How expensive is growth at the expense of its own...

5.13. How expensive is growth at the expense of its own external sources?

A company can only afford a debt of a certain size, based on the size of its financial flows and assets. If you need more money, you have to sell shares. In addition, exploratory drilling is not a type of activity that can be financed with the help of loans. If nothing is found, the loan is difficult to return. Therefore, we do not borrow money for exploration, we raise money through equity .... We received $ 130 million from the placement (IPO for LSE in August 2005) This money will be used for production drilling, exploration and possible acquisitions of new assets. In the next two years, we intend to invest more than $ 75 million in exploration and production programs. "

General Director of Urals Energy (the volume of oil production is about 280-300 thousand tons per year with reserves of 12 million tons) William Thomas

Realization of growth at the expense of the company's own sources can go both through reinvestment of profit, which means often a rejection of dividends, and through its own external capital. Own capital is attracted from external sources either:

■ from existing owners;

■ a limited circle of new owners (often they are the so-called "qualified investors" - qualified investors), it also makes sense to include venture investors;

■ a wide range of new owners.

Under an IPO, the new owners of the company may be offered both additional emission shares and existing shares held by the "old" owners, for example, the founders of the company (as was the case in 2007 for Uralkali). If already existing shares are listed on the exchange, then no capital is drawn into the company. The company receives the status of a public, has an observable market valuation and attracts capital from other sources. A positive factor in attracting capital after the IPO is a significant reduction in the cost of new sources of financing. For example, on the pharmacy network 36.6 There was a decrease in the cost of attracted money from 18 to 13%. The condition of the IPO is the incorporation of the company, which imposes on the management of the company requirements: openness to past performance results, transparency of decisions taken, a designation of development strategy and possible risks, consideration of the interests of all owners in making decisions, and not only majority (controlling shareholders) .

In a perfect market, retained earnings and additional issue of shares can be considered as substitutes in sources of financing. The more imperfect the market, the more expensive is the attraction of external equity. Rise in value is associated with both direct costs (payment of consultants, underwriters), and indirect, when the market refuses to pay a fair price for new shares, and a "foam discount" appears.

For non-profitable companies with high potential for growth in market value, development on equity becomes virtually the only available option. However, the stock market should create conditions for such development. The mature American stock market allows even loss-making companies to successfully conduct an IPO. Of the 84 companies that conducted an initial public offering on the US stock exchange in 2007, only 54% of the company was profitable. A similar situation was observed in other years of the late XX - early XXI century, when the share of profitable companies did not exceed 65%. In the boom period of Internet companies (2000), out of 406 companies only 29% were profitable. The peculiarity of placement for such companies is the sale of shares at the lower boundary of the established chain range. Despite this characteristic, companies manage to raise the necessary funds for further growth.

The imperfect market and problems with attracting external capital characterize the term "financial constraints". (financial constraints). It shows the difference in the values ​​of the required return on internal and external sources of financing for the company. The more imperfect the market, the more expensive the external sources of financing, since the owners of capital require an award for the risk of incorrect behavior of insiders, for the risk of low liquidity, etc. The more imperfect the financial market, the more difficult it is for a company to attract new equity.

It is traditionally assumed that large companies are less restricted in the amount of financing, they can use both internal and external sources, while medium and small companies, due to the higher cost of attracting external financing, are forced to rely mainly on internal cash flows when implementing its investment programs, i.e. are financially-constrained companies. Studies show that the characteristics of the institutional environment leave an imprint on the possibility of attracting money from the external capital market and not always the size is the determining factor.

The IPO procedure may be preceded by the placement of a certain block of shares (about 10-15%) among a group of qualified investors (private placement). Private placement of shares or shares enables the company, without opening or becoming public, to offer part of its shares issued by registration of a new issue to professional investors (investment banks that usually organize private placement, private equity funds or strategic investors, such as counterparties). The prerequisite for the success of private placement is good financial performance of the company, as well as the presence of growth prospects. It is on the analysis of these parameters that investors evaluate the market value of the company and determine the price they are willing to pay for the offered shares (units). For a dynamically growing company, a number of private placements are possible that precede an IPO. At the same time, the value of shares (shares) can grow over this period several times, providing the company with cheaper financial resources. Such an experience was demonstrated by the investment company "Troika Dialog". with VSMPO holding.

