The First All Russian IPO Congress

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The First All Russian IPO Congress
IPO terminology
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Executive Summary

• The terminology used by investment bankers during
  an IPO is often complicated
• Objective of this presentation is to provide a
  glossary of some the commonly used technical
  language of IPOs. Focussing on
• Bookbuilding
• Aftermarket
• Syndicates

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Bookbuilding
Demand curve for OAO Open Investments
Definition The process of generating a book of
investor demand for an IPO

• Used to determine the price at which a IPO is to
  be offered to investors
• The process is carried out over a fixed time
  period
• Final issue price is not determined until the end
  of the process and the book has closed

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Bookbuilder
Definition Bookbuilder is an industry standard
software application that is used during the
bookbuilding process

• It is a tool that documents the level of demand
  from investors at different prices within the
  price range
• Links most investment banks electronically

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Price range
Pricing the GTC IPO
Definition An indicative range of possible
prices for an IPO

• Derived from various valuation techniques to give
  minimum and maximum price
• The price range is designed to act as guidance
  for investors
• The prices stated in the range are not legally
  binding on the issuer

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Euromarket Underwriting
Definition Underwriting means to assume IPO risk
for a fee Euromarket Underwriting differs from
the usual understanding

• Underwriter is not obligated to buy shares in the
  IPO in the event that it is undersubscribed
• Does not guarantee an amount of capital for the
  issuer from day one of the IPO process
• Euromarket underwriting covers the settlement
  period only, i.e. investor default
• In the event of a force majeure during the
  settlement period, underwriting commitments are
  no longer an obligation

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Conversion rate
Open Investments
Definition The number of investors visited
one-on-one during the roadshow that make order in
the IPO

• In the Open Investments IPO 56 of the investors
  visited one-on-one during the roadshow submitted
  orders
• The orders generated by these investors accounted
  for 95 of total demand

Milan (CC) 1 investor
Notes CC conference call
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Aftermarket
Open Investments aftermarket share price
performance
Definition The performance the shares issued in
an IPO on commencement of trading

• Goldilocks scenario
• Goal is to see modest share price appreciation
  in the IPO aftermarket

Price Range
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Stabilisation
Stabilisation at work

• Stabilisation
• Lead manager buys shares at IPO price
• Share price rises

• Share price stabilised
• Trading volatility ceases
• Stabilisation ceases

• IPO prices high
• Investors sell shares immediately
• Shares price falls

Definition IPO aftermarket support offered by
the lead manager of an IPO

• Stabilisation runs for a short period in the
  immediate aftermarket following an IPO
• Form of permitted temporary market manipulation
  to support share price
• Investors buying shares during this period are
  informed that the price is being stabilised

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Greenshoe
Greenshoes Global IPOs gtUS100m 2000 - 2005 YTD
Definition Price support mechanism that gives
the Lead Manager a call option to buy shares at
the IPO price from the issuer The name originated
from the now-defunct Green Shoe Company, whose
IPO in the 1930s included the first use of such a
provision Greenshoes are also often referred to
as over-allotment options

• Typically, the greenshoe size is 10-15 of the
  issue size and can be exercised in the 30 days
  following commencement of trading
• If an IPO is over-subscribed the Lead Manager
  will allocate the greenshoe to investors,
  creating a short position
• If the shares price rises rapidly in initial
  trading the greenshoe option will be exercised
• Underwriter buys and issues shares from the
  company, covering the short position created in
  the allocation. Aftermarket stabilises

Source Bondware
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Reverse Greenshoe
Definition Price support mechanism that gives
the Lead Manager a put to sell shares back to
the issuer Has exactly the same effect on the
share price as a traditional greenshoe but is
structured differently

• Case Study
• ING included a reverse greenshoe option in the
  November 2004 Open Investments IPO
• In the aftermarket the Open Investments share
  price increased
• The reverse greenshoe was not exercised

• Used to support share price in the event that the
  share price falls in the post-IPO aftermarket
• Underwriter buys shares in the market then sells
  the shares shares back to the issuer
• In certain circumstances a reverse greenshoe can
  be more practical form of price stabilisation
  than the traditional method

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Order Quality
Order Quality in the Open Investments IPO
Definition Propensity of informed, long-term,
supportive investors that subscribe to an
IPO Order quality is usually described in
tiers, with Tier 1 being the highest quality
demand
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Flipping
Trading Volumes of Globe Trade Centre (GTC)
following their IPO Retail Customers Flipping
Shares
Definition Shareholders that sell shares
purchased in an IPO as soon as they start
trading

