answer to hundreds, business plan and expected growth. The The company’s financial statements need to perhaps thousands, of shareholders. In addition, investment bank will work with the officers in adhere to US Generally Accepted Accounting the chief executive officer and chief financial the development of this model, conduct due Principles (GAAP) in order to go public. Any officer should regularly discuss the business diligence on the assumptions and drivers internal transactions, compensation and growth prospects with the financial behind this model and stress test the arrangements and relationships involving community, as well as addressing the questions projections. management or the board that might be and concerns of stock analysts, business appropriate for a private enterprise but improper Determine management compensation and journalists and regulators. for a public company must be eliminated. The stock option programs Solid historical financial performance company should consider whether any outside Boards of directors usually hire compensation The company should be able to show investors consultants to determine compensation for affiliations a sound balance sheet and a consistent pattern top executives and employees throughout the (i.e., operations tangential to the company’s of top and bottom-line growth over the past company. Their analysis incorporates trends core business) will be negatively perceived by several years. in specific comparable companies as well as the market. Financial controls in place Requirements for a company going public trends in the appropriate industry. The The company will need to demonstrate to the include: recommendations are reviewed by SEC, its auditors and the investing public that it underwriters with an eye toward ensuring • two years of audited consolidated balance has rigorous financial controls. Given the long that the numbers are within market sheets (plus reviews of any interim period, lead time and complexity of the Sarbanes-Oxley expectations. if applicable); requirements, financial controls are a key Select a board of directors, form board • three years of audited consolidated income focus area. committees and appoint committee heads statements (plus reviews of any interim What is involved in preparing for an IPO? period, if applicable); As a public company, an issuer will need to Select the underwriter • three years of audited consolidated cash-flow establish audit, nominating and compensation The company should appoint an investment statements (plus reviews of any interim committees. In addition, independent directors bank as the lead book-running underwriter. period, if applicable); will need to be added to the board. A guide for North American companies to listing on the US securities markets 17
  5. 5. Role of the investment bank Investment banks frequently help to when the issuer is not well known to the public of the deal and a myriad of other factors, the key recruit and assess potential board members or potential investors. stages of the process are as follows. for the company. Experience Week one Establish all necessary controls and Has the bank recently served as a book-runner Conduct organizational meeting procedures for Sarbanes-Oxley compliance for an IPO? What is the bank’s general The overall purpose of the meeting is to make Before going public the company must have experience level and how many transactions, sure all the working parties understand the certain financial controls and computer systems including IPOs, has it executed, both overall and structure of the offering, timing, tasks and in place in order to run its business effectively. in the company’s specific industry space? responsibilities necessary to take a company There is a specific timeline for the public. These meetings are usually held in Industry expertise implementation of certain elements of Sarbanes- person at the law firm or the company’s Does the bank have specific knowledge of the Oxley in order to be compliant, but not all the headquarters and involve discussions to make industry? How many transactions has it elements need to be completed at once. sure that everyone is on the same page completed in that industry? However, the company should develop an regarding the transaction, process, timetable implementation plan to ensure timely Distribution capabilities and all other relevant issues. The underwriter compliance with the various requirements. What is the geographic distribution of the will provide a detailed organizational book that investment bank’s salesforce? In addition, does goes through all of these issues. What are the criteria for selecting an the investment bank employ sector-specific underwriter? Weeks two to five salespeople? It is important to assess both There are many types of investment banks, each Conduct due diligence institutional and retail distribution capabilities, as suited to a different type of IPO. These include: The overall purpose of due diligence is to ensure retail distribution provides an important balance the accuracy, truthfulness and completeness of • global full-service firms; to institutional demand. the company’s registration statement and • smaller full-service national firms with global One-stop shopping prospectus, and to understand any issues capabilities; The chosen bank should offer a number of associated with the company. While each • regional firms with specialized geographic services such as equity, debt and advisory professional advisor performs a different role in knowledge and a variety of product offerings; capabilities – these can all be provided by a this process, the investment bank will focus on and large investment bank. the diligence of the