Ipos: Is the Window Open? Nicholas Pettifer, Americas Editor, iflr

IPOs: Is the Window Open?

Nicholas Pettifer, Americas Editor, IFLR

• Nicholas Pettifer, Americas Editor, IFLR

• Grant Miller, Managing Director - Equity Capital Markets, Cowen and Company, LLC

• David Ryan, Assurance Partner, PricewaterhouseCoopers LLP

• David Lynn, Partner, Morrison & Foerster LLP

Financing Environment

U.S. Macro Economic Drivers

Euro Zone Debt Crisis Threatening Economic Growth

Equity Market Internals

Lower Volatility Enhanced Equity Financing Conditions

IPO Market Activity

IPO Pricing Trends

IPO Structural Trends

U.S. IPO Activity – 2010 Year-to-Date

Considerations in Deciding to Go Public

Access to cash and capital markets for future financings and growth.

• Access to cash and capital markets for future financings and growth.

• Create a currency for future tax free acquisitions.

• Liquidity for investors (after lock-up period).

• Provide a vehicle for performance-linked employee compensation.

• Raise the company’s profile and credibility with customers and suppliers.

• Potentially maintain founder and management control of the company’s future.

Possible higher valuation if technology is strong but earnings potential is weak.

• Possible higher valuation if technology is strong but earnings potential is weak.

• More certain cash-out of existing investors.

• Avoiding time and cost of the going public process.

• Avoiding the burdens of living as a public company.

• Ability to keep things confidential.

• No need to fill out management team.

Upfront costs.

• Upfront costs.

• Management time—both before and after.

• Increased disclosure and reporting obligations.

• Corporate governance requirements.

• Trading restrictions on insiders and directors.

• Compliance costs.

• Public shareholders—activism and litigation threats.

• Investor relations.

• Uncertainty—legislative and regulatory changes.

Launching a Successful IPO

Get your corporate house in order before running up your costs:

• Get your corporate house in order before running up your costs:

• Assemble an experienced management team.

• Recruit independent members of the board of directors.

• Prepare necessary financial statements.

• Implement appropriate executive compensation policies.

• Clean up the capital structure.

• Organize corporate records, minute books and stock ledgers.

• Document material agreements.

• Adopt appropriate defensive measures.

• Identify potential issues early—no surprises.

Get your business in order before you get distracted by the IPO process

• Get your business in order before you get distracted by the IPO process

• Make sure your intellectual property is protected.

• Make sure your balance sheet is strong enough to withstand delays and expenses.

• Will your results be impacted by the focus of management on the IPO?

• Do your projections take into account the costs of being a public company?

• Address risk management and insurance issues.

• Deal with potential “cheap stock” issues.

The Business of being a public company—act like a public company, starting now!

• The Business of being a public company—act like a public company, starting now!

• Does your board look and feel like a public company board?

• Are your internal controls adequate for public company requirements?

• Will your executive compensation programs and policies withstand scrutiny?

• Are there related party transactions that must be eliminated?

• Are you prepared to deal with public stockholders?

IPO Valuation and Structure

IPO Example #1: GTEC

Global Defense Technology & Systems, Inc. (GTEC) Overview

GTEC: Valuation Driven by EBITDA and Earnings

IPO Valuation

Global Defense Technology & Systems, Inc. (GTEC) — $62.9 Million IPO

GTEC: Current Valuation Compared to Comparables

IPO Example #2: ALIM

Alimera Sciences, Inc. (ALIM) Overview

Alimera Valuation Based On Various Methodologies — Summary(a)

ALIM: Valuation Driven by Revenue

Historical Analysis of Companies With Phase III Data(a)

IPOs of NDA Stage Companies — 2004–2010 YTD(a)

Alimera Sciences, Inc. (ALIM) – $72.0 Million IPO

The IPO Process

Company counsel

• Company counsel

• Pre-IPO housekeeping and preparation.

• Prepare the company for due diligence process.

• Legal requirements.

• Manage drafting.

• Submit filings and responses to SEC.

• Post-IPO obligations and disclosure.

