ECM

Question 1

What are some of the most important indices?

Answer 1

• DAX
• MDAX (50 biggest)
• SDAX (50 next biggest)
• TecDax (30 biggest Tech)
• EuroStoxx 50 (biggest 50 companies in Europe)
• S&P 500
• FTSE 100

Question 2

Average market cap of DAX company? Which one has highest, which one lowest?

Answer 2

€15-30bn on average. Biggest ones are Bayer, Siemens, SAP, Deutsche Telekom, Daimler and Allianz.

Question 3

Why are DAX and S&P not comparable?

Answer 3

DAX is performance index (assumes constant dividend reinvestment) while SNP is price index (ignores dividends)

Question 4

What’s a Spin-Off and what’s the difference to an IPO?

Answer 4

IPO offers all public investors to invest in company. Spin-Off extracts subsidiary from holding company and becomes own entity.

Question 5

When is a Spin-Off an alternative to an IPO?

Answer 5

• Subsidiary wants to be excluded of company, IPO or sale, however, are not possible
• Investors assume negative synergies, i.e. both companies are more valuable as separate companies

Question 6

What is a dual track?

Answer 6

M&A and IPO process at the same time to increase chances of selling company. Either you find a buyer until preparation of IPO or you do the IPO. Very popular for PEs.

Question 7

What is a triple track?

Answer 7

Trade Sale (M&A), IPO and Spin-Off at once. Usually when company wants to get rid off small part at all costs. Usually, the company hopes to do M&A deal or IPO and only does Spin-Off if other two are not possible.

Question 8

Why don’t you always choose a dual track if it means higher chances of selling?

Answer 8

Pros:
- Increased transaction probability
- Usually maximizes value as competition for transaction increases
- Independent of IPO time frame
Cons:
- A lot more work
- More work for management team of company
- Demands more effort
- IPO possibly gets cancelled by Trade Sale

Question 9

What’s the difference between common and preferred stock?

Answer 9

Common stock are last in value chain but have voting rights. Preferred stock gets paid before common stock but doesn’t have voting rights.

Question 10

Which pros and cons does IPO have compared to Trade Sale?

Answer 10

Pros:
- Realistic alternative to sale
- Future access to market for new capital
- In good market times, IPO can raise a lot more money
- Previous owner can sell shares regularly and doesn’t have to sell everything at once
- Current owner can possibly also retain majority stake
- DD usually slightly less extensive than in M&A deal
Cons:
- Usually lower valuation than M&A deal (premium)
- Creates new recurring costs (investor relations, compliance,…)
- Success is highly dependent on market
- Not possible for every company; requires particular size

Question 11

Which topics have to be covered in IPO process?

Answer 11

• Transaction structure (primary and secondary emission etc.)
• Capital structure
• Peer Group selection
• Joint Bookrunners selection
• Preparation of Accounting Materials
• Creation of compliance and investor relations
• Exchange selection
• Legal and IPO fleet preparation
• Approval of fleet by regulatory body
• Preparation of process documents
• Definition of investor universe
• Preparation of pre-deal investor education

Question 12

A company wants to IPO or spin-off a subsidiary. Which influence does capital structure of the seller have on IPO or Spin-off?

Answer 12

In IPO, mother sells subsidiary and receives cash which can be useful to delever etc. but it also has less EBITDA etc. to fulfill interest payments etc.

That’s the problem with the Spin-off. Company splits spun-off company’s shares from own shares and gives them to current shareholders. It therefore loses EBITDA etc. and also doesn’t receive any cash.

Question 13

A company shall go public with high leverage. Should an IPO or Spin-off be done?

Answer 13

A Spin-Off. IPO investors don’t want risky level of leverage. During spin-off previous shareholders just get the shares (“if they want or not”).

Question 14

What’s a Flowback Risk in a Spin-Off and how would you minimize it?

