Custom «Warbutg Pincuss and Emgs: The IPO decision» Essay Paper

Emgs is a technology based company with the interests in an oilfield services’ sector. This means that the company is neither a typical oilfield services’ nor a technology based company. Its classification with other organizations is a problematic issue causing a lot of disturbances to its management. The company is initially owned by an investment group, Warburg Pincus. Its net worth in terms of a private equity is about $8 billion. The group has invested into such areas like communication (12%), industrials, consumer goods and retail (18%), information technology (8%), health care (18%), real estate (5%), financial services (11%), media and business services (17%), energy (9%) and other sectors (2%). This implies that emgs is basically cushioned financially, since it is a part of a larger family. This also implies that emgs’ value as a company is positively affected by the fact that it is owned by the group with as much worth as $8 billion.

According to Ross, Westerfield, and Jaffe (2005), an IPO is basically an Initial Public Offering organization whereby the shares of stock or the values in a business are sold to the public on a securities’ exchange for the first time. It entails transforming the company that is initially owned by few private investors in to the public organization owned by shareholders upon purchasing stock shares. This transformation from private to public usually serves to provide the expansion capital for the company to monetize the investments made by early confidential shareholders and to make the company as a publicly traded enterprise. Floating the IPO offers numerous advantages and disadvantages as discussed in this paper. The question of emgs’ IPO has numerous pros and cons; and whether or not to float  depends on which of these can be regarded as the weight in the emgs’ situation.

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II. The Advantages of Floating an Emgs’ IPO

1. Enlarged and Diversified Equity Base

Floating emgs will create an enlarged and diversified equity base with including public investors through the public sale of shares. This not only assures the company of more equity, but also provides a large number of investors that will be interested and involved in the running of business. Having an enlarged and diversified equity base means more company assets, and more expertise in the Board of Directors. Emgs, therefore, stands to benefit from this IPO by the amount of financial expertise to be attracted to the company by virtue of a stocks listing. This will mean that other than private investors are currently running the companies. There will be more people involved and more equity to manage (Keown, Martin, Petty, & Scott, 2005).

2. Cheaper Access to Capital

Via public securities trading, emgs is bound to get a much cheaper access to capital from the funds raised. The company will have much more money in its disposal following the IPO. Thus, it can easily expand or diversify its line of business as planned. This is because all the money raised from an IPO goes directly to the company for its expansion or diversification projects without borrowing or incurring any debts. The fact that an IPO is meant to raise funds means that emgs will have more capital to fund its pending business activities (Ross, Westerfield, & Jaffe, 2005).

3. Increased Exposure to the Public and Market Prestige

Publicizing the company means introducing it to the rest of the world, since it is currently known by private investors. To get listed, the company will have to publicly file its applications with the regulatory authority of any listing venue they opt for like the SEC in the US. This is bound to create a buzz in the market as investors will be rushing to get as much information about the company as they can within the shortest possible time in order to be ready when an offer opens. Having emgs listed in stock exchanges is bound to attract the people’s attention to the company and its activities. This can serve as advertising. The company will gain the highly needed publicity and market recognition.

4. Facilitated Acquisitions

Although the company does not currently intend on making any new acquisitions, this may change in future. Being listed in the stock exchange market will ensure that the company can easily acquire the necessary funds to facilitate the acquisition. In emgs case, this means that it will no longer rely on its private investors to raise the amount needed to get a new acquisition whether for the technology or the oilfield services’ section.

5. Multiple Financing Options

Becoming a publicly traded enterprise provides the company with a lot of financing options when a need for funding arises. Such ones include equity, convertible debt and even the cheap bank loans that are easily accessible to some publicly traded enterprises. This means that the company can fund its expansion plans without having to source for funding from few private investors (Bruner, 2003).

6. Liquid Equity Participation

After issuing an IPO, the company tends to attract and possibly retain a much better management personnel and other employees generally through the liquid equity participation. This is because experts are usually interested in investing or buying shares in the companies being in their field of interests. This means that the company will attract the experts as it needs them for successful operations.  

II. Disadvantages

1. Ongoing Costs

Listing in the securities’ exchange has a number of costly and continuous requirements. These may seem expensive for the company, although some listing venues have the cheaper listing rates than others do. This disadvantage can, therefore, be countered or mitigated by choosing a cheaper listing venue, since the costs are not standardized across all markets.

