INITIAL PUBLIC OFFERING INITIAL PUBLIC OFFERING (IPO) PROCESS IN THE(IPO) PROCESS IN THE

PHILIPPINES: AN PHILIPPINES: AN UNDERWRITER’S VIEWUNDERWRITER’S VIEW

Some pointers for companies that plan to GO-PUBLIC

By Prof. Dr. Eric Y Nasution

DEFINITION OF AN INITIAL DEFINITION OF AN INITIAL PUBLIC OFFERING OR IPOPUBLIC OFFERING OR IPO

An Initial Public Offering or IPO is the process by which a private company,

or in our case the small & medium enterprises (SMEs) in Silang, transform itself into a public company by selling

some of its authorized shares and become listed companies at the

Philippine Stock Exchange.

MOTIVATION OF WHY SMEs ARE MOTIVATION OF WHY SMEs ARE GOING PUBLICGOING PUBLIC

1. FINANCING GROWTH AND EXPANSION2. OWNERS CASHING OUT OWNERSHIP3. WHEN STOCKMARKET AT PEAK, TAKE

ADVANTAGE OF THE GOOD PRICE4. PAYING EXISTING DEBTS5. TO BE A LISTED COMPANY IS A

PROMOTIONAL STRATEGY6. OTHERS ________________________

MAJOR PHASES IN THE IPO MAJOR PHASES IN THE IPO PROCESSPROCESS

1st PHASE: CORPORATE CLEAN-UP AND RE-ORGANIZATION

2nd PHASE: HIRING PROFESSIONALS

3rd PHASE: DUE DILIGENCE AND DRAFTING

4th PHASE: PRICING THE COMPANY

5th PHASE: MARKETING EFFORT

6th PHASE: ADJUSTMENT (RE-ALLOCATION)

CORPORATE CLEAN-UP CORPORATE CLEAN-UP EXAMPLESEXAMPLES

1. IMPLEMENTATION OF GOOD GOVERNANCE2. COMPLIANCE OF ALL GOVERNMENT REGULATION AND

DIRECTIVES (LOCAL and NATIONAL)3. INSTALLATION OF ALL TECHNICAL SYSTEMS and PROCEDURES

(ACCOUNTING, INFORMATION, etc.)4. RATIONALIZATION/REORGANIZATION, INCL. SPINNING OFF

CERTAIN DEPARTMENTS, UNITS or PRODUCTS5. RESEARCH & DEVELOPMENT OF PRODUCT LINES6. PROPER IMPLEMENTATION OF STRATEGIC PLANNING7. IMPLEMENTATION OF PRUDENT TAX PLANNING SYSTEM

COVERING EMPLOYEES, PROPERTIES, INCOME, etc.8. PLANNING and IMPLEMENTING FAIR EMPLOYEES

COMPENSATION9. ETC.

HIRING PROFESSIONALSHIRING PROFESSIONALS

ISSUER

PROFESSIONALS:

Underwriter (FIRST APPOINTMENT),

auditor, legal counsel, financial adviser, appraiser, notary, printing company,

depository.

INVESTORS

LIST OF LIST OF PHILIPPINE UNDERWRITERSPHILIPPINE UNDERWRITERS

1.ABACUS CAPITAL 2.ATR-KIM ENG CAPITAL3.BDO CAPITAL 4.BPI CAPITAL5.CITICORP CAPITAL6.FIRST METRO INVESTMENT7.RCBC CAPITAL8.STATE INVESTMENT TRUST

9. PENTACAPITAL10. EBC INVESTMENT11.AMALGAMATED INVEST12.EBC INVESTMENT13.ING BARINGS14.MULTINATIONAL INVEST15.UNICAPITAL

SOURCE: I.H.A.P.

DUE DILIGENCE AND DRAFTINGDUE DILIGENCE AND DRAFTING

FOR THE MANAGING UNDERWRITER TO FULLY UNDERSTAND THE COMPANY’S BUSINESS, incl. THE FOLLOWING:

* PREPARATION OF PROSPECTUS(offering memorandum in compliance with the Securities Regulation Code) * FILING LEGAL DOCUMENTS WITH THE SECURITIES & EXCHANGE COMMISSION (SEC)

* OTHER RELATED DUE PROCESSES

PRICING THE COMPANYPRICING THE COMPANY

IN PRACTICE THE FOLLOWING ARE THE PRICING METHODS USED BY THE UNDERWRITERS:

* A SIMPLE BOOK VALUE (NET WORTH) * A NET ASSETS VALUE (MARKET VALUE) * A SIMPLE PRICE-EARNING (P/E) * NET DISCOUNTED CASH FLOWS * DIVIDEND DISCOUNT MODEL

MARKETING EFFORTSMARKETING EFFORTS

THE PRE-MARKETING OF THE PROPOSED COMPANY’S SHARES IS IMPORTANT! (Especially by the managing underwriter)1.Segmentation of the target investors2.Target/positioning of segments with stronger

purchasing power3.Formulation of stock mixes: Promotion

materials, distribution through selling agents, road shows, attractive price discount thru fees allocation, etc.