Answer 14

A massive sell-off of stocks after a transaction. Supply of stocks increases drastically which reduces the price. Can be mitigated on supply and demand side through marketing campaign, compelling equity story, Pre Deal Investor Education (PDIE).

Question 15

What is a Stock Split and why would a company do it?

Answer 15

Increase amount of stock by certain ratio while retaining actual total value. It is done to make it look more feasible for small investors to buy the stock.

Question 16

Which titles and functions do banks have in an IPO?

Answer 16

Usually split into five roles:

• Global Coordinator: Usually there from the start to plan everything with the company from Equity Story to Marketing Materials, Management and Analystpresentations. Lots of Influence on IPO price, decision which investor gets what. Additionally, sell-side research of the bank prepares IPO research reports. They also do underwriting of IPO (~60-80%) and get big percentage of fees.
• Joint Bookrunner: Banks in second row. Less decisions but important roles in marketing the IPO, creation of IPO research documents for investors and taking in orders.
• Co-Leads: Support function; primarily for marketing of IPO. Often complement others by targeting investors that are not reached by Global Coordinator or Joint Bookrunner. Sometimes take on very small part of Underwriting.
• Co-Manager: rare; Co-Leads without underwriting function and without order intake; just supporting marketing; often only included to have their name on IPO prospect
• Independent Advisors: Independent Corporate Finance advice without underwriting; often first in process and helping to choose Global Coordinator; used to eliminate conflict of interest

Question 17

What makes a good bank for an IPO?

Answer 17

• High Deal Flow, especially in ECM and more importantly IPOs in target markets
• High Deal Flow in said Industry
• Analysts in Sell-Side Research with good reputation
• Good Equity Sales Ranking
• Lots of trading activity in market
• Good analysis and knowledge on Equity Story
• Good knowledge on investor universe
• Positive but realistic view on price target

Question 18

What is Free Float?

Answer 18

Company ownership can be separated into three categories: Institutional investors that intend to hold stock long-term, those that hold it for shorter periods and retail investors. Second and third are frequently traded and are therefore called free float (“Streubesitz”).

Question 19

How is an IPO marketed?

Answer 19

• “Early-Look” and “Pilot-Fishing” Roadshows with investors for early feedback on company and Equity Story
• ~4 weeks before IPO there are roughly 2 weeks of PDIE (Pre-Deal Investor Education) where research analysts meet investors and present research (price target/range etc.)
• Roadshow in last 2 weeks before IPO; management of company meets banks to present company and answer investor questions

Question 20

What’s the difference of an IPO or Block Trade that is “Fully Underwritten” or placed according to “Best Efforts” rules?

Answer 20

With “Best Effort” IBs place stock during IPO as good as possible but if there is not enough demand, it can also sell less. In a Fully Underwritten deal, all stocks are placed. If there is not enough demand, banks have to take on the rest.

Question 21

What are Primary and Secondary Issues?

Answer 21

Primary issues sells stocks that were not issued before; secondary deals are with stocks that are already issued

Question 22

What influence does Primary/Secondary transaction have on company and seller?

Answer 22

More primary allows seller to collect more cash. However, more primary also means less secondary (the part that previous owner wants to sell in IPO).

Question 23

Why are companies generally undervalued for IPO price i.e. why is there an IPO discount?

Answer 23

No control premium (as small parts are bought) and fewer than usual information that leads to demanding discount

Question 24

A $400m stock company issues $100m new stock. All stocks include one voting right. By how much are existing stockholders diluted?

Answer 24

20% as ($100m/$500m); not 25% as one could assume

Question 25

What’s a Scrip Dividend?

Answer 25

New stock instead of cash dividend. So it’s a new issuance of capital by reinvesting in the company.

Question 26

What is a Squeeze-Out?

Answer 26

Forceful acquisition of minority interests e.g. in M&A deal

Question 27

Who invests in IPOs?

Answer 27

Hedge Funds; Long-only Investors; Retail Investors

Question 28

How is the opening price in an IPO determined?