2. Full Financial Disclosure Requirement

In most, if not all jurisdictions, the securities’ exchange regulatory requires a full disclosure of financial and business details of the company analyzed before it qualifies for listing. This implies that the company has to publicize the sensitive information that may be used to its disadvantage by its competitors, customers and suppliers. In this case, emgs may be required to disclose the information that may be useful to the OHMS and its other suppliers or customers. This kind of information would serve to compromise the company in not such a major way; thus, it is not bad enough to deter the IPO floatation.

3. Risk of not Reaching Target Funding

When the company issues the IPO, it has a targeted amount of funding that it expects to get. This, however, is not always realized due to one reason or another. The risk exists for every company contemplating the securities’ exchange as a way of raising funds. It can be countered by having some realistic expectations and carefully analyzing the prevailing market conditions to ensure that the IPO has been issued at the best possible time so as to maximize its potential.

At this point, it is important to note that the disadvantages presented by the emgs IPO are much less significant than the advantages that floatation can offer to the company. This, therefore, means that the emgs is better placed if it floats the IPO as the benefits will serve to provide the company with the numerous growth and expansion opportunities. This will benefit not only to new shareholders but also to initial private investors that do not opt to sell out their stakes.

III. Marketing Conditions that Should Determine the Timing of the IPO

For the company like the emgs, the factors that should determine its timing for the IPO are the prevailing market oil prices. This is because the company is considered to be more of the oilfield services’ company despite its technology operations. A drop in oil prices is bound to affect the share prices of all oilfield services’ companies regardless of the listing venue. Thu,s the best time for the emgs IPO would be in early 2007 when the oil prices enjoyed a stable spell.

Factors to Consider when Choosing a Listing Venue

Choosing a listing venue is as important to the company as the rest of preparations for becoming a publicly traded enterprise. There is a number of factors to consider while making this choice. In the emgs case, the options being considered were New York and Oslo. The two venues are compared below; a factor by a factor, to determine which one is more suitable or better suits the company.

1. Peer Group

In New York Securities Exchange, the concentration of listed oilfields services companies is 0.7% unlike in Oslo having a 15% concentration. This means that the listing in Oslo will give to the emgs a higher concentration of peers than if this is listed in the NYSE. A higher concentration means higher risks for the company. There should there be a decision by investors to cushion themselves from losses through mass sell-offs to minimize their exposure. This risk is, however, permanent within the oilfields services sector as it depends on the stability of oil market prices regardless of the listing venue (Grove, Mock & Ehrenreich, 1997).

The emgs is a technology based company with the interests in oilfields services. In Oslo, however, there aren’t any listed technology based companies of any scale. This means that the listing in Oslo will leave the company with a probability of being placed under a wrong category with some incomparable peers. The listings in the NYSE will, therefore, be a much better option with regards to finding comparable peers as a number of technology based companies as listed there.   

2. Valuation

In the US, a valuation for the securities exchange is generally higher than in the European countries mostly due to its regulatory aspects, size and liquidity of the market. Also, the NYSE has a much higher price-to-earnings ratio than Oslo does at 17.3 x against 14.8 x. This means that if all other factors are kept constant, any company valued in the US will be offered a much lower valuation in Norway.

In Europe, however, the markets have trended towards a higher appreciation for equity offerings from the companies that exhibit high growth potentials. So regardless of the price-to-earnings ratio, Europe markets could give to specific companies a higher valuation than the US market provided to the company analyzed. It has exhibited the impressively high growth characteristics. This basically means that although the US market tends to favor some companies in terms of its valuation, Europe is bound to be more appreciative of the emgs growth characteristics. Thus, it gives a far much better valuation based on the company’s potential.

3. Analyst Coverage

The listing in Oslo would result to the company being covered by the oilfields sector analysts as a ‘hot company’ along with few others in the sector. This is not an accurate coverage as the company’s business model is not the same as that of the capital intensive and slower growing oilfields services companies (Hardymon & Leamon, 2008).

In the NYSE, on the other hand, there is a sufficient number of oilfields services companies. Due to the emgs’ small size, it will be difficult to attract the attention of an analyst. This means that the company will not be able to receive any analyst coverage unless its management has gone out of its way to negotiate with the analyst community.

This implies that Oslo is a better listing venue as the analyst coverage is a vital affair for any company participating in the securities’ market. The company will simply have to take some discrepancies in its business model in comparison to those of other companies in the sector. This is an unfair advantage that it shall have over them. In this way, the company will be viewed as a leader and attract even more investors.

