What do "Corp Fin" professionals actually do on a day-to-day basis to underwrite an offering? The process, though not simple, can easily be broken up into the same three phases that we described previously. We will illustrate the role of the bankers by walking through the IPO process.
Hiring the managers
Tins "phase" in the process can vary in length substantially, lasting for many months or just a few short weeks. The length of the hiring phase depends on how many I-banks the company wishes to meet, when they want to go public, and how market conditions fare. Remember that several investment banks are usually tapped to manage a single equity or debt deal, complicating the hiring decisions that companies face.
MDs and Sales Calls
Often when a large IPO candidate is preparing for an offering, "word gets out on the Street" that the company is looking to go public. MDs all over Wall Street scramble to create pitch-books and set up meetings in order to convince the company to hire them as the lead manager. I-bankers who have previously established a good relationship with the company on sales calls have a distinct advantage. What is surprising to many people unfamiliar with I-banking is that MDs are essentially traveling salespeople who pay visits to the CEOs and CFOs of companies, with the goal of building investment banking relationships.
Typically, MDs meet informally with the company several times. In an initial meeting with a firm's management, the MD will have an analyst and an associate put together a general pitch-book, which is left with the company to illustrate the I-bank's capabilities.
Pitch-books come in two flavors: the general pitch-book and the deal-specific pitch-book. Bankers use the general pitch-book to guide their introductions and presentations during sales calls. These pitch-books contain general information and include a wide variety of selling points bankers make to potential clients. Usually, general pitch-books include an overview of the I-bank and detail its specific capabilities in research, corporate finance, sales and trading.
The second flavor of pitch-books is the deal-specific pitch. While a general pitch-book does not differ much from deal to deal, bankers prepare offering pitch-books specifically for the transactions (for example, an IPO) they are proposing to a company's top managers. Deal-specific pitch-books are highly customized and usually require at least one analyst or associate all-nighter to put together (although MDs, VPs, associates, and analysts all work closely together to create the book). The most difficult part of creating this type of pitch-book is the financial modeling involved.
Apart from the numbers, these pitch-books also include the bank's customized selling points, he most common of these include:
- the bank's reputation, which can lend the offering an aura of respectability
- the performance of other IPOs managed by the bank
- the prominence of a bank's research analyst in the industry, which can tacitly guarantee that the new public stock will receive favorable coverage by a listened-to stock expert
- the bank's expertise as an underwriter in the industry
Pitch-book Preparation
After substantial effort and probably a few all-nighters on the part of analysts and associates, the deal specific pitch-book is complete. The most important piece of information in this kind of pitch-book is the validation of the company going public. Previous to its initial public offering, a company has no public equity and therefore m "market value of common stock." So, the investment bankers, through a mix of financial and industry expertise develop a suitable offering size range and hence a "marketable valuation range" for the company. Of course, the higher the valuation, the happier the potential client. At the same time, though, I-bankers must not be too aggressive in their valuation - if the market does not support the valuation and the IPO fails, the bank loses credibility.
The Pitch
While analysts and associates are the members of the deal team who spend the most time working on the pitch-book, the MD is the one who actually visits the company with the books under his or her arm. The pitch-book serves as a guide for the presentation (led by the MD) to the company. This presentation generally concludes with the valuation. Companies invite many I-banks to present their pitches at separate meetings. These multiple rounds of presentations comprise what is often called the "beauty contest" or the "dog-and-pony-show."
The "pitch" at a dog-and-pony show comes from the managing director in charge of the deal. The MD's supporting cast typically consists of a VP from corporate finance, as well as the research analyst who will cover the company's stock once the IPO is complete. For especially important pitches, an I-bank will send other top representatives from either its corporate finance, research or syndicate departments. (We will cover the syndicate and research departments later.) Some companies opt to have their board of directors sit in on the pitch - the MD might face the added pressure of tough questions from the board during the presentation
Selecting the Managers
After a company has seen all of the pitches in a beauty contest, it selects one firm as the "lead" manager, while some of the other firms are chosen as the "co-managers." The number of firms chosen to manage a deal runs the gamut. Sometimes a firm will "sole manage" a deal, and sometimes, especially on large global deals, four to six firms might be selected as managers. An average-sized offering will generally have three managers underwriting the offering - one lead manager and two co-managers.
