Sunday, August 24, 2008

Trial Run : IPO

The dream of many entrepreneurs is going public one day. I'll provide a look at the realities of an IPO. I'll start with a basic overview of an IPO, and then explain how to prepare for one, public relations do's and don'ts, and life as a public company. It's an enormous topic, but my plan is to provide you with general understanding.

Timing and responsibilities Your board of directors, together with the underwriters (investment bankers), will determine the timing of an IPO. Expect a 14- to 18-week process, but bear in mind that market conditions may expand or compress this range. To have the best shot at controlling timing and minimizing market risk, be both prepared and highly flexible. Your chief executive officer and chief financial officer won't get much work done outside of the time-consuming IPO process.

Choosing an underwriter The main issue here is to be sure your underwriter is committed to your offering. Here's what to ask: Is it already representing competitive offerings or offerings in the same time frame which may be a distraction? Has it had any "cratered" deals (deals that were not successfully marketed)? You'll pick at least two underwriters with expertise in your industry. And you'll want them to hold the stock after the offering. Look at the history of the underwriters. Do they often sell off their shares at the first opportunity? If so, be warned.

The organizational meeting The key company executives, attorneys, and accountants, plus the investment bankers from the underwriting firm and their attorneys, will attend the organizational meeting. They form what is known as the IPO working group. The timeline, number of shares to sell in the offering, legal and accounting issues, due diligence, publicity, and the road show will all be discussed in this meeting.

Determining the stock price and number of shares The underwriters will determine the valuation of your company, and you'll work with them to set the price of your stock from there. Setting the valuation is no trivial exercise. Market conditions, comparable companies, past and projected financial performance, market position of your products or services, new products in development, and management team will all be considered. The more data you provide to the underwriters, the more likely they'll set a valuation you're happy with. From the valuation, a range for the share price will be set, but it won't be solidified until shortly before the offering.

Prospectus The prospectus plus additional public information about the company that is considered material. It is filed with the SEBI. The prospectus is the IPO marketing document. It explains the offering, the business, the products, the risks involved, the use of proceeds, who the executives are, and their view of the financial condition and results of operations, the financials—in essence the most accurate and complete picture of the company. The summary section is the most important part of the prospectus, because it's the only section everyone reads. The summary will either boost or dash confidence, so you'll likely write it last, once the entire prospectus is done.

Caution: Above all, in spite taking all precautions two major IPOs, Emmar MGF and Wockhardt Hospitals withdrawn their IPOs, when they failed to manage the required amount of subscription from investors. After the poor performance of Reliance Power IPO (Initial Public Offering), investors have started avoiding IPOs.

Inputs also from: Christine Comaford CEO of business accelerator Mighty Ventures, is the author of the best-selling book Rules for Renegades.

Wednesday, August 13, 2008

IPO Trends favor India and China

Attorneys who assist clients in the process of preparing an IPO generally believe that 2009 will result in a stronger market than 2008. A recent survey has revealed the current reluctance is tied to general economic conditions. Companies which have filed to go public are waiting up to six months for the launch event compared to an average of three months a year ago.

The survey also found that companies based in China and India are increasingly seen as potential opportunities for new IPO launches and to encourage these firms to seek capital in the US, attorneys believe the Sarbanes-Oxley legislation may be relaxed for foreign firms.

Here’s a breakout by industry for expected IPOs in the next several months:
Alternative energy
Traditional energy
As you prepare to prospect for new business in 2009, keep these trends in mind.

[Sources: Gaven Anderson release 8.5.2008; Ernst & Young release 8.5.2008]

Saturday, August 9, 2008

Sebi reduces IPO listing time to 7 days

Sebi will reduce IPO listing time from 21 to 7 days but it may happen in next in 6 months time .