Answer 28

After two-week long PDIE-Phase, price range is determined. Afterwards during two-week long Roadshow, investors submit their orders (“Bookbuilding”). Afterwards, IPO price is determined.

Question 29

What is a Greenshoe in an IPO?

Answer 29

Emitting (up to) 15% more during IPO than originally determined. Differentiated into Primary and Secondary Greenshoe. Bank needs to get Share Lending Facility from previous owner to sell shares that it doesn’t own yet (i.e. short position). To not increase risk from short position, bank gets call option from previous owner (“greenshoe”). After IPO, if price decreases, bank doesn’t need option because it can buy shares cheaper on market. If the price rises, it exercises the option and acquires cheap shares. Bank therefore either sells for what it bought or receives profit by buying lower. It usually shares profit with emitting company.

Question 30

What is a Brownshoe in an IPO?

Answer 30

A Brownshoe (also called Reverse Greenshoe) fulfills same goal as Greenshoe but uses a Put-Option instead of a Call-Option to stabilize price. Shares are emitted and bank receives Put-Option. If price rises, bank doesn’t need Put as it hasn’t lent any shares. If price falls, bank buys shares for lower price and sells them for emission price via put option to the seller. Therefore, a Brownshoe allows stabilization after IPO without a Share Lending Facility. Seller has to be aware of taxable consequences when selling and buying shares but otherwise Brownshoe has same function as Greenshoe.

Question 31

Why can newly issued shares lead to negative effect on share price?

Answer 31

- No suitable investment opportunity with new additional money - Market interprets new issuance as overvaluation on market

Question 32

What is a Blocktrade (or Selldown)?

Answer 32

Company selling a large amount of share via IB that takes on the shares on its books and further distributes them to their own customers. Bank organizes marketing, placement and accelerated Bookbuilding.

Question 33

When is a Prospectus needed in an IPO?

Answer 33

Prospectus is “all-in-one” document DD. Includes information on company, historical financials, descriptions of company risks and all additional information that is relevant to investors. It is written in cooperation with audit company and has to be approved by financial regulatory unit. Similar to Vendor DD as it includes basic information for all potential IPO investors.

Question 34

What could be reasons to primarily emit preferred shares instead of common stock?

Answer 34

Emission for long-term financing while voting rights remain with minority of original investors. E.g. Volkswagen that has a lot of preferred shares.

Question 35

An investor owns Call Option on 5% of new stock. He wants to increase it to be able to own 10% of the stock and buys options for 5% of stock with same strike. Can the investor own 10% after exercising the option?

Answer 35

No, both options are not the same. They have different values that don’t allow to buy 10%. First options given by company are usually for management and allow buying of treasury stock which creates new shares. This means, buyer would only own 9.52% (10% / 105%). Options bought by bank means bank has to own shares already so no new ones are created when the option is exercised.

Question 36

An investor owns options for shares of company. Value of option is dependent on dividends as well. Investor sees that dividend amounts to €3 per shares which is €2.4 after taxes. Which value does he have to consider?

Answer 36

Gross dividend of €3. Taxes don’t play any role.

Question 37

What is a Comfort Letter and which role does the 135-day rule play in an IPO?

Answer 37

Comfort Letter is issued by audit company that approves financials in Prospectus. Financials therefore can’t be too old. Numbers are valid for up to 135 days.

Question 38

What is Accelerated Bookbuilding?

Answer 38

Accelerated process used to emit new stock (without options on new stock) or Selldowns. Accelerated because it happens overnight before markets open. IPO usually takes two weeks but in Selldown or newly issued shares, investors already know company. Because shares are already traded, selling during market open could be very volatile which is why ABB is usually done overnight.

Question 39

Chair wants to mandate an IB to emit new convertible bond and issue new stock. What is done as a first step?

Answer 39

Check if additional capital can be raised (“bedingtes” and “genehmigtes” Kapital).

