Pandora conducted an IPO using a bookbuilding process where institutional investors submitted non-binding bids indicating demand at various price levels. Google conducted its IPO using a Dutch auction process where bids were submitted for a uniform clearing price. Both IPOs faced challenges in setting the right offering price due to information asymmetry and uncertainty. Bookbuilding allows underwriters to allocate shares in a discretionary manner to reward investors who provide valuable information through their bids.

1. Copenhagen Business School Topicsof Finance – F87 11-30-2010 GOING PUBLICTwo different approachesBookbuilding Vs. Auction Pandora and Google case studies Sheila Jolin - Francesco Neri David Östblad - VedranKontic

2. TABLE OF CONTENTS Introduction to IPOs Pandora´s IPO IPO process Price setting mechanisms Information asymmetry and uncertainty in IPOs Bookbuilding Mechanism Post-IPO activities The syndicate Google´s IPO Dutch auction process Did Google succeed? Conclusions

3. WHAT IS AN IPO? INITIAL PUBLIC OFFERING

4. An IPO is the first sale of a company’s shares to the public and the listing of the shares on the stock exchange Our presentation will not focus on: Seasoned equity offering (SEOs) Right offerings We want to focus on explaining how different options the companies have when they decide to go public for the first time – and how the different mechanisms work. In both SEOs and Right Offering price is publicly available since the company is already in the market.

6. To improve credit standing

7. Acquisition currency (for a stock payment to be accepted, the shares of the acquiring firm need to be listed)

8. Management compensation (stock options)

9. Take advantage of favourable market conditions

10. Reputation

11. Expand the basket of funding sources to support growth

12. To get liquidity

13. To deal with the transfer of control – such as succession of the first entrepreneurial generation.

14. To facilitate the acquisition of the company for higher value

15. For private equity firms is one of the favorite exit strategies

17. PANDORA IN A FEW WORDS Pandora designs, manufactures, markets and sells handmade jewelry all over the world. In 2009 it was one of the third largest jewellery brands in the world in term of estimated retail revenue. The company is represented in more than 40 countries across six continents. The 65% of turnover is realized outside Europe. Private Equity firm AXCEL acquired 60% of Pandora from the Enevoldsen family Established In CPH by Per & Winnie Enevoldsen Started manufacturing In Thailand New marketsUS. Germany Australia IPO on Nasdaq OMX Copenhagen 2003-04 2008 2010 1989 1982 Generated revenue (2009) - DKK 3,5 billion (EUR 465 m) EBITDA (2009) - DKK 1,6 billion EBITDA Margin 45% EARNINGS (2009) – € 135 m Generated revenue (H1 2010) DKK 2,6 billion (EUR 345 m) EBITDA (H1 2010) app. DKK 1 billion Pandora A/S employs 4.500 people worldwide (3.300 in Thailand) Source: Pandora

18. PANDORA’s IPO The IPO consisted of approximately 44.6 million existing shares. Approximately 2.7 to 3.4 million new shares, plus 6.7 million existing shares which is an overallotment option. In the end 2.9 million new shares were established. Free float = 36% OWNERSHIP STRUCTURE Before the IPO Without the Greenshoe After the Greenshoe Source Pandora FAMILY & EMPLOYEES AXCEL OTHER NEW SHAREHOLDERS

20. Foreign market

22. Private offering

23. Retail tranche

25. International offeringThe distinction is not related to the market of listing International institutional investors Retail tranche (only 5%) composed by Danish investors The offering attracted strong interest from investors both in Denmark and internationally. The deal was at least three times over-subscribed.

26. ACTORS Global coordinator Investment Banking – Equity capital market - Sales Institutional investors Company shareholders Syndicate of banks Financial advisor Specialist Sponsor Shareholder advisor Legal counseling Auditor Communication department Retail investors Issuer / Company Supervisory authority SEC in the US Finanstilsynet in DK A company is responsible for the organization and management of the stock exchange (NASDAQ OMX)

28. Bookbuildingclosed/Allocation – Oct. 4

30. Applies for listing to the market authority and to the stock exchange

31. Preparing documentation

32. Drafting prospectus

33. Communication plan

35. Choise of the market of listing

36. Choice of the Global Coordinator

37. Preliminary valuation

39. Offering deminsion

40. Definition of the acceptance period

41. Contacts for the syndicate

44. Prospectuspresentation

45. Roadshow

46. Bookbuilding

47. Price setting

48. Allocation and allotment

49. Greymarket

51. Stabilization

52. Market making by the specialist

54. Approaching The Market Pre-marketing The global coordinator will informally solicits institutional investors to get their “feelings” about the issue (eg. “Pilot Fishing”: with this practice the bank conducts a confidential pre-sounding of a planned IPO with some key investors). Price range setting The valuation will reflect the sentiment assessed during the pre-marketing step. Presentation - “Roadshow” The management of the issuing company and the investment bank present the issue to institutional investors in the major European centers - for larger offerings it usually takes one week in Europe and one week in the US. During the roadshow period non binding bids are requested and the book is built.

