IPO+workshop[1]

1、ipo workshop netflix case study - may 23, 2002class notes, based on a presentation by merrill lynchoverview of the ipo process4. the 4 steps of ipo1. originationmarketing to convince corporate clients to utilize ml as a bookrunnerdiscuss company positioning, potential valuation, structure and execut

2、ion2. preparationdue diligencedrafting of disclosure document s-1 registration statementexchange listing applicationdrafting of marketing materials and preparation for anticipated investor q&aother organizational steps: new board appointments3. executionmarketing to investors via one-on-one and

3、group meetingsbookbuilding and pricingallocation of shares to investors4. aftermarkettradingfeedback from sales and capital marketsfollow-on financingadvisory work5. key playersfinancial sponsors / vcunderwriterscounselauditorseclenders and bondholdersrating agenciesprinterpr/ir firm6. role of the u

4、nderwriterresearch ß(research compliance)issuer ßà i-banking ßà equity capital markets ßà sales ßà investorsà trading ßà specialistsfor issuer, i-banking, eq. cap. markets and sales there is research involved, regulated by independent bodie

5、s.there is a shift from i-banking to by-side firms doing research.7. “typical” ipo timetable (weeks)0-1 organizational meeting0-4 draft prospectus, due diligence3-4 file registration statement with sec4-10 sec review/response period8-10 prepare roadshow presentation10 deal launch10-11 european roads

6、how (optional) (2-3 days)11-12 u.s roadshow (8-10 days)12 pricing13 closing13+ trading8. transaction flowchartsteps on the way, all critical, treated as black boxesfinal pitch/recommendationmandateorganizational meetingdue diligencedrafting, prospectus, underwriting agreement, other agreements9. key

7、 structural considerations· timing - company performance- market and sector performance- ipo calendar jan-1 through mid-may / mid-may onwardsthe convention is that (depending on year, market) from june you have half of the year “in the bag” and youll get credit for the next year.there is meanin

8、gful valuation variation, especially with high-growth companies· size- % of company sold- primary vc. secondary shares- use of proceeds- investor liquidity· distribution- institutional vs. retail- domestic vs. international· underwriting group· underwriting discountnote: high swi

9、tching costs for the company to switch underwriterscase study netflixinitial public offering: may 23, 2002260 full-time employeesnetflix is a software company. ceo sold previously another company (100s of $m).block-buster 85% of rents is new-releases, and its the least profitable portion (but easies

10、t to find in store).netflix builds the personalized video store interactively, according to their past rentals. cinematch technology generates personalized recommendations.13. pre-ipopre-ipo ownership77% vc23% managementrevenues (3 months)$18.4, $18.9, $21.6, $30.5last 12 months - $89.4 mmebitda -$5

11、.0mm (ltm)- can management execute its business plan?total capitalization: $15.1debt - $4.1debt/cap = 27%14. the “pitch”1. executive summary2. ml credentials3. netflix positioning4. preliminary valuation5. execution considerations15. executive summarykey message: if you had 60 sec. with the ceo in a

12、 taxi, what would you say?- positioning- valuation- structure- marketing- why ml?16. phase i originationpresent ml credentialspositioning- why invest in netflix now?- leverage dvd explosion- proven growth strategy- $29 billion in-home entertainment market opportunity- 600k+ subscribers generate recu

13、rring revenue- 50% gross margins- positive ebitda and free cash flowpreliminary valuationnetflix valuation approachthe valuation analysis is impacted by a variety of key factors:- management projections- industry trends, including secular trends and the competitive landscape (no real comps!)- curren

14、t equity market conditions, including precedents ipo analyses and after-market performance- current valuation levels and metrics of comparable companies- inpus from experienced research , i-banking, equity capital markets and sales professionalsanalysts and investors will focus on key metrics includ

15、ing:- subscriber growth and churn which will drive revenue growth- full year adjusted ebitda and net income breakeven“as amazon is to bam retailers, netflix is to bam movie retailers”method 1:- enterprise value/revenue- 2003e revenue multiple analysismethod 2: subscriber multiple analysis (comparabl

16、e analysis, margin sensitivity)comps: aol, hbo, tivo, cvc, charter, comcast, cox (mainly subscription services)method 3: dcfderive multiples and match with previous methodsvalue in concensus: $430mm (average)23. execution considerations (term sheet for the offering)proposed deal size: $75primary/sec