Due diligence and drafting
Organizational Meeting
Once the I-bank has been selected as a manager in the IPO, the next step is an organizational meeting at the company's headquarters. All parties in the "working group" involved in the deal meet for the first time, shake hands and get down to business. The attendees and their roles are summarized in the table below.
At the initial organizational meeting, the entire team from each investment bank's corporate finance group attends; the MD from the lead manager guides and moderates the meeting. Details discussed at the meeting include the exact size of the offering, the timetable for completing the deal, and other concerns the group may have. Usually a two- or three-month schedule is established as a beacon toward the completion of the offering. Often, the organizational meeting wraps up in an hour or two and leads directly to due diligence.
Due Diligence
Due diligence involves studying the company going public in as much detail as possible. Much of this process involves interviewing top management at the firm. Due diligence usually entails a plant tour (if relevant), and explanations of the company's business, how the company operates, how management plans to grow the company, and how the company will perform over the next few quarters.
As with the organizational meeting, the moderator and lead questioner throughout the due diligence sessions is the top banker in attendance from the lead manager. Research analysts from the I-banks attend the due Diligence meetings during the IPO process in order to probe the business, ask tough questions and generally better understand how to project the company's financials. While bankers tend to focus on the relevant operational, financial, and strategic issues at the firm, lawyers involved in the deal explore mostly legal issues, such as pending litigation.
Drafting the Prospectus
Once due diligence wraps up, the IPO process moves quickly into the drafting stage. Drafting refers to the process by which the working group writes the S-l registration statement, or prospectus. This prospectus is used to shop the offering to potential investors.
Generally, the client company's lawyers compile the first draft of the prospectus, but thereafter the drafting process includes the entire working group. Unfortunately, writing by committee means a multitude of style clashes, disagreements, and tangential discussions, but the end result usually is a prospectus that most team members can live with. On average, the drafting stage takes anywhere from four to seven drafting sessions, spread over a 6 to 10-week period. Initially, all of the top Corp. Fin. representatives from each of the managers attend, but these meetings thin out to fewer and fewer members as they continue. The lead manager will always have at least a VP to represent the firm, but co-managers often settle on VPs, associates, and sometimes even analysts to represent their firms.
Drafting sessions are initially exciting to attend as an analyst or associate, as they offer client exposure learning about a business, and getting out of the office. However, these sessions can quickly grow tiring and annoying. Drafting sessions "at the printer" can mean more all-nighters, as the group scrambles to finish the pros rectus in order to "file" on time with the SEC (the Securities and Exchange Commission).
When a prospectus is near completion, lawyers, bankers and the company all "go to the printer," which is sort of like going to a country club prison. These printers, where prospectuses are actually printed, are equipped with showers, all the food you can eat, and other amenities to accommodate locked-in-until-you're-done sessions.
Printers are employed by companies to print and distribute prospectuses. A typical public deal requires anywhere from 10,000 to 20,000 copies of the preliminary prospectus (called the "red herring" or "red") and 5,000 to 10,000 copies of the final prospectus. Printers receive the final edited version from the working group, literally print the thousands of copies in-house and then mail them to potential investors in a deal. (The list of investors comes from the managers.) Printers also file the document electronically with the SEC.
As the last meeting before the prospectus is completed, printer meetings can last anywhere from a day to a week or even more. Why is this significant? Because printers are extraordinarily expensive and companies are eager to move onto the next phase of the deal. This amounts to loads of pressure on the working group to finish the prospectus.
For those in the working group, perfecting the prospectus means wrangling over commas, legal language, and grammar until the document is error-free. Nothing is allowed to interrupt a printer meeting, meaning one or two all-nighters in a row is not unheard of for working groups.