company’s operations, • boutique firms that specialize in a particular The IPO from start to finish – a timetable management, financial prospects, historical industry or product. An IPO requires the coordination of many performance, competitive position and business When choosing an investment bank to parties including the company, the legal teams strategy. The investment bank will also look underwrite an IPO, a company should consider of the company, the underwriter, auditors closely at factors such as the company’s a number of factors. and printers. workforce, suppliers, customers, creditors and An IPO can generally be completed in 15 to anything else that might have a bearing on the Reputation 20 weeks. Although the exact timetable will vary offering or viability of the company as a public The prestige and cachet of a top-tier investment with market conditions, the scope and complexity entity and on the accuracy and completeness of bank lends credibility to an offering, especially the prospectus. 18 A guide for North American companies to listing on the US securities markets
  6. 6. Role of the investment bank Due diligence comprises many interrelated • corporate governance, including board of • corporate structure; processes. Business due diligence is directors and audit/compensation • debt covenants; conducted mainly by the investment bank and committees; and • environmental issues; is designed to verify the company’s business • reference checks. • intellectual property; and strategy and potential for future growth. As • registration rights and rights of first refusal. part of the information and fact-gathering Financial due diligence is geared toward process, investment bankers will conduct on- confirming the company’s historical financial Draft the registration statement/prospectus site inspections, particularly for manufacturing results and understanding its future Before a company can be listed, it must first and property-intensive businesses. They will operational and financial prospects. Key focus register its securities with the SEC. Although the also interview company officials, suppliers areas include: form of the registration statement or prospectus and customers to understand fully every to be used varies according to the IPO, all • audited and interim financial statements; aspect of the company’s business and its companies must meet common disclosure • capital structure; financial statements. The knowledge obtained requirements, as well as including any • breakdown of historical financials by will later help underwriters and management additional material information to ensure that business; to craft a strong, consistent message that can nothing in the registration statement is • detailed review of monthly/quarterly budgets be used during the marketing process. misleading or omitted. Although the registration (for two years) and yearly projections (for Business due diligence generally focuses on statement is a legal document, it is also a three to five years); such issues as: marketing tool to help to sell securities to • meetings with auditors; potential investors. It is the role of the • overall business model and growth strategy; • budget versus actual financial statements for investment bank to assist the issuer in crafting • relevant macroeconomic trends; the last eight quarters; the appropriate marketing story. • industry trends; • accounting policies and auditor In particular, the registration statement must • pricing structure; management letters; address the following: • analysis of operating results; • use of proceeds; • products, markets, customers and suppliers; • financial control systems and Sarbanes-Oxley • business information: • marketing and distribution; compliance; and • description of the company, its business • management strategy; • debt covenants. and main products and services; • manufacturing; • strengths and strategies; Legal due diligence is conducted by the • facilities; • general business developments over the attorneys and is the process of verifying the • competition and competitive position within past several years; company’s legal records, material contracts and the sector; • industry trends and background; litigation. Key areas of focus include: • environmental issues; • risk factors; • patent positions; • litigation; • planned use of the proceeds; • labor; • compliance with local, state and national laws • description of the security; • management systems; and regulations; • underwriting; and • management structure; • title to principal assets; • taxation; A guide for North American companies to listing on the US securities markets 19
  7. 7. Role of the investment bank • financial information: • capital stock – all voting, dividend Continue to prepare the issuer to become a liquidation, pre-emptive and other rights public company • audited financial statements for at least attaching to the shares; and The investment bankers will assist the the last three financial years and selected • full disclosure on direct or indirect company on a number of matters critical to financials for the last five years; ownership or control of the company, its transformation into a public entity. • depending on the actual timing of the including the identity of shareholders These include: IPO, interim financial information; and holding more than 5% of the company’s • capitalization information; • discussions of valuation; shares; • the composition of the board of directors and • prospects, including management committees; and • material related-party transactions, which are discussion and analysis of the company’s • internal controls, in compliance with stock intended to provide investors with a clear