Company IPO – Hiring of Investment Bank
Once a company ensures compliance as mentioned in my previous article ‘Company IPO and Challenges‘ with all requirements, the company should prepare for the launch of its IPO. First step to the Launch of Company IPO is the hiring of an investment bank. Investment banks can work alone or together with other banks on one IPO, with one taking the lead. They usually form a group of banks or investors to spread around the funding and risk. Though cost is an important parameter while selecting the Investment Banker, There are so many other factors a Company evaluates while selecting an underwriter. Few of them are mentioned below:
Suitability of Investment Banking
How well a particular investment bank will align with your company, both at present and in the future is determined by several factors like (a) investor relations, If you plan on serving a small market, a local firm may be the best choice for your company because they will have relationships within that market but if you plan to market to national audiences, it may be wiser to choose a larger firm with a broader range of experience and more extensive network. (b) Knowledge of industry – Many investment banks work for specific industries. Previous knowledge and experience of your industry, Knowledge of your company and its history to investment banks will make a win-win situation because it will help banks while structuring IPO and introducing your company to potential investors and pitching your company to investors during the road show. (c) Concurrence on Company Growth- Investment bank and your company must be on the same line in case vision of your company , Evolvement of your industry , and growth in 5, 10, and 20 years down the road.
Track Record
Investment Bank track record plays a large role in a company’s decision when selecting a bank to take them public. While launching IPO of a company, Investors want to see consistency in Track record specially of Investment bank managing the IPO ,not only general credibility, experience, and a positive reputation of Investment bank but track record of managing IPO of similar size, industry and growth .
Good Analysts
Good and Experienced analysts turn company Financial Metrics into a narrative in style to attract investors. When a company looks for an investment bank, it is hiring analysts in addition to underwriters. Capabilities, understanding, experience, skill, and style of analysts play an important role in company IPO as Good analysts turn your numbers into a narrative.
Distribution Capability
One of the roles of an investment bank is to buy shares from the filing company and then sell them to institutional investors. So while selecting an investment bank one should check the strength of its syndicate (distribution capabilities) and make sure the bank you select can put together a strong syndicate that provides a strong, the right type and right size distribution channel for your company. While hiring underwriter IPO Company should their distribution capabilities, distribution strategy and distribution Network.
Aftermarket Performance
While selecting an Investment bank , the company evaluates the overall view of the bank’s prior underwriting efforts and its aftermarket success . Aftermarket performance is a measure of the movement of an IPO’s shares after being introduced on an exchange.
(a) Aftermarket analyst coverage– Amount of attention a company receives from analysts in the form of published opinions regarding the company’s position and potential after IPO. If there is Poor coverage, it results in lack of investor interest and a drop in share price. (b) Ability of a Bank to act as market makers post-IPO– Facilitate the trading of a company’s stock as market makers is very important as it directly influences the liquidity of company’s shares and provides price stability in the post-issuance trading of your shares. If a company’s shares experience a significant price change in either direction, this is a strong indication that the offering was not priced correctly. Evaluate your prospective bank past offerings for these price movements to determine how appropriately they price the offerings .
Reputation and Credibility of IPO Company
If company going for IPO reaches a certain level of credibility, strength and Reputation in the Market, investments banks want to be your underwriter, and will do their best to sell their services to you, But If your company isn’t as well established one, you may need to seek out an underwriter more actively.
Feasibility of IPO
If one investment bank believes your IPO to be feasible, many other banks want to be involved as well. Unless your company is exceptionally large, it is likely that you will need only one lead underwriter, but there are circumstances in which you will need to select more than one lead underwriter or say joint-book runners
Activities of Investment Bank
There are a number of activities Investment banks may fulfill for the success of IPO depending on the terms of your negotiations. Some of the task listed below (List is Illustrative not exhaustive):
- Create a letter of intent
- Form a banking syndicate
- Provide financial advice
- Act as lead financial advisor
- Develop a listing execution plan
- Refine the offer structure and strategy
- Investment thesis- Shaping of Company equity story for market the offering.
- Develop marketing materials
- Create the registration statement
- Manage the road show
- Develop a valuation framework
- Price the offering
- Advise on proposed mergers and acquisitions or manage a dual process
- Provide analysts to publish research on your firm, positioning you for your offering
- Determining an appropriate valuation range for your business
- Evaluating strategic alternatives to selling
- Identifying and contacting potential buyers
- Helping to prepare and market the business for sale (including creating marketing materials and coordinating management presentations and site visits)
- Designing and leading the sale process, including keeping all parties on track to meet important milestones
- Working with legal counsel to evaluate bids and negotiate the transaction agreement, including financing structure and terms
- Buy the entire offering and then sell it to investors, or simply make their best effort to sell the entire offering with no obligation to buy remaining shares
Negotiation with Investment Banks / Underwriter
The process of an investment bank handling an IPO is called underwriting, the term underwriter originated from the practice of having each risk-taker write their name under the total amount of risk they were willing to accept for a specified premium. In an IPO there is a firm commitment in which the Investment bank as an underwriter agrees to assume the risk of buying the entire inventory of stock issued in the IPO and selling it to the public at the IPO price.