4. Investor Base

Both Oslo Bors and NYSE provide a multinational shareholder base upon listing. This means that regardless of the listing venue, any US or European investors will need to be coached on the IFRS accounting system and provided with some quarterly financial statements from the emgs, since the company’s operations are compliant to Norwegian regulations. This is regardless of the venue. Thus, it confers an advantage to neither Oslo nor New York.

5. Accounting Systems

Oslo provides a limited expertise and resources that make managing and implementing the US GAAP accounting system both expensive and very difficult. This means that the company, with its operations in Oslo, cannot comply with the US accounting regulations without having a need for any US-based accounting firm or staff. Thus, the listing in the US for the company which operations are compliant to the Norwegian regulations can prove to be hard. The emgs will need to recruit the accounting staff in Houston, thus, incurring more unnecessary costs. For this reason, Oslo listing is cheaper and less demanding.

6. Securities Rules and Regulations

The US listing involves much higher upfront and on-going costs. These are coupled with a lot of management distraction issues and many other complexities that are unheard of in Oslo market. However, the securities’ regulations in Oslo require that at least 40% of the company’s board to be made of women. This regulation is hard to meet, but not necessarily impossible. Not many candidates for the emgs board are women. They definitely cannot constitute the required 40%. But rather than the high costs and management distractions of the NYSE, the emgs better complies with Oslo regulations. This can be done by sourcing more women to become a part of the company’s board appointed by private investors.

7. Currency for Acquisition

The listing in the US will mean that the company has a much better currency at hand in case it needs to make the acquisition as compared to Oslo listing. Oslo value will depend on the prevailing liquidity of the Norwegian currency.

The company is, however, not looking at making any major acquisitions at the moment. This implies that it may not necessarily use this advantage. In other words, Oslo listing is still the preferred and logical choice.

8. Eligibility for Listing

For New York listing, the interested company, in this case – the emgs, is expected to make its application to list on the NYSE directly to the exchange. The New York Securities Exchange (NYSE) does not have a specific concept to differentiate some primary and secondary or premium and standard listings.

In order to become eligible for listing, the company needs to sufficiently pass at least one of the exchange alternative tests based on earnings, valuations, revenues and cash %uFB02ows. The company will also need to meet the exchange distribution and size requirements stipulated for the specified planned offering.

Being a non-US company, the emgs will be subjected to the NYSE established set of eligibility criteria being specific to non-US companies. The company, however, can also preferably choose to qualify in the criteria specified for the US domestic companies. Before the formal submission of an application to the NYSE, the company is allowed to approach the exchange and ask for a confidential preview of eligibility prior to its planned submission. Some companies seeking to list in Oslo also have to pass a number of tests. However, they are not as complex as the US tests. The financial disclosure is, thus, a standard for all securities’ exchanges (Fridson & Alvarez, 2011).

9. Ongoing Costs

All the expenses incurred in the IPO are classified as direct costs. These may include underwriting, legal and accounting fees. They also include the fees paid to the exchange, advertising and marketing expenses as well as the costs incurred from rules and regulatory compliance. Under-pricing, on the other hand, is an indirect cost.

Once the company has been listed, there are some ongoing direct fees that will still have to be paid. They include exchange and professional fees. The ongoing indirect costs incurred may not be so obvious. They include some trading costs incurred by the company and its investors. These costs are generally cheaper in Norway and other European markets.

10.  Publicity and Marketing

Publicity and marketing for the IPO listed in the NYSE are limited by certain rules and restrictions. Basically, no offers, oral or other, are allowed to be made before a public filing of the registration statement with the SEC. The Securities’ Act in the US broadly defines an offer to include any action that can arouse a public interest in the mentioned company or its securities. This implies that companies and other transaction participants are required to censor their public statements till the registration statement has been publicly filed. This is done to avoid illegal offers, otherwise known as a “gun jumping.” Gun jumping has the potentially dangerous consequences for a transaction. For example, if the SEC learns of such an incidence it can impose a “cooling off” period. This may, in turn, delay the effectiveness of the registration statement and consequently the pricing and settlement of the IPO transaction. Sales deals may be performed and even confirmed after the registration statement has been declared as effective by the SEC. However, oral offers can be made during a ‘waiting period’ after the registration has been publicly filed while the SEC is reviewing the transaction for pricing and settlement.

Oslo Bors is, however, not as strict as companies are allowed to market their shares while they are waiting for the authorities’ confirmation on the price and settlement of the transaction.