The Division of Corporation Finance Review Team

• The Division of Corporation Finance Review Team

• Legal (Examiner and Reviewer)
• Accounting (Examiner and Reviewer)
• Branch Chiefs, Assistant Chief Accountant, Senior Assistant Chief Accountant, Special Counsel and Assistant Director

• What are they looking for?

• How does the staff review your registration statement?

• What is the comment letter process?

• What are the timing considerations?

• How do you manage the review process?

Public Company Financial Reporting and Sarbanes-Oxley

Phase I

• Phase I

• - Assessing readiness allows for increased accuracy in management’s IPO planning and timing.

Anticipate issues and avoid untimely delays in external financial reporting process that can lead to:

• Anticipate issues and avoid untimely delays in external financial reporting process that can lead to:

• A decrease in the market’s confidence in management,

• - Damage brand image,

• - Difficulties in raising capital, and

• - Ultimately a lower market value for current and future capital market transactions.

• Assess state of readiness for life as public company in following areas:

IPO Execution

Marketing Program: The Roadshow

• Opportunity for company to articulate ‘story’ and investment opportunity face-to-face with investors

• U.S. Roadshow:
• 8–10 days, with approximately 100+ one-on-one meetings
• International Roadshow:
• 2–4 days, with approximately 20–50 one-on-one meetings

• Investors prepare for meeting by reading the offering prospectus, having discussions with research analysts and salespeople prior to meeting management

• Critical focus on MD&A and analysis of comparable companies

• Most sophisticated investors and institutions will spend time building earnings and valuation models to test investment thesis

• Market environment plays critical role in investment appetite

• Critical juncture in deal process

• Investors ask everything required to make an informed investment decision

The Roadshow Presentation

• Company and Underwriters will develop the roadshow presentation during the weeks following initial filing with the SEC, and while awaiting the first round of SEC comments

• Key components of a roadshow presentation:

• Tagline or mission statement
• Brief overview of Company
• Description of the market opportunity
• Highlights of Company strategy
• Discussion of products/services and product/service roadmap
• Discussion of customers, design wins, partners, etc.
• Overview of competition and competitive differentiation/barriers to entry
• Review of historical financial results and projected financial model (i.e., gross margins, operating expenses as a % of revenues, operating margin, net margin)

• Roadshow presentation should be approximately 25 minutes long

• Critical to leave plenty of time during roadshow meetings for investor Q&A

• Company management and Underwriters will rehearse roadshow presentation and Q&A numerous times in advance of actual roadshow

Illustrative Roadshow Schedule and Targeted Accounts

Selected Targeted Institutions in Europe

Illustrative Roadshow Example

Marketing: Attack the Market to Create Excitement and Demand

• Work extensively with management on roadshow presentation

• Compelling story
• Effective graphics
• Comfortable and convincing voice-over
• Robust Q&A prep

• Institutional sales memo

• Pertinent deal information
• Sales points and positions
• Anticipate investor questions

• Management teach-in

• Educate salesforce
• Preview of anticipated Q&A

• Net roadshow

• Deal captain teach-in

• Complements analyst teach-in with the “investor hooks”
• Real-time adjustment to positioning based on feedback

• Targeting effort

• Identify top prospects
• Communicate aggressively

• Strategic design of roadshow

• Shape roadshow to tap every pocket of demand
• Schedule cities to generate early order momentum and buzz
• Feedback loop to management
• Leverage proprietary Cowen insight and senior-level relationships to drive anchor order conversion

• Develop and capitalize on demand tension

• Strategic messaging to investors during roadshow
• Find investors who will drive price

Pricing and Allocation of Shares

• Registration statement declared “effective” following clearance of SEC comments

• Shortly before pricing, Underwriters conduct final “bring down due diligence call” with Company management

• Pricing call occurs shortly after being declared effective by the SEC

• Changes in offering size or price:

• Depending on the magnitude of changes, those changes may need to be filed as an amendment with the SEC and approved before proceeding with the offering

• Execution and delivery of Underwriting Agreement

• Printing and distribution of Final Prospectus

Aftermarket Support — Key Ingredients

Over-Allotment Option Overview