Before Accepting the offer to work as an Investment Banker, Investment Bank or say underwriter collect all the required information about the Company. They analyze the state of the company , company business plan and scrutinize various aspects of the company Once a bank has decided to work with a company , it’s been discussed about the offering of banks pre- and post-IPO and the compensation they will receive in exchange. An agreement is signed by the company and underwrites in which they mention all the details like how much amount will be raised and how much they charge for the whole process etc. In Some cases, underwriters make a promise to subscribe to at least a fixed percentage of unsubscribed Shares on some term and condition basis. It depends on the underwriters whether they promise or not. Let’s understand this by an example A Company want to issue 10000 share to the public and an agreement is signed between underwriter and company that underwriters will provide a guarantee to subscribe least 50% share i.e. 5000.If the public didn’t subscribe to the 5000 share underwriters will buy the remaining shares.
Underwriting Arrangements
Following underwriting arrangements are available to the issuing company:
- Firm Commitment: Under such an agreement, the underwriter purchases the whole offer and resells the shares to the investing public. The firm commitment underwriting arrangement guarantees the issuing company that a particular sum of money will be raised.
- Best Efforts Agreement: Under such an agreement, the underwriter does not guarantee the amount that they will raise for the issuing company. It only sells the securities on behalf of the company.
- All or None Agreement: Unless all of the offered shares can be sold, the offering is canceled.
- Syndicate of Underwriters: Public offerings can be managed by one underwriter (sole managed) or by multiple managers. When there are multiple managers, one investment bank is selected as the lead or book-running manager. Under such an agreement, the lead investment bank forms a syndicate of underwriters by forming strategic alliances with other banks, each of which then sells a part of the IPO. Such an agreement arises when the lead investment bank wants to diversify the risk of an IPO among multiple banks.
Investment banking in India-Brief Overview
Investment banking in India started in the 19th Century. During that period, European banks first established their trading industries in the land of India. In the 1970s, the State Bank of India started to spread its wings and created a bureau of merchant banking. In the same decade, ICICI bank started offering various Merchant Banking services. After a decade more than 30 merchant banks, financial institutions, and commercial Banks started setting up their operations.
Banks working as Investment Banker/ Underwriter have to register with SEBI. To act as an Underwriter, a certificate of registration must be obtained from the SEBI. The SEBI has the full authority to grant the certificate of registration. No person should act as an underwriter unless he holds a certificate granted by the SEBI. The stock broker or the merchant banker should hold a valid certificate or registration. There are approximately 1450 merchant bankers in India. Out of that around 930 are registered with SEBI .There is an association of all investment banks in the name of “Association of Investment Bankers of India” i.e. AIBI. AIBI’s primary objective is to ensure that its members render services to all constituents within an agreed framework of ethical principles and practices. AIBI is the investment banking industry’s sole representative to all statutory authorities especially to SEBI. The Chairperson of AIBI represents Investment Bankers on the Primary Market Advisory Committee (PMAC) of SEBI. There are around 57 members registered with AIBI as on date like Ernst & Young Private Ltd , Standard chartered Bank , Price water house coopers , Avendus capital pvt ltd, Deloitte JM Financial institutional securities ltd , Capital global advisory pvt ltd, Axis Bank Ltd, Barclays Bank PLC, BNP Paribas, Central Bank of India, Credit Suisse Securities (India) Private Ltd, Deutsche Equities India Private Ltd, Edelweiss Financial Services Ltd, HDFC Bank Ltd. HSBC Securities & Capital Markets (India) Private Ltd. ICICI Securities Ltd. IDBI Capital Market Services Ltd.JP Morgan India Private Ltd. Morgan Stanley India Co. Private Ltd. Religare Capital Markets Ltd.SBI Capital Markets Ltd. SMC Capitals Ltd etc.
In the process of a private company going public, selection of an investment bank /underwriter is the key step to be undertaken. An IPO Underwriter is a financial expert who works closely with the private company to assist them in the issue of securities in the public market. They guide and assist the company making sure to satisfy all the requirements whether regulatory or administrative, imposed by the SEBI as well as the rules imposed by the stock exchange such as NSE and BSE. These underwriters create the market for the securities by contacting a broad range of investors, including mutual funds, pension funds, insurance companies and more. Underwriters play a very important role in the process of making a company a public entity.
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