Considering all the factors mentioned above with regards to the two listing venues considered for floatation, it is imperative to note the advantages of listing in Oslo. Oslo listing has proven to not only be cheaper, but much more convenient with fewer and more manageable challenges as compared to the NYSE listing. Thus, the emgs is better off listed in Oslo Bors than in the NYSE despite the latter one also having few advantages for the company (Brigham & Ehrhardt, 2011).

IV. Valuation of Emgs

In providing the valuation for the emgs, the most relevant valuation model to use is a relative value model, whereby the company is assessed for its risks, liquidity and return relatively to another company already listed in the same sector. In the emgs’ case, the OHM is that company. It has been known to be the emgs major and even the most significant competitor since it was founded in 2002.

The OHMS was founded by several VC firms and listed with the valuation of $87.4 million. From the shares’ floatation, the company managed to raise the capital of $17.7 million. The company’s liquidity is intact since its current assets match its current liabilities.  In 2005, the company’s shareholder equity and total liabilities was $18.5 million. This is a basic example against which the emgs value will be determined.

In comparison, the emgs, as a whole, had a total worth of equity of $8 billion with only 8% invested in the technology sector. As well 9% was invested in the energy sector. In 2005, the emgs’ total liabilities and the c investors’ equity was $33 million. Also, the emgs has a large number of clients ranging from ExxonMobil and Shell having some strategic partnerships with the company to BP, Chevron, Total, Conoco Phillips, Eni, Statoil, Hydro, Petrobras, ONGC, Petronas, Petoro, Woodside, Anadarko, Apache, Aker Exploration, Devon, Talisman, Marathon, Murphy, RWE, Gaz de France, DNO, OMV and Rocksource. These companies are classified as international, large international and national oil companies, exploratory and production organizations. This is the fact that highlights the enormous growth potential highlighted as the company’s valuation.  

This basically implies that the emgs valuation is bound to be far much higher than that of the OHMS. Furthermore, focusing on the emgs as a technology based company with the interests in oilfields services, the company will then have a total of 17% out of its $8 billion as a starting capital. This means a basic value of up to $1.36 billion.

The company incurred the losses in its first two years of operations. However, it has now embarked on the upward trend. These first two years were expected as the company was struggling to get off its feet and establish itself in the market. Investors are bound to understand the risks involved in the oilfields services’ sector and, thus, appreciate how fast the emgs is picking up in the already crowded sector.

Considering its exponential growth potential, as exhibited in its upward trends, the company is not only twice as profitable as the OHMS but far much larger in terms of its long term returns, assets and liabilities. The company has a lower risk factor as it is cushioned by the diversification of its investments. It is more liquid since it has many investment options that can match its current liabilities. All these factors drive up the company’s value. Thus, with a basic capital of up to $1.36 billion and an upward trend in its profitability plus the exponential growth potentials as exhibited by the company’s market presence, the approximate valuation of the company is $3 billion.

Conclusion

With the private equity of $8 billion, Warburg Pincus is quite a powerful group of private investors. The emgs is, therefore, not badly placed in terms of its market orientation. With its large and influential customers and strategic partnerships, the company is set for high returns. This implies that the listing in the securities’ exchange is bound to provide more advantages than disadvantages for both the company and its investors in a long run. It is important, however, to consider that the company is partially an oilfields services’ company. This sector is highly dependent on the stability of oil market prices. By the current trends, the risk in the oil sector is reduced since the prices have been consistent and encouraging. This means that the current market trends in the oilfields services’ sector is more or less favorable for  the floatation. It is bound to attract a good number of investors. Also, it is important to know that the only major listed example by which the emgs value and performance can be determined is its competitor, i.e. the OHM. However, the OHM has not only relatively lower performances than the emgs, but also a far much lesser overall value.

This, therefore, puts the company on such a place where it can attract investors based on its upward trend and exponential growth potential. Also, it can discourage them based on the recent performances of its sole competitor in the market. In attracting investors, the company can successfully argue for its growth potential using the fact that it has managed to surpass its most recent growth projections (Norreklit, 2003). The investors will, thus, be required to look beyond the losses incurred during the company’s first two years of operations. They may also look upon the future especially considering the company’s strategic partnerships and expertise and an increased capital base being bound to result from the floatation. Basically, the emgs is success and the IPO is a sure way of realizing the future prospects of this company. The company operates from Oslo so other than the numerous advantages presented by New York listing, the emgs serves to benefit more from Oslo listing. The benefits include a cheaper listing and accounting costs, a better valuation as a European market, an analyst coverage, cheaper ongoing costs, more publicity and marketing, among others. The emgs is, thus, far much better floating the IPO in Oslo at an estimated valuation of at least $3 billion.