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IPOs in Germany. IPO procedures

Term Paper 2018 18 Pages

Business economics - Banking, Stock Exchanges, Insurance, Accounting

Excerpt

Table of contents

Index of figures

List of abbreviations

1 Introduction

2 Definition and theoretical procedure of an IPO
2.1 Definition
2.2 Theoretical procedure of an IPO

3 Options for determining the issue price for an IPO
3.1 Fixed Price procedure
3.2 Bookbuilding procedure
3.3 Auction procedure

4 The IPO of German chemistry-company Evonik
4.1 Case study
4.2 Critical evaluation

5 Conclusion

Bibliography IX

Index of figures

Figure 1: Phases of an IPO

Figure 2: Chart of Evonik Industries

List of abbreviations

IPO Initial public offering

1 Introduction

It was the 25th of April in 2013 when the newspapers headlined the successful initial public offering (IPO) of Evonik, the German chemistry company. “Evonik finally finds the right chemistry” reported the Financial Times[1] whilst Reuters wrote “Evo- nik celebrates stock market premiere”.[2] Prior to the successful listing in 2013, Evo- nik had postponed such transaction three times already, citing adverse market conditions as the reason.[3] [4] Adverse market conditions are widely used as the most common reason for withdrawing or postponing an IPO, with insufficient investor demand also being given as an explanation to not proceed with the transaction, as evidence by German real estate company Deutsche Annington.[5]

Listing a company on a public stock market is not an easy task, but rather a very time consuming and expensive process. The most crucial part of the entire trans- action is finding the right offer price at which company is offering its shares to in- vestors. The aim of this paper is to explain and describe the IPO process in gen- eral, with a special focus of the techniques on how the issue price will be derived.

The thesis begins with a theoretical section describing and explaining the basic process of an IPO as well as clarifying basic definitions. Subsequently, the main techniques how the issue price is set will be explained and analyzed. The theoretical part is followed by a practical section, using the example of Evonik to analyze how its issue price was determined. The last chapter contains a final conclusion summarizing the findings of the paper.

2 Definition and theoretical procedure of an IPO

2.1 Definition

The abbreviation IPO stands for Initial Public Offering, which is also known as Go- ing Public. This term refers to the initial offering of a company’s shares on a public market.[6] The process includes all measures related to the initial offer of company shares, including the admission of shares to trading on the stock exchange, as well as the corresponding transformation of legal form.[7] The main goal of the IPO is the procurement of capital.[8] In addition to numerous other participants, such as legal advisers or accountants, the issuer, the advising investment banks (most of the time several banks are advising on an IPO) and the investor have an important role in the process.[9] In brief, the issuer, with the support of one or more investment banks, offers its shares to potential investors. Before the company is listed on the stock exchange, it offers investors the first opportunity to participate in equity capi- tal in a public offering, a process taking place on the primary market.[10] Once a company’s shares have been admitted to trading on an exchange, investors which have not subscribed for shares during the IPO can buy the shares in the secondary market.[11]

2.2 Theoretical procedure of an IPO

Basically, the process of an IPO can be divided into three phases:

Abbildung in dieser eseprobe nicht enthalten

Source: Modelled after Ernst & Young, Ihr Börsengang und die Zeit danach, p.19.

In the first phase, the preparation phase, the fundamental strategy of the IPO will be established. In addition, it will be examined whether the company has the right legal and corporate structure for the capital market or whether necessary structural adjustments will have to be made. Furthermore, it is of high importance to deter- mine whether the company has an attractive investment case that investors would likely buy into.[12]

The second stage of the process, also known as the implementation phase, , the required advisors will be selected, such as , lawyers, investment banks and ac- countants who will be involved in the process on a day-by-day basis. Once all par- ties have been appointed, processes such as due diligence, ie a risk assessment, creating the investment case (also known as equity story) and the development of an offering structure will kick off. Another task in this phase is also the preparation of marketing materials for analysts, the press and most importantly, investors.[13]

At the beginning of the placement phase, the IPO prospectus will be submitted and, usually after several rounds of making adjustments, approved by the regulator and the stock exchange. This is followed by an announcement called “Intention to float”, potentially a press conference and the start of the Pre-Deal-Investor-Education, when the investment banks’ research analyst are meeting with investors prior to commencement of the management roadshow. Another important point in this phase is the bookbuilding process, which runs coherently with the roadshow. Dur- ing this process investors submit offers to the investment banks on whether or not they wish to participate in the IPO, and if so, what amount each investor would like to invest. The bookbuilding process closes with setting the final offer price for the shares. Once the final price has been set the allocation process starts, in which it is determined how many shares each participating investor will receive.[14]

The IPO process ends with the listing on the stock exchange and the subsequent trading of the shares on the secondary market.