17、ondary mix: 100%overallotment: 15% of offering for up to 30 daysuse of proceeds: repay existing indebtness and fund working capitallock-up provisions: standard 180 days for netflix, senior executives, directors and all other insidersgeographic distribution: 90% us / 10% international institutional/r

18、etail mix: 75% institutional / 25% retailmarketing: 12 days us roadshow, complemented by internet roadshow and conference calls to international accounts.- usually never allocate more than 20% to institutional. retail will take the deal at any price.- here there was a huge institutional demand.norm

19、is to take public 25%-35%.phase ii: preparatoin25. due diligenceinvestigation into a companys business condition, financial condition and prospectspurpose is to ensure disclosure documents provide a complete balanced and accurate picture of a company.help determine and shape the marketing messages.p

20、rocess for netflix:- operations- strategy- financial history and plan- legal proceedings- competitive landscape- end market dynamics- detailed financial due diligence (historical results and projections)- facility tours- legal due diligence- accounting due diligence- intellectual property diligence-

21、 management background check by 3rd party investigator- drafting sessions26. documentation prospectusprincipal method of communication to investorsbalanced disclosurekey selling messages need to come througheverything must be verifieddeal structure: use of proceeds, capitalizationcompany description

22、industry overviewstrategyrisk factors (good defense for securities litigations, 2nd line of defense after due-diligence)historical financialsmanagements discussion and analysislegal and tax matters27. drafting process- edit and re-check documentprocess considerations: - starting point varies conside

23、rably by issues- issuers counsel typically keeps the “master” copy- lead bookrunner always uses own style- order of prospectus contents largely identical28. the sec review process3/6 initial s-1 filing3/15sec comment letter received3/20first s-1 amendment filed4/1sec comment letter received4/10clari

24、fying conversation with sec4/16second s-1 amendment filed5/7third amendment filed (red herring)5/16fourth s-1 amendment filed5/20fifth amendment filed (declared effective)5/23final prospectus filed29. other key stepsadditional documentation: underwriting agreement, comfort letter, legal options, int

25、ernal approval: equity commitment committeepreparation of marketing materialsroadshow presentations (30 min.)investor q&a (30 min.)institutional salesforce memorandum (research analyst will explain the deal to the sales force)retail information memorandum (explain the investment opportunities to

26、 the retailers)choose exchange and obtain listing approvalcoordinate private plane and other roadshow logisticsupdate company and board periodically on market and industry backdropphase iii : executionthe three stages of marketing1. launchinvestor targetingmanagement kick-off2. roadshowone-to-onesgr

27、oup functionsconference callsinternet management roadshows3. feedback (from investors)book-building (from feedback, questions, indications of interest, etc.)allocationpricingà equity capital marketsà investment communityroashow (8-10 days, 20 events)- ny launch (or two)- boston launch- san

28、 francisco- los angeles- denver- and more- internet roadshowassociate responsibilities during roadshowcoordinate roadshow itinerary with ecm confirm flights, hotels, carsarrange audio/visual requirementsprovide prospectuses to all investorscater to issuers preferences: meals, hotels, entertainment,

29、etc.communicate investor feedback to ml teamintroduce management team and highlight deal terms and timing to investorskeep company on schedule- executives should only concentrate on showing up and selling stocks.key selling themesinvestment highlights- market leader in segment- robust subscriber gro

30、wth- etcinvestor concerns- competition- limited operating history and history of net losses- subscriber churn- limited earnings visibility- dependence on studios and dvd adoptionà looking for reasons not to investbookbuilding and pricingcriteria:- comparable holdings / sector experience- salesf

31、orce feedback- participation in roadshow- timing of order entry- price limits- size of order relative to avg. holding size- ml experience with investor likely aftermarket behaviorà maximize allocation to investors who will buy, hold and buy morenetflix offering summaryinitial base offering: 5,500,000overallotment (“greenshoe”) : 825,000total shares offered: 6,325,000offering price: $15gross spread: $1.050 (selling concession 0.630 + underwriting fee 0.203 + management fee 0.217)net proceeds per share: $13.950gross proceeds (mm): $94.9net proceeds (mm): $88.2in addition the company has