THE ACTUAL PRIMARY MARKETTHE ACTUAL PRIMARY MARKETPROCESSPROCESS

THE ACTUAL PRIMARY MARKET PROCESS REFERS TO THE ACTUAL SELLING OF SHARES FROM THE COMPANY’S AUTHORIZED CAPITAL (ranging from 1 to 3 weeks, depending how prepared is the underwriter in the pre-marketing period)

• In selling, the underwriter/s is assisted by the selling agents (brokers, members PSE)• The investors are normally the pension funds, insurance

companies, investment houses, etc.• After selling, adjustment/re-allocation of shares is to be

done among the underwriters

ADJUSTMENT (UNDERWRITTEN ADJUSTMENT (UNDERWRITTEN SHARES RE-ALLOCATION)SHARES RE-ALLOCATION)

DUE TO THE DIFFERENT FORMULATION/IMPLEMENTATION AND EFFECTIVENESS OF THE MARKETING

STRATEGIES OF THE INDIVIDUAL UNDERWRITER,

*SOME OVER SUBSCRIBE THEIR PORTION*SOME UNDER SUBSCRIBE THEIR PORTION AN ADJUSTMENT (RE-ALLOCATION) OF AN UNDERWRITER’S PORTION IS NECESSARY

PROFILE OF AN UNDERWRITING BOOK  Underwriter Amount Actual Sale Under Over ( M I L L I O N P E S O S )   BPI Cap.* 15.0 20.0 5.0 JP Morgan 10.0 5.0 5.0 Abacus Cap. 5.0 4.0 1.0 ---------- -------- Total 30.0 29.0 ---------- -------- * Manager Under subscribed 6.0 Over subscribed 5.0 SELLING AGENTS: Stockbrokers and securities dealers (Members of the Philippine

Stock Exchange or PSE)  

PAYMENT OF UNDERWRITING FEEPAYMENT OF UNDERWRITING FEE

Underwriting fee (0.75% to 1.0%) All underwriters will receive the

underwriting fee for guaranteeing the availability of the issue amount according to their respective portions.

PAYMENT OF MANAGEMENT FEEPAYMENT OF MANAGEMENT FEE

Management fee (0.5% to 1.0%)The manager of the syndicate of

underwriters will only receive this fee, without sharing it with the other underwriters. It is a fee for organizing and managing the issue, including preparing the prospectus and making the registration statement effective.

PAYMENT OF SELLING FEEPAYMENT OF SELLING FEE

Selling fee (0.75% to 1.25%)  Underwriters and selling agents that

participate in the selling of the issue will receive this fee according to the amount of sales they make.

OTHER PROFESSIONAL FEESOTHER PROFESSIONAL FEES

IN ADDITION TO THE PHILIPPINE STOCK EXCHANGE FEES (P 20,000 non-refundable processing; P 50,000 fixed listing fee and annual listing maintenance between P 20,000-P 200,000 ,P 100 for every P 1 million market cap value) OTHER PROFESSIONAL FEES (auditor, legal counsel,

notary, printer, etc.) ARE TO BE PAID IN ADVANCE BY THE COMPANY OR TO BE DEDUCTED FROM THE I.P.O.

PROCEEDS.

ALL THESE TOTAL FEES RANGED FR. 8% TO 12% FROM THE IPO AMOUNT, DEPENDING ON THE TOTAL AMOUNT RAISED BY THE SMEs.

SOME FREQUENTLY ASKED SOME FREQUENTLY ASKED QUESTIONSQUESTIONS

When the primary market process led by the investment banks (underwriters) is over, are these underwriters still responsible for the trading of shares in the secondary market (Philippine Stock Exchange)?

Answer: Legally? ___ morally? ___.• Whom should the listed company consult when

problem/s pertaining to the performance of the shares arise/s?

Answer: _ PSE _ Underwriter _ Consultant _ All

SOME FREQUENTLY ASKED SOME FREQUENTLY ASKED QUESTIONSQUESTIONS

If the company’s shares doesn’t perform in the PSE, whom should it consult and what should it do?

WHOM: _ PSE _ Brokers _ Consultant _ All WHAT TO DO: 1. Upgrade the performance of the

company. 2. Ask the advices of brokers 3. Other• Will the company’s shares always be listed at the

PSE?• Answer: If it doesn’t perform (no transaction,

stagnant, etc), a possibility of DELISTING.

SUMMARYSUMMARY

For an IPO (equity financing), a company goes to an investment bank (underwriter) and not to a commercial bank for loan.

Depending on how the company manages its financing, equity can be a financing strategy with a cheaper cost.

The process of the primary market ranges from 2 to 3 months, relatively.

GOD BLESS YOU