Question 40

Why do options on new stock have to be issued (=Bezugsrecht)?

Answer 40

Newly issued shares are sold for less than market, as no one would buy at higher prices. Newly bought shares lead to dilution of existing shareholders that therefore need to receive options on new stock.

Question 41

Under which circumstances can new capital be issued without options on new stock?

Answer 41

If less than 10% of current capital is issued and less than about 5% of price deviation (between existing and new stock) exists because dilution remains limited. For a company, this has the decisive benefit that ABB can be done, so that new stock can be issued overnight without being affected by market price fluctuations.

Question 42

What is a “Pflichtangebot”?

Answer 42

Investors has to offer “Pflichtangebot” for minority shares if he owns more than 30% of a company. If he doesn’t want to buy new shares, he can offer to buy at minimum price, that is usually unattractive compared to market price so that no one wants to sell to him.

Question 43

A company issues 1m new shares with $1 value and raises $10m euros. How is this reflected on BS?

Answer 43

Equity is divided into “Grundkapital”, “Kapitalrücklage” and “Gewinnrücklage”. €1m nominal value is booked into “Grundkapital”, while remaining €9m is booked into “Kapitalrücklage”.

Question 44

What is an “Opération blanche” and why is it interesting for investors?

Answer 44

Stockholder sells options on new stock during new issuance so that profits can be used to buy new stock without investing new money. Therefore Opération blanche is like a combination of exercising all options on new stock and sale of all options on new stock.

Question 45

How do you calculate the number of options on new stock to sell for an Opération blanche?

Answer 45

Iterative problem. Selling more options on new stock means more money to buy new stock, but then less options on new stock remain that allow to buy at this price. Balance can be calculated like this: BZR Verkauf = BZR_Total * Aktien_Jung * Emissionpreis / (Aktien_Jung * Emissionspreis + Aktien_Alt * Wert_BZR)

Question 46

What is the Theoretical Ex Rights Price (TERP)?

Answer 46

Theoretical price after emission of options on new stock. New Stock is issued below market which is why options on new stock have positive value. TERP is weighted average of old and new stock: TERP = (Aktien_alt * Aktienpreis_alt + Aktien neu * Emissionspreis) / (Aktien_alt + Aktien_neu)

Question 47

How would you value options on new stock during trading?

Answer 47

Option on new stock is like option without time value because of very low time difference. Since ratio is not always 1:1 for options on new stock and new stock, we have to take ratio into account and can’t just take difference between old and new stock price: Wert_BZR = (Aktienpreis_Markt - Aktienpreis_BZR) / #Bezugsrechte/#Aktien

Question 48

What is the FMV of options on new stock while they are still being distributed?

Answer 48

The options on new stock are still implicitly included In stock so that market price is reduced by value of options on new stock: Wert_BZR = (Aktienpreis_Markt - Aktienpreis_BZR) / (#Bezugsrechte/#Aktien + 1) = Aktien_Alt - TERP

Question 49

During IPO or Blocktrade, banks often agree with management on “Lock-Up” clause for management and existing investors upon new emission. What does it mean and what is it good for?

Answer 49

Protect new investors from pressure to sell. Without Lock-Ups owner would have risk of decreasing stock price. With Lock-Up, previous owner, company and management agree to keep stock for a certain time period (usually 180 or 350 days).

Question 50

What is a Prime Standard Segment on the German stock market and why do most companies want this segment in IPO?

Answer 50

German stock market is separated into following - Prime Standard: EU regulated; transparent (biannual and quarterly reports, financial calendar, ad-hoc publications, min. one analyst conference per year, etc.) - General Standard: EU regulated; transparent (biannual reports, etc.) - Entry Standard: unregulated

Question 51

What is Underwriting?

Answer 51

In investment banking, underwriting is the process where a bank raises capital for a client (corporation, institution, or government) from investors in the form of equity or debt securities.