56. Within the retail tranche the allocation is made on a non-discretionary basis (like pro-rata basis)Price setting When the books are closed the bank and the issuer set the offer prize

58. Certification and reputation

60. ComparablesPreliminary valuation Due diligence Fair value val. Pre-marketing Roadshow TIME Pricing 2 – 4 months before 1 – 3 months before 1 month before 2 weeks before 2 – 3 days before First meeting with the company Source JP Morgan

62. Best effortFixed price Offer price is set by issuer and Global Coordinator before bids are submitted The Global Coordinator underwrites the offer (Firm Commitment) The Global Coordinator puts its best effort to sell shares (best effort) Auction Investors are invited to an auction where they bid for shares A market clearing price is set after bids are submitted Two types of action: Price -discriminatory Uniform-price Once the offer is covered, shares are allocated at a single clearing price Since 1998, the US Treasury used this format to sell all of its bonds, notes and bills. Key feature: Allocation of shares among institutional investors is decided by the Global Coordinator on a discretionary basis Key feature: Allocation of shares among investors are decided on a non-discretionary basis Despite the lack of transparency, it is the most common approach METHOD USED BY PANDORA

64. Bidder A estimates $5 m.

65. Bidder B estimates $20 m.Bidder B wins, but overpays 10 m. Risk of underpricing On average the closing market price on the first day of trading is higher than the offering price. This has a negative effect on the wealth of the pre-issue shareholders. Shareholders leave ”money on the table”

66. THE MARKET’S PROBLEMS WITH THE PRICING OF IPO Firms that issue during low-volume periods usually experience neither high initial overpricing nor subsequent long-run underperformance Monthly data Cycles in both the volume and the average initial return Periodof “hot issue” Monthly data During periods of over-optimism many firms rush to market – this could results in disappointing returns in the long term Source: Ibbotson, Sindelar, Ritter (1994)

67. The underpricing phenomenon exists in every nation with a stock market, although the amount of underpricing varies from country to country

69. Maybe IBs did not want to take advantage of a crazy market

71. Information Cascades Potential investors pay attention to whether other investors are purchasing

74. Underwriting

77. CERTIFICATION – banks’ reputation reduce uncertainty

78. RESEARCH – aftermarket analysts coverage

80. Certification and reputation

81. Create and stimulate a demandBook building Offering price PANDORA PRICE RANGE DKK 175-225 per share Preliminary valuation Due diligence Fair value val. Pre-marketing Roadshow TIME Pricing 2 – 4 months before 1 – 3 months before 1 month before 2 weeks before 2 – 3 days before First meeting with the company Source JP. Morgan

82. BOOKBUILDING-PRICING Information is crucial to set the price and investors have information (HARD and SOFT) that can resolve the uncertainty concerning the price. The use of strategic pricing and allocation policy can offset the investors’ incentive to understate their interest in an IPO A large amount of bids would be excluded Just a small amount of bids would be excluded. More heterogeneous group of investors Demand No. of share (m) Underpricing is reduced The expected underpricing would be much higher Offer (fixed) Offering Price (€) Source: Forestieri (2008), Jankinson and Jones (2007) A good compromise For Pandora was 210 DKK € 9,1 € 7,6 This demonstrates how the allocation among the institutional tranche on a discretionary basis works. The offering price is set not only on the basis of the intrinsic value of the issuer and the market conditions, but also on the basis of which investors the Global Coordinator wants to favor. The reward to investors consists in larger allocation of underpriced shares.

84. A Step Bid, by the contrary, reveals the investors’ elasticity to the offering price

85. A Limit Bid is in the between

87. Investment bankers award more shares to bidders who reveal information through limit bids.

88. Bidders who participate in a large number of issues receive favorable treatment in the allocation of shares.

89. Investment bankers favor insurance companies and pension funds, which are usually considered long-term investors.

90. On average, 30% of bidders are not allocated shares.

91. Limit bids are favored relative to strike bids. Step bids are even more favored.

92. Large bidders are awarded with a larger fraction of their bids compare to small bids.

94. STABILIZATION – THE GREENSHOE OPTION STABILIZATION is “the buying of security for the limited purpose of preventing or retarding a decline in its open market price in order to facilitate it distribution to the public” To assist in the stabilization effort the IB may overallot shares to investors (usually 15%) The bank overallots shares creating a SHORT POSITION Global Coordinator Issuer Selling Shareholders Grant an option to purchased share in the following 30 d. GREEN SHOE OPTION Strike Price = Offering Price The option is granted for free THE BANK HAS TO GIVE BACK THE SHARES BORROWED 2 Possible scenarios