financial condition and operations over the exchange requirements. understanding of actual and potential past three years: conflicts of interest; and Although all these issues need not be • analyses of historical financial results; • other matters: resolved at this stage, most companies find it • future trends in operations; • a description of the company’s property; prudent to address board composition and • success or failure of specific operations; • pending legal and regulatory proceedings internal control issues in their prospectus as a • trends in liquidity; in which the company is involved; and way of demonstrating that adequate corporate • the company’s significant capital • relevant details on the material contracts, governance controls are in place. expenditures (whether current or exchange controls and other limitations proposed); affecting shareholders and the company’s Determine whether the company is eligible to • expected sources of funding; and tax position. list on a US securities exchange • any additional relevant trends and areas At this stage, the company needs to: of uncertainty; Legal documents and agreements • determine on which stock exchange it wants During this stage, the company’s management, to list; • management and governance: underwriters and legal counsel work together to • decide what level of listing it will seek; and • composition of the board of directors and draft the necessary legal documents. The • reserve a symbol. collective purpose of these documents is to background of individual officers; and assure investors, regulators and others that the • compensation disclosure and analysis offering has been objectively vetted for gaps, Weeks six to eight regarding the philosophy and practice irregularities, ambiguities, misleading Complete the registration statement and file behind the company’s compensation statements and other potential problems. The with the SEC programs; documents include: After the company’s investment bankers and other advisors have finished drafting the • board committees: • the underwriting agreement; registration statement, the lawyers will • compensation, nominating, corporate • the comfort letter; electronically file the registration statement with governance and audit committees; • lock-up agreements; and the SEC. Once the registration statement has • legal opinions. 20 A guide for North American companies to listing on the US securities markets
  8. 8. Role of the investment bank been filed, the company becomes subject to the by the stock exchange that the company is Marketing strategy provisions of Sarbanes-Oxley. Some of these approved for listing. Approval must occur prior The underwriters will set up a comprehensive provisions will have an immediate impact on the to launching the roadshow for the IPO. marketing plan incorporating the company’s company, such as the prohibitions on loans to investment themes to target specific investors. Sizing and valuing the offer executive officers and directors and the need for The investment bank will gauge the interest in Preparation of roadshow slide presentation auditor independence. the IPO within the investment community and Scripted and orchestrated by the investment File the application to list the company on a ascertain whether the IPO is indeed viable. The bank and the issuer, the roadshow is a series of stock exchange investment bank will also determine the number meetings with potential investors in key cities The listing application must be filed at of shares to be offered. across the country and, if appropriate, overseas. this stage. The price range for the offering will be The roadshow includes a formal determined on the basis of the information presentation on the company’s business Weeks nine to 16 gathered from due diligence and drafting, along operations, financial results, performance, Receive SEC preliminary approval of the with feedback elicited from the capital markets. markets, products and services delivered by the registration statement The investment bank and company should also company’s top management. It is typically Approximately 30 days after the registration consider the following variables: followed by a question-and-answer session. The statement is submitted, the SEC will send a roadshow provides the company with an comment letter to the company. The listing • valuation analysis (using appropriate invaluable opportunity to meet investors face to company and its advisors will then revise the comparable methodologies); face, showcase its managerial talent and registration statement and file an amendment, • the issuer’s objectives – notably the amount communicate its strategy, vision and objectives. as well as a letter in response to the SEC. of capital it needs to raise and the degree of The investment bank’s role in the Subsequent rounds of comments, revisions and control it wishes to retain; preparation of management for the roadshow amendments may ensue; the process continues • the issuer’s financial performance and includes: until the SEC gives its preliminary approval to growth prospects; begin the marketing and roadshow for the • the competitive arena; • assisting the issuer in the preparation of slide offering. As every IPO is unique, it is impossible • general stock market conditions; presentations; to predict exactly how long this process will take. • market requirements; • organizing rehearsals; However, as a rule, the timeframe is • the level of investor interest – both • preparing salesforce education materials; approximately six to eight weeks from initial institutional and retail; and • mapping the roadshow itinerary; submission of the registration statement to the • management. • targeting investors for one-on-one meetings SEC to preliminary approval to launch the with senior management; and transaction. All issues need to be resolved with Although the company may want to price • organizing roadshow logistics. the SEC and the registration statement must be the shares as high as possible, it will be at a declared effective before the IPO can be priced. disadvantage if the price range presented to Weeks 17 to 19 investors fails to attract adequate demand or to Salesforce calls to investors Receive stock exchange approval for listing ensure a healthy performance following the IPO. Once the transaction has been launched, the The company and its lawyers will be informed role of the salesforce takes on increasing A guide for North American companies to listing on the US securities markets 21
