Going Public vs Staying Private

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Going Public vs Staying Private
Oleksandra Dubovyk Associate Director, IPO
Services Ukraine 380 44 499 2009
Oleksandra.Dubovyk_at_ua.ey.com
Mark JarvisPartner - Inbound IPO's 44 20
7951 4690 MJarvis_at_uk.ey.com
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Todays Market

• Its tough out there
• A move to quality exists if you have the right
  story you can IPO
• Emerging Markets are in favour
• Q1 2008 2/3rds of all IPOs (excluding Visa) were
  from Emerging Market companies
• PE is still very much around but more selective
• Private Placements are popular as a first round
  pre IPO fund raising tool
• Debt is short
• But the best companies are still pursuing IPOs

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Should you?

• Should you remain Private or go Public?
• Trend for small- and medium-sized companies to
  use the capital markets to develop their
  business.
• MA deals, bond issues, buyouts, sales to
  strategic investors and private placements become
  increasingly demanded by companies.
• Surging growth of Pre-IPO and direct investment
  funds is another indication of market growth
• A first step could be a Private Stock Offering?
• Maybe a sale to a PE fund?
• Or are you ready for an IPO?
• We will cover this in the next 20 minutes
• But remember not everyone who is big is Public.

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Combined Top 20 NPC Public listed companies
NPC Not Publicly Traded
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The right reason to go Public?

• Is this the right message?
• Private Stock Offerings
• The best way to raise money (capital) is issuing
  stock in your private company - in most cases
  only issue 15 to 45 of your company .. so you
  retain the majority of the shares and the control
  of your company. This can be done easily if you
  have the KNOWLEDGE. The best two things about
  stock offerings are NO LOAN PAYMENTS and NO RISK
  of your personal assets, such as your home, car
  etc. By selling and issuing stock in your
  corporation, it can be almost like having a
  license to print money.
• Source Florida based companys website

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Values

• Values - Private vs. Public Company
• Changing a private company into a public company
  can result in a substantial increase in the value
  to shareholders.
• Interestingly most private companies are
  liquidated rather than sold, because a buyer
  cannot be found.
• Statistics show that sellers of private
  companies, fortunate enough to find a buyer,
  receive an average of 4 to 6 times their net
  earnings. Rarely is the seller cashed out.
• By comparison, public companies sell at an
  average of 25-30 times their net earnings. The
  reason being that, unlike a private company
  purchase
• investors have no management responsibilities
• they can purchase a very small portion of the
  company
• their investment is liquid, and
• there are millions of investors.
• Source FSMCG

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Options
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Is Private Equity a solution?

• Is private equity ownership that much less
  onerous than being publicly traded?
• For managers, the advantages of going private are
  no longer as clear as they once were.
• Critics of Sarbanes-Oxley claim that CEOs can't
  wait to escape the law
• But many private companies are actually complying
  with top level corporate governance in case they
  eventually go public again
• The differences between private and public
  company CEOs have although by no means
  disappeared.
• Privately held firms can hold on to the best
  parts of the Corporate Governance Codes while
  avoiding much of the paperwork and expense.
• While private, they can also avoid disclosing
  executive pay information.

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Maybe a Private Placement?

• Pros
• Issuer largely determines conditions of the
  placement by itself
• list of the investors, share price and number of
  the shares
• Quick method for the capital raising
• Puts a marker down for the future value of the
  company at IPO time
• Relatively lowcost
• Cons
• Restricted access to the financial resources
• Lack of market visibility / PR for the company
• Business cultures of the original shareholders
  and the investors may be conflicting
• Investors may wish to participate in the
  day-to-day management of the company

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Lets go Public - its decision time

• The decision for a private business owner to take
  a company public is never easy
• The financial costs are not only considerable but
  ongoing.
• Financial projections, previously developed with
  an acceptable degree of accuracy, must be
  checked, double-checked and disseminated through
  the proper channels or the analyst community will
  deal a swift blow.
• Despite these costs, growing businesses have a
  large appetite for capital and for many of these
  companies the benefits of a liquid, publicly
  traded security far outweigh the costs.
• Many owners are encouraged to consider public
  issuance by investment bankers because IPOs are
  one of their more lucrative products. In most
  cases, the bankers are correct and justified in
  their advice.

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So you have decided

• You have decided to raise money as a Ukrainian
  company
• Possibly by PE
• Possibly by Private Placement prior to IPO
• Or you are the market leader and you are going to
  go direct to IPO
• What do you need to do?

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• The Ukrainian market

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IPOs performed
Source companies data, ErnstYoung estimates
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Private Placements
Source companies data, ErnstYoung estimates
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• Adding Value to Your Company

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Adding Value Process
Diagnostics
IPO/PP
MAXIMISING value
Corp. Governance
IT
Finance
Tax/Legal
Controls
What does the Investor need?
Changes needed
Situation as is

• Full understanding about companys activities,
  its financial state and its market position
• Assurance in the future of the company,
  predictability
• Understanding all of the current and potential
  risks, connected with the work of the company
• Understanding of the value base to determine what
  amount he is ready to pay for a company or a part
  of the business

• Group structure
• Historical financial information
• Forecasted financial information
• Planning and budgeting
• Tax/Legal
• Financial reporting processes and controls
• Corporate governance
• Risk management
• It information security

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Changes Needed To Maximize Your Companys Value
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• Is Your Company Ready?

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Public vs. Private Equity

• Many corporate executives view private equity as
  expensive relative to public equity.
• But stock markets occasionally become "closed"
  and public equity can involve significant
  information costs.
• Private equity partially overcomes these costs by
  relying on the oversight of well-informed and
  highly motivated owners.
• Moreover, research suggests that the best private
  equity firms consistently add value.

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Why would you go Public?

• Pros
• Demonstrate your market leading position
• Achieve enhanced market capitalisation owners
  become richer
• Access to a wide and varied network of financial
  resources more efficient funding
• Achieving a high level of corporate governance
  a better run company
• Increased market image enhanced company
  valuations
• Cons
• Loss of control
• Extra corporate costs

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Is your company ready for a Public Listing?
Size
Corporate structure
Management and corporate governance

• There is no right size for listing on AIM, but UK
  companies are usually in a start-up phase and
  foreign companies are usually of high growth
  potential. A profitable trading record is not a
  requirement for listing

• Clear and transparent shareholder and corporate
  structures with straightforward business models
  are more attractive to investors

• A strong management team with a proven track
  record and listing experience is preferable.
  Many listing companies will recruit new
  independent non-executive directors

Growth
Use of proceeds
Accounts and information systems

• Actual or potential high growth is the main
  attraction for investors in AIM companies

• The amount of the offering and the use to which
  the proceeds are put will be evaluated by
  investors. Forecasts and plans will be required
  as part of the listing process

• The reporting requirements for listed companies
  are demanding and will require good accounting
  and information systems

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Critical success factors for the IPO
Factors

• Company-wide support for process
• Adequate resources from the Company available to
  run the process
• Fully resourced programme management in place
• Nominated decision maker with authority to commit
  Company
• Communications between all parties
• Realistic initial view on status of preparation
  to inform planning process
• Experts / advisors with relevant experience
• Adequate advisor resource committed
• Compelling investment case to market
• management/ strategy / financial performance

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To summarise

• IPO if
• You are the market leader
• You are ready for a whole new way to run your
  business
• You are committed to the process
• There are other steps if you are not ready
• PE investors may help you grow your business
• A Private Placement is less demanding
• But the jewel in the corporate crown is a listing
  on a Global Exchange

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Thank you