On the plus side, printers stock anything and everything that a person could want to eat or drink. The best restaurants cater to printers, and M&M's always seem to appear on the table just when you want a handful. And food isn't all: Many printers have pool tables and stocked bars for those half-hour breaks at 2:00 a.m. Needless to say; an abundance of coffee and fattening food keeps the group going during late hours.
Marketing
Designing Marketing Material
Once a deal is filed with the SEC, the prospectus (or S-1) becomes public domain. The information and details of the upcoming IPO are publicly known. After the SEC approves the prospectus, the printer spits out thousands of copies, which are mailed to literally the entire universe of potential institutional investors.
In the meantime, the MD and VP of the lead manager work closely with the CEO and CFO of the company to develop a "roadshow" presentation, which consists of essentially 20 to 40 slides for use during meetings with investors. Junior team members in corporate finance help edit the roadshow slides and begin working on other marketing documents. For example, associates and analysts develop a summary rehash of the prospectus in a brief "selling memo," which is distributed to the bank's salesforce.
The Roadshow ("Baby Sitting")
The actual roadshow begins soon after the "reds" are printed. The prospectus, called a "red herring," or "red" prior to the pricing of the deal, helps salespeople and investors alike understand the IPO candidate's business, historical financial performance, growth opportunities and risk factors.
Using the prospectus and the selling memo as references, the salespeople of the investment banks managing the deal contact the institutional investors they cover and set up roadshow meetings. The syndicate department, the facilitators between the salesperson and corporate finance, finalizes the morass of meetings and communicates the agenda to corporate finance and sales. And, on the roadshow itself, VPs or associates escort the company. Despite the seemingly glamorous nature of a roadshow (traveling all over the country in limos with your client, the CEO), the corporate finance professional acts as little more than a babysitter on the roadshow, he most important duties of the corporate finance professionals often include making sure luggage gets from point A to point B, ensuring that hotel rooms are booked, and finding the limousine driver at the airport terminal. After a grueling two to three weeks and hundreds of presentations, the roadshow ends and the group flies home for much needed rest. During the roadshow, sales and syndicate departments compile orders for the company's stock and develop what is called the "book." The book details how investors have responded, how much stock they want (if any), and at what price they are willing to buy into the offering.
The End in Sight - Pricing the Deal
IPO prospectuses list a range of stock prices on the cover (usually something like $16 to $18 per share). This range is preset by the underwriting team before the roadshow and meant to tell investors what the company is worth and hence where it will price. Highly sought-after offerings will price at the "top of the range" and those in less demand will price "at the bottom of the range."
Hot IPOs with tremendous demand end up "above the range" and often trade up significantly on the first day in the market. The hottest offerings close two to three times higher than the initial offering price. Memorable examples include Apple Computer in the 1980s, Boston Chicken in the mid-90s, and Netscape Communications and a slew of Internet stocks in the past two years.
Follow-on public offerings and bond offerings
Bond deals and follow-on offerings are less complex in nature than IPOs for many reasons. The biggest reason is that they have an already agreed-upon and approved prospectus from prior publicly filed documents. The language, content, and style of the prospectus usually stay updated year to year, as the company either files for additional offerings or files its annual report (officially called the 10K). Also, the fact that the legal hurdles involved in registering a company's securities have already been leaped makes life significantly easier for everyone involved in a follow-on or bond offering.
Corporate Finance
If a follow-on offering involves the I-banks that handled a company's IPO (and they often do), the MDs that worked on the deal are already familiar with the company. They may not even have to develop a pitch-book to formally pitch the follow-on if the relationship is sound. Because the banking relationship is usually between individual bankers and individual executives at client companies, bankers can often take clients with them if they switch banks.
Because of their relative simplicity, follow-ons and bond deals quickly jump from the manager-choosing phase to the due diligence and drafting phase, which also progresses more quickly than it would for an IPO. The roadshow proceeds as before, with the company and a Corp. Fin VP or associate accompanying management to ensure that the logistics work out.