  9. 9. Role of the investment bank importance as the underwriters begin to contact company’s board of directors has approved the bank, should actively target current and appropriate investors to educate them about the offering price can final allocation take place potential investors to communicate the company and arrange meetings with senior (the stock is usually priced after the close of the company’s strategy effectively. The company’s management. market on the day on which the registration senior management should be accessible to statement is declared effective). Allocation is investors through conferences, non-deal Launch the offering and roadshow made by the investment bank following roadshows and other venues to increase the The beginning of the offering is kicked off by a consultation with the company. The objective company’s exposure to current and target management presentation to the investment is to ensure the quality of the investor base by equity investors. bank’s salesforce in order to discuss the allocating to investors which are likely to hold The company’s management should be offering, business, financials and the the shares for the long term and possibly prepared to ensure that the company continues company’s prospects. increase their holdings after the IPO. to perform well in the long term to meet Afterwards, the management meets investors’ expectations. The company should potential investors in key cities and, if Print the final prospectus also ensure that: appropriate, overseas. Many IPO roadshows After the pricing of the IPO, the lawyers will last approximately two weeks. revise the prospectus with the final pricing and • the management team can effectively size information and file the prospectus with communicate the company’s strategy and Building a book of orders the SEC. Once printed, the investment bank financial results to institutional investors and No firm sales of stock are permitted until the will distribute copies of the final prospectus to the public; SEC has declared the registration statement investors. • the company’s corporate culture encourages effective. Upon launch, the syndicate’s compliance with its internal controls and salesforce approaches investors and compiles Week 20 procedures; and indications of interest. The book-building Closing • periodic public disclosure filed with the SEC process is the mechanism of assessing The exchange of securities for funds typically is timely, complete and accurate. institutional and retail demand for the issue and occurs three business days after pricing. determines the final size, timing and pricing of After listing: the role of the The investment bank will provide market the issue. The syndicate desk receives orders investment bank intelligence on trends in the industry, updates and other feedback from the salesforce about Achieving a successful IPO generally marks an on trading activity in the company’s stock, as each investor’s demand for stock and alters the exciting new chapter in the company’s life, well as advice on acquisitions and disposals and book accordingly. where it enjoys the prestige associated with the viability and need for any follow-on Pricing, allocation and closing listing on a high-profile stock exchange, financings. Working with the company’s senior increased publicity and new access to capital. Through such activities, the investment management, the investment bank However, it would be a disadvantage for the bank can help drive the company to recommends the price at which the shares will company to be complacent. Instead the accomplishments beyond a successful IPO. be offered to the market. Only when the company, with the assistance of its investment ©UBS 2008. All rights reserved. 22 A guide for North American companies to listing on the US securities markets
  10. 10. Investment banking at UBS. Where sound advice comes from strong partnerships. And vice versa. At UBS, we believe that good advice and strong relationships go hand in hand. Because to give every client the independent, impartial advice they expect from us, we have to understand their needs thoroughly. Working right next to them to build their business for the future or make their deal a success. Whether it’s strategic advice and investment ideas, debt or equity, structured products or foreign exchange, we can deliver the relevant solution from across the firm. Ensuring that you get the most important advice of all. The advice you really need to hear. Issued in the UK by UBS Limited, a wholly owned subsidiary of UBS AG, to persons who are not private customers. In the U.S., securities underwriting, trading and brokerage activities and M&A advisory activities are conducted by UBS Securities LLC, a wholly owned subsidiary of UBS AG that is a registered broker-dealer and a member of the New York Stock Exchange and other principal exchanges and SIPC. © UBS 2008. All rights reserved.