Primary market reforms are on top of the agenda of India’s capital market regulator SEBI. SEBI wants to kick off the exercise by cutting down the time between a company’s public issue and the listing of its stock from 21 to seven days. SEBI also wants to iron out glitches in SEBI’s investigation and legal wings and make sure that involved parties are heard before any judgment is passed. The market is not in the best of health.
Isn’t it an ideal time for reforms as nobody will accuse SEBI of spoiling the party.

India Inc. feels the Inflation Heat

As India Inc witnesses a slowdown in the earnings growth rate, India’s top 25 business houses also mirror the trend. Financial Express study of these large industrial houses, with diversified business presence, shows that the net earnings growth rate is low at 7.3% in the first quarter of FY09, as compared to double digit growth rates recorded in previous quarters. However, the revenues kept growing at a rapid clip, where the companies in reckoning recorded a 35.5% growth in the period under consideration.
In absolute terms, the total net profit of the 25 largest business houses has increased to Rs 15,878 crore in April-June’08 from Rs 14,799 crore in April-June’07. Clearly, there has been volume growth, but rising input costs and higher interest rates have been taking their toll.
On the other hand , the total sales of the 25 houses also increased by 35.5% to Rs 1,55,160 crore in April-June’08 , against Rs 1,14,541 crore in April-June’07. Analysts attribute the lower growth in earnings to lower trading income and income from non-core sources like the stock market and the foreign exchange market. Since the rupee and the stock markets have been volatile, especially in the first quarter of FY09, the total other income of the above number of houses decreased by 1.6% to Rs 3,515 crore in April-June’08 from the level of Rs 3,571 crore in April-June’07.
Subsequently, the net profit margin, which is expressed as the PAT to sales ratio, which measures the rupee net profit made from a hundred rupee sales, has dipped from 12.92% in April-June’07 to 10.23% in April-June’08.
Individually, among the top 25, the ratios increased significantly from April-June’07 to April-June’08 in the case of Tata (14.82% to 15.41%), Munjal (Hero) ( 7.14% to 8.98 ), Murugappa (2.47% to 5.56 %) and Torrent (6.34% to 7.50%).
Among the 25 business houses, the ratios decreased significantly from April-June’07 to April-June’08 in the case of Mukesh Ambani (12.30% to 9.89%), OP Jindal (14.34% to 8.85%) and Anil Ambani (25.66% to 14.87%).
On the net profit level, significant growth of over 25% in the first quarter of the current fiscal, over the same period of the previous year was witnessed amongst eight industrial houses. These include the Tata gruop, the Ruchi Soya group, the Essar, the Munjal or the Hero group, Ispat-MPK, Murugappa, Torrent and Kalyani. While Mukesh Ambani’s Reliance group topped the list with... sales of Rs 41,596 crore in April-June’08, the Kirloskars group were at the bottom of the list with collective revenues worth Rs 1,264 crore

R-Money to "export" currencies Rs 10,000 Crore

Anil Ambani group's Reliance Money is eyeing to "export" currencies worth about Rs 10,000 crore in the current fiscal a four-fold jump from previous year's figure as part of its money changing and transfer business. Reliance Money, the brokerage and financial products distribution unit of ADAG's financial services arm Reliance Capital, is looking for a significant growth in its money changing and transfer business, the company CEO Sudip Bandyopadhyay said in Kolkata. He said the company exported currencies worth Rs 2,500 crore in the last fiscal and is targetting Rs 10,000 crore in current financial year. The size of the Indian export currency market was around Rs 40,000-50,000 crore to and was growing further due to increased tourist inflows and trade activity, he said. When Indian rupee became fully convertible, then currency movements would increase and the market would grow exponentially, he added. On money transfer, he said, Reliance Money was the largest partner of Western Union. The target was to transact Rs 2 lakh per month by the end of the year, he said. Meanwhile, Reliance Money had floated a company in the Gulf, Riyada Reliance Money, with a view to sell global products to foreign clients. He said the company would seek membership of Saudi Arabia's Takaful stock exchange to conduct business there.Bandyopadhyay added that the Riyadh-based firm would make an issue to raise Rs 240 crore by way of off-loading 74 per cent stake to institutional investors on private placement basis. To further expand its international presence, the company is also eyeing to acquire an entity in the Middle East, the Reliance Money CEO said