• Undesirable as it affects the share price
  performance
• Retail customers and hedge funds are often
  flippers
• In the first three days of trading following the
  Globe Trade Centre (GTC) IPO retail investors
  flipped shares worth PLN 46m, over 50 of total
  retail allocation
• The value traded by retail investors fell off
  dramatically after the first week of trading

Source Data from ING customer points
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Syndicate Terminology
Lead Manager
Definition The syndicate is a collection of
underwriters and selling institutions that have
grouped together to undertake and manage an IPO
for a company All roles in the syndicate
structure are flexible This and the following
slides are illustrative examples of IPO syndicates
Joint Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co Manager
Co Manager
Co Manager
Selling Agent
Selling Agent
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Selling Agents
Lead Manager

• Most junior member of the syndicate
• Do not underwrite the IPO
• No guaranteed fee

Joint Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co Manager
Co Manager
Co Manager
Selling Agent
Selling Agent
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Co-Managers
Lead Manager

• 2nd most junior member
• Underwrite a small percentage (c.5) of the IPO
• small guaranteed fee
• Role often offered to reflect existing commercial
  relationships with the issuer, e.g. lending banks

Joint Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co Manager
Co Manager
Co Manager
Selling Agent
Selling Agent
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Co-Lead Managers
Lead Manager

• Important player
• Underwrite a significant percentage (c.10-15) of
  the IPO
• Write IPO research on the company
• Guaranteed fee to reflect research efforts
• Role offered to banks with a proven track record
  for their research and broking skills
• A value-adding member of the syndicate

Joint Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co Manager
Co Manager
Co Manager
Selling Agent
Selling Agent
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Joint Lead Manager
Lead Manager

• Key player
• Part of the decision-making process, giving
  advice alongside the Lead Manager, e.g. on
  timing, offer size
• Underwrite a large percentage (c.35-45)
  of the IPO
• Write IPO research on the company
• Help organise company roadshow

Joint Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co Manager
Co Manager
Co Manager
Selling Agent
Selling Agent
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Lead Manager
Lead Manager

• Most important syndicate member
• Manage the book of demand
• Co-ordinate junior syndicate members
• Underwrite the largest percentage of the IPO
• Write IPO research on the company
• Organise company roadshow
• Also referred to as the Bookrunner or Global
  Coordinator

Joint Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co Manager
Co Manager
Co Manager
Selling Agent
Selling Agent
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Fees Praecipium
Lead Manager

• For the Lead Manager only
• Reward for documentation and managing the deal
• Typically 20-25 of management fees earned in the
  IPO
• Global IPOs that have included a Praecipium 2000
  - 2005 YTD

Joint Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co Manager
Co Manager
Co Manager
Selling Agent
Selling Agent
Source Bondware
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Fees Gross Spread
Lead Manager

• Difference between the price paid to the issuer
  by the underwriter and the price paid by the
  purchaser of shares in the IPO
• Fee split 20 Management
• 20 Underwriting
• 60 Selling
• Underwriting fees easy to split as based on fact
• Selling goes to Lead Manager. As managers of the
  book, all orders go to them
• Does not offer an incentive to other sellers of
  the IPO

Joint Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co Manager
Co Manager
Co Manager
Selling Agent
Selling Agent
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Fees Designations
Lead Manager

• Reward system to give an incentive to junior
  members of the syndicate
• When a buyer makes an order with the Lead Manager
  they can designate a percentage of selling fee to
  reward a manager of choice
• Makes the selling process competitive between the
  syndicate
• Ensures that the issuer gets value for money
  from the syndicate

Joint Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co-Lead Manager
Co Manager
Co Manager
Co Manager
Selling Agent
Selling Agent
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ING

• ING has lead managed more IPOs in Russia than any
  other Investment Bank

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Contacts
To find out more about any of these topics and to
learn more of INGs extensive Russian equity
capital market capabilities please contact the
following Mark Martin Managing Director, Head
of LEMEA Equity Capital Markets ING London 44 20
7767 6437 mark.martin_at_uk.ing.com Siobhan
Walker Managing Director, Relationship Management
Lending ING Moscow 7 095 755 5166 siobhan.walker_at_
ingbank.com Pavel Iliev Analyst, Corporate
Finance ING Moscow 7 095 755 5418 pavel.iliev_at_ing
bank.com