3 Options for determining the issue price for an IPO

In the following, three methods for determining the issuance price will be analyzed, namely the fixed price procedure, the bookbuilding procedure and the auction pro- cedure.[15]

3.1 Fixed Price procedure

The first method of setting the offer price for an IPO is the so called fixed-price method, in which the issuer fixes the issue price.[16] The fixed price is determined on the basis of available forecast figures and the trading multiples from comparable companies. In order to confirm the plausibility of these budget figures, an exact examination of the company’s financials is required. This exercise is called Finan- cial Due Diligence and is usually carried out by accounting firms, which are special- ized in such examinations. In addition to the fundamental company valuation, the current capital market and competitive situation also influence the calculation of the fixed price.[17] Compared to other models, the capital market, thus the potential in- vestors, are not included in the investigation. The idea of this method is to allow Investors to subscribe for shares at the given issue price.The decision of those who do not submit an offer has no influence of the issue price.[18] Thus, there is a certain tension since this method determines a fixed price but does not guarantee that all shares can be placed with investors.[19]

A key advantage of this method is the planning certainty for the company and the banks, because the price does not change.[20] In addition, the bank usually guarantees the take-up of the entire issue volume prior to the placement, a process known as underwriting. While this does provide security for the company, however, the bank is not required to consider special placement wishes. A further examination of the quality and scope of investors is also not guaranteed.[21]

3.2 Bookbuilding procedure

Since the mid-90s, the bookbuilding procedure has been the most commonly used method for setting the price for new stock offers.[22] In the applied procedure, no fixed price is specified but interested parties can submit offers within a given price range.[23]

First, the banks conduct exploratory talks with potential investors. In these talks the expected demand, how many shares at what price the investor is willing to invest, will be discussed. The results of the discussions with the investors form the basis for determining the price range, at which the shares will offered.[24] Once the price range has been set, it will be made public and potential investors will be contacted. In this stage of the process, the marketing phase, the company and the banks in- troduce the interested investors to the management of the company and provide more information on the structure of the transaction. This procedure is called road- show, and forms the most curcial part of determining whether the deal is going to be successful.[25] Coherently the so order-taking-phase or bookbuilding takes place, followed by the so-called subscription phase.[26] The bookrunner records all sub- scription orders in an order book and thus has an overview of the demand at each subscription price of the defined price range. Analogous to the fixed price proce- dure, a certain exaggeration is sought here, so that a demand on the after-market/ secondary market can be assumed. At the end of the subscription period, the bookrunner closes the orderbook and submits all offers received to the issuer.[27] The orderbook now shows which investor would like to invest with which volume and at what price. On the basis of the received offers and the knowledge of the bookrunner on the quality of each individual investors, it is now decided how the shares will be distributed, commonly referred to as the allocation process. Here, among other things, the expected behavior of the investor in the secondary market

[...]


[1] See https://www.ft.com/content/d8454b4e-acfd-11e2-b27f-00144feabdc0 , Accessed on 24/06/2018.

[2] See https://de.reuters.com/article/dax-idDEBEE93O02U20130425, Accessed on 16/07/2018.

[3] See https://www.welt.de/print/die_welt/finanzen/article115625912/Evonik-ueber-Ausgabepreis.html , Accessed on 17/07/2018.

[4] See https://www.stern.de/wirtschaft/news/chemiekonzern-evonik-boersengang-ist-abgesagt- 3417560.html, Accessed on 16/07/2018.

[5] See https://www.wiwo.de/finanzen/boerse/boersengang-abgesagt-deutsche-annington-flop-mit- ansage/8439712.html, Accessed on 16/07/2018.

[6] See Salzer, E., Investor Relations-Management and IPO-Erfolg, 2004, p. 16.

[7] See Becker, H. P., Investition und Finanzierung, 2012, p. 174.

[8] See Ernst, D., H ä cker, J., Realoptionen im Investment Banking, 2002, p. 78.

[9] See Deutsche B ö rse AG, Praxishandbuch Börsengang: Von der Vorbereitung bis zur Umsetzung, 2007, p.128-132.

[10] See Schuster, T., Uskova, M., Finanzierung, 2015, p. 60.

[11] See Becker, H. P., Investition und Finanzierung, 2012, p. 174.

[12] See Ernst & Young GmbH, Börsengang und die Zeit danach, p.19.

[13] See Ernst & Young GmbH, Börsengang und die Zeit danach, p.19.

[14] See Ernst & Young GmbH, Börsengang und die Zeit danach, p.19.

[15] See H ä berle, S. G., Das neue Lexikon der Betriebswirtschaftslehre, 2008, p. 518.

[16] See Fugger, H., Börsenlexikon simplified, 2006, p 72.

[17] See Wirtz, B. W., IPO-Management. Strukturen und Erfolgsfaktoren, 2012, p. 94.

[18] See R ö hling, T., Wissensmanagement während eines IPO Prozesses, 2003, p. 26.

[19] See Keuper, F., et al, Die moderne Finanzfunktion: Strategien, Organisation, Prozesse, 2007, p.367.

[20] See R ö hling, T., Wissensmanagement während eines IPO Prozesses, 2003, p. 26.

[21] See Wirtz, B. W., IPO-Management. Strukturen und Erfolgsfaktoren, 2012, p. 94.

[22] See Deutsche B ö rse AG, Praxishandbuch Börsengang: Von der Vorbereitung bis zur Umsetzung, 2007, p.300.

[23] See Fugger, H., Börsenlexikon simplified, 2006, p 34.

[24] See Deutsche B ö rse AG, Praxishandbuch Börsengang: Von der Vorbereitung bis zur Umsetzung, 2007, p.300.

[25] See Rudolph, B., Unternehmensfinanzierung und Kapitalmarkt, 2006, p. 301.

[26] See Deutsche B ö rse AG, Praxishandbuch Börsengang: Von der Vorbereitung bis zur Umsetzung, 2007, p.300.

[27] See Rudolph, B., Unternehmensfinanzierung und Kapitalmarkt, 2006, p. 301.

Details

Pages
18
Year
2018
ISBN (eBook)
9783668779211
ISBN (Book)
9783668779228
Language
English
Catalog Number
v437694
Institution / College
University of applied sciences, Munich
Grade
2,0
Tags
ipos germany

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Title: IPOs in Germany. IPO procedures