Wednesday, August 6, 2008

New Norms for VC's

Government is likely to revisit norms for venture capital funds and talks have been held with the market regulator SEBI in this regard.Norms governing domestic and foreign venture capital (VC) funds in India are set for an overhaul. The new guidelines, being drafted by the finance ministry and the capital market regulator SEBI, may not allow VCs to invest in listed companies and restrict them only to startups. The guidelines will also seek to remove the differences in the treatment of foreign and domestic VC funds. One of the aspects being reviewed is the minimum capital required for VCs to set up shop in India. Currently, domestic VCs need to have a minimum capital of Rs 5 crore to operate, while foreign VCs don’t have any such requirement. The new guidelines will attempt to provide a level playing field for domestic and foreign funds. The government is studying norms in other countries, where mere commitments to provide capital to a VC fund would be sufficient. VCs, who are currently exempt from SEBI’s takeover code or lock-in period for shares held would be allowed to enjoy this exemption only if they invested in “genuine new ventures.” The government feels that VCs should provide capital to new ventures and not invest in established listed companies. Speaking earlier at the launch of the Venture Capital Association of India, joint secretary in the finance ministry KP Krishnan said, “It is time to revisit the regulatory regime of venture funds. Now, they are not required to register with the regulator. It is important for us to know how many of them operate in India as well as the volume of business that they do.” On another count, while domestic VCs can get a tax exemption only if they invest in high-risk areas like biotechnology or nanotechnology, foreign VCs escape taxes altogether as they normally operate from offices established abroad. Most foreign VCs do not have to pay any tax, as they have no permanent establishment in India. The differences in tax treatment between domestic and foreign VCs is also under review, the official said. The government is also understood to be looking at redefining the investments that are more risky instead of categorising certain sectors such as biotechnology as risky. The government’s intention is to have a new classification of risky areas of funding irrespective of the sectors.

Tuesday, August 5, 2008

Making an IPO

With IPO being the buzzword in the industry sector, following the seven steps would ensure a smooth climb up the IPO ladder when an Initial Public Offering (IPO) comes in for funding ambitious, gigantic projects. .However, going for an IPO is definitely not easy. An industry expert cautions,
"The right recipe is to go step by step with each step dependent on the other. If you miss out one step the whole structure will crumble."

Making an IPO involves immense research, planning and strategising. One must bear in mind that here the ownership and management of the organisation is not just focused on a particular person(s), but instead distributed and diluted on a larger scale and hence the stakes are automatically higher. So, an error even on a miniscule level can have drastic repercussions.

1. Choosing the Perfect Time

Before even plunging into the intricacies of the pre-IPO arrangements, choosing the ideal time to go public is of core importance. The timing of going public is very crucial in the pre-IPO process. One should look into many aspects before the plunge—like looking into the prevailing market sentiment. In the 1980's and early 1990's when branding and marketing were non-existent, liquidity in the market, behaviour of the secondary market and merchant bankers' advice were instrumental in deciding the right time for the IPO.

2. Choosing the Right

TeamForming the right team is essential before going for an IPO. Apart from the Chief Executive Officer (CEO) or the Chairman, the main members are the Chief Financial Officer (CFO), Chief Operating Officer (COO), the Company Secretary, the auditors, professional merchant bankers, and the Chief Information Officer (CIO) in the current age of information and legal advisors. It is very important for the board of directors involved in the venture to have a progressive outlook. Only an intelligent team can contribute to the success of the venture. Zeroing in on the right CFO is crucial. Experts in the field opine that the CFO should be a veteran with not just a sound financial knowledge of the market and the trend of IPO. The CFO required when the company is at its growth stage is different from the CFO needed for an IPO, where he should have good networking and market contacts. A merchant banker works out the logistics of the company, but it is the CFO who actually markets the IPO. Team building and the professional team that you bring in is very important. You should be very careful not only about land and equipment but also while deploying money and manpower. Apart from the CFO and the Company Secretary, choosing appropriate auditors makes a world of difference. Unlike other members of the team, the auditor has the additional job of assessing whether the entire accounting system is in order, is transparent and analysing whether the numbers and projections as shown in the Excel sheet are realistic and practical. If you have a good auditor, half your battle is won. In fact, one should employ auditors at least one or two years before the IPO is launched.When the company goes public, it must make a note of disclosures about the company operations and past records. It can't afford to make any observations which are incorrect or not backed by strong evidence. You should have a team who can strategise and can plan the inflow and outflow of resources and money.