96. Strike price: DKK 210 (= Offering Price)

98. Total amount of shares sold: 54,17 m

99. Total proceeds: DKK 11,36 m

100. Contrasting the price decline

101. Leaving less shares in the market

103. Leaving more shares in the market

104. The IB gets more feesTHE BANK GIVES THE PROCEEDS OF THE OVERALLOTTED SHARES TO THE ISSUER Results

105. Valuation of Pandora – DCF Model Very low leverage Net Debt/Ebita < 1 SELL recommendation! Source: JyskeBank

106. SYNDICATE COMPENSATION finaloffering price - price the membersof the syndicatepayfor the shares Remunerationprovidedfor the benefit of the “management group” for the organizationof the deal Differences in IPOs’ feesaround the world (Gross Spread averagevalue) Management fee On average 20% – 25% US 5-7% 8% of Global IPO ($) 18% of fees UK - EU 3 - 4,5% China – India 0,75-1% 50% of Global IPO ($) Only 38% of fees Remunerationfor the underwriting serviceprovidedby the bankswhichguarantee the sucessof the IPO Hong Kong 2-3% Gross spread 100 % Underwriter fee On average 20% – 25% The 7% spread and the 20/20/60 division are the industrystandars Remunerationfor the sale service providedby the bankswhichcontribute in the allocationofshares Selling fee On average 50% – 60% Source: Financial Times

107. The SyndicateThe distributionofFees - Example Source: Pandora The Lead Manager gets 50% of the management fee, 32% of the underwriting fee and 76% of the selling concession. This is consistent with the lead manager’s considerable discretion in the allocation of sales credits. Source: Torstila (2001)

108. Google Dutch Auction Case

109. WHY GOING IPO IN 2004? Source: Google In 2004 Google expected very high performance in the coming years. The launch of GMAIL to enhance the search engine. To realize their vision: “organize the world's information and make it universally accessible and useful”. Google needed more resources to grow in the future. Google’s owners wanted to provide employees with an option to convert their holdings in Google for cash.

113. Some issuers have fared well in the after market and some have struggled.

114. Only subsequently the issuer and its bankers were allowed to reduce the offering price, notwithstanding the cleaning price determined in the auction.

116. DUTCH AUCTION PROCESS Like in the book-building all shares will be sold at the same initial public offering price

118. Price per share the investor was willing to payThe auction assessed the market demand only for the Class A common stock. The Clearing price is the highest price at which all the shares offered may be sold to potential investors.

119. Source: www.google-ipo.com

120. Example of the Pro-Rata Method All investors who had submitted and not withdrawn bids with a price per share that was equal to or greater than the initial public offering price were eligible to receive an allocation of shares . Successful bidders will receive share allocations on a prorata basis No. shares offered No. shares represented by valid bids Allocation % × Shares Representedby Successful Bid Source: GoogleAmendment No. 1 TO Form S-1

123. The action process usually encouraged a speculative frenzy and a distruptive backlash immediately after the start of trading.

125. PERFORMANCE EVALUATION P = 50 E A price many analysts deemed too high The underpricing of 18% was very close to the average 18,8% first-day return of US IPOs during the period 1980-2001, but lower relative to other Internet IPOs, especially those that went public during the IT bubble (1999-2000). The auction failed to achieve a fair market valuation for Google. However Sergey and Larry were able to maintain the control of the process (i.e. avoiding middleman in final decision making) and to create an “open IPO”. The Wall Street firms co-managing the deal received less than half of their usual fees (2,8% of the revenue raised).

126. During the first year after the IPO, Google´s stock more than triplicated. The stock has never been traded below the offering price of $85

127. POTENTIAL REASONS FOR GOOGLE’S OUTCOME

129. Despite theory argues that the Dutch auction improves both pricing and allocation, U.S. issuers have been slow to use any auction format. Since 1999, only nine firms have used the OpenIPO format.

131. REFERENCES Iannotta, G. (2009). Investment Banking. A guide to Underwriting and Advisory Services. Springer-Verlag Berlin Heidelberg, 44-98. Cornelli, F.& Goldreich, D.(2001). Bookbuilding and strategic allocation. Journal of Finance, 56, 2337-2369. Booth, L. The Costs of Going Public: Why IPOs Are Typically Underpriced. QFINANCE Berkeley, A.J. (2005). Some background and Simple FAQs about Dutch Auctions and the Google IPO. Torstila, S. (2001). The Distribution of Fees Within the IPO Syndicate. Financial Management, 5-23. Ibbitson, G.R., Sindelar, L.J., Ritter, R.J. (1994). The Market’s Problems with the Pricing of Initial Public Offerings, Journal of Applied Corporate Finance, 1, 66-74. Benveniste, L.M. (1989). How Investment Bankers Determine the Offer Price and Allocation of New Issues. Journal of Financial Economics, 24, 343-361. Hild, M.(2008). The Google IPO. The Journal of Business & Technology Law, 3 n°1, 41-59. Anand, A.I. (2005). Is The Dutch Auction IPO a Good Idea?. Center of Law, Economics and Public Policy, Yale Law School. Forestieri, G. (2007). Corporate and Investment Banking, Egea. Vise, D., Malseed, M. (2007). Google story. Egea. Hansell, S. (May 10, 2004). For Google, Going Dutch Has Its Rewards And Its Risks. The New York Times. Page, L., Sergey, B. (2004). Founders’ IPO Letter. S-1 Registration Statement. Pandora A/S. (October 2010). Company Announcement. No.1 (http://investor.pandora.net/) Pandora A/S. (September 2010). IPO Prospekt. (http://investor.pandora.net/). Thomsen, H.J. (14/10/2010). Pandora Equity Research. Jyske Bank. www.investor.google.com