3. Definite Goals and Purposes

A company should be focused and clear about the purpose of the IPO. Usually, the purpose behind making an IPO is to accumulate funds and finances for expansion and investments and above all woo the investors and consolidate as a brand. This requires a purely corporate structure. Currently, there are stringent SEBI guidelines to be followed before any company goes public. Keeping this in mind, the valuations which the company wishes to command will depend on the future goals and projects of the company, and the management team. Unless the management is fully sure of the ultimate goals, the company will not be able to come up with a high valuation for the proposed issue of shares.

4. Choosing the Right Merchant Bankers

The primary role of a merchant banker should be to act as a bridge between the organisation and the investors. Firstly, the merchant banker should have a brand image in the market. A merchant banker should have the capability and the experience to handle a large-scale IPO. And they should be able to reach a larger mass of people because investors today are just not located in the metros but also in tier-II and tier-III cities." Simultaneously, they also chalk out the risk management strategies for the company since risks and ventures are two sides of the same coin. Hence a company should choose such a merchant banker who is just not professional but who understands the logistics and mechanics of the industry. Apart from being a link between the organisation and the investors, a banker also has to generate interest and build up the confidence of the investors.

5. Capital Restructuring

Companies should decide on the ways to deploy their capital, namely capital restructuring. Companies should be clear about the debt and equity ratio. This boils down to setting the ideal Debt-Equity Ratio (DER), which can vary from 1:1 to 2:2. "You have to work out your ratio according to the cash and the growth rate, so that they can accordingly structure their profits.In capital restructuring, you have to be sure of the DER maintained, what are the facilities you are planning to set up and what is the land value you are going to purchase. The way you are going to deploy your capital is also very important. You have to be very careful while deploying the resources and forecast the profit you will incur in three-four years' time."

6. Creating Investor Interest

Confidence building and generating investor interest should be on the priority list for a company.A Company must project an image of transparency and good governance to the investors. Infosys should be the role model for all companies going in for an IPO. Many of the experts agree that IT giant Infosys is a role model because their balance sheet is very clear, they value their managers as assets and year after year they expand rapidly. A company is accountable to its investors, which is why when they go public they have to disclose company projections—past, present and future prospects. This is where the team of advisors, consultants and legal experts comes into the picture. IPO is all about building investors' confidence so we overperform to hike up investor confidence. If you raise the expectations and do not meet them, then investors will not excuse you for the next two-three years. Infosys, for instance, follows this strategy and gets higher multiples because they understate their plans.The projections given to the public should be realistic. The excel sheet might project rosy details of growth, but if they do not live up to the expectations then public confidence is sure to plummet to the lowest level.

7. Media Campaigns

A few years ago, marketing and media campaigns were considered a luxury, but today they are absolutely necessary. They contribute to the relative success of an IPO venture. The campaigns can be in the form of road shows and extensive investor meetings. They are required because the investors need to be made aware of the company and its past performances and any important projects undertaken/completed. During the campaigns, various facets related to company performance, the need to raise money and future plans are disclosed, information that investors seek. A successful media campaign ensures complete participation in the IPO by one and all. In fact, recently when a bigwig real estate company went public, a few crores went in media campaigns alone! However, there is no short cut to success. A step-by-step approach always pays in the end