When attracting direct investment, a huge role is played by the procedures of financial and legal verification by the investor of the company (Due Diligence). As investors gain access to internal information about the company, the likelihood of their dishonest behavior (commercial espionage) is high. In this regard, many companies are on the way to signing a protocol of intent with the inclusion of penalties for violation of obligations or use the deposit procedure. It should be noted that many professional investors prefer to receive information prepared by financial advisers, and not by the management of the company itself. There are two motives here: greater confidence in the external expert than in the person concerned; the collection and analysis of information by professional consultants often go for the benefit of the company itself, as it allows you to streamline management accounting and reporting, to allocate and use leverage to create value. Financial advisers also help the company prepare a professional presentation of information to attract capital - the so-called information memorandum (offering memorandum).

Public placement in most cases is accompanied by inclusion of the company's shares in the listing of the stock exchange or withdrawal to the over-the-counter market. After the public offering, the client base of the company's investors is expanding. As a rule, first the portfolio is formed by portfolio investors, and then private (individual). The initial public offering confirms that the company has achieved a high level of information transparency, has shown a steady growth of financial indicators, the level of corporate governance of the company is in line with accepted standards and the company has a long-term business development strategy.

The first IPO procedure for the United States company took place in 1996. The cellular operator "VimpelCom" placed shares (ADR) on the New York Stock Exchange. The management of the company deliberately set the placement price underestimated with respect to internal cost, which gave rise to two effects on the market: the demand for VimpelCom's depositary receipts " many times exceeded the offer; on the first day of bidding, the price of the receipt exceeded the placement chain by more than 40%. Investors thus won, and the company "prongrate", as the attraction of money was more expensive than it was determined by the intrinsic value. Often companies are compelled to go under the understatement of the price of placement, i.e. on a conscious "underestimation" in order to expand the range of investors and to compensate investors for the risks of entering the capital of a little-known company.

In mid-2007, more than 40 companies of the United States market conducted 1PRO on United States, London and American trading floors. Not all public offerings of United States companies were effective for investors who decided to take part in them. Investments in a number of companies in the United States market through the IPO procedure show a negative return. Comparisons are conducted based on the observed current price of the share with the price of the primary offering. For example, in autumn 2007, the following companies show the negative return on investments from the moment of placement on the stock exchange: "Sitronics", development companies AFI Development and group "LSR", the largest the financial sector company - VTB, Dixy, the oil services company Integra.

In most cases, the money raised in the open capital market is channeled to new investment projects and acquisitions. In a number of cases, the funds go to refinance debts, which leads to a change in the structure of capital. An example is OAO Sitronics, whose management made a decision out of the $ 356.5 million raised in February 2007, $ 100 million to be used to purchase Eurobonds placed in March 2006. For investors, such a decision is more reasonable, than long-term storage of money in bank accounts before a worthy investment option is found. A company that decides to raise funds through shares should:

■ Meet a number of requirements put forward by investors;

■ have a stock of shares ready for placement, or obtain consent of already existing shareholders for the issue of new shares;

■ have an effective program to increase liquidity and share value.

The main directions of such a program should be 3:

■ increasing the information transparency of the issuer;

■ the formation of transparent information (story) for investors;

■ Competent actions in the stock market.

The presence of discount prices when entering the foreign capital market is associated with asymmetric information and the traditional interpretation of the new external capital market as a signal about the company's overvaluation. Indeed, what is the point of the owners to part with the undervalued shares. They will offer shares (ownership interests) to new owners only on condition that the market either correctly estimates the business, or even overestimates the company's capabilities. The classic model that demonstrates this effect is the Myers-Maylouf model (1984).

With regard to the cost of consulting services, underwriters, road-show, all these costs when organizing an IPO can be an impressive amount. In foreign markets, one IPO costs the issuer an average of $ 1 million. Financial advisers themselves emphasize that IPOs of companies with a turnover of at least $ 100 million a year or with huge growth potential (when the annual revenue rate is not less than 100%).

In the LFK System adhere to the principle that it is reasonable for a company to go to the exchange if its value exceeds $ 2 billion. In accordance with such police for 2006-2007, Several subsidiary companies of the group were withdrawn to the exchange, for example, "Comstar-UTS", "Sistema Hals". CitrONICS & quot ;. At the same time, AFK's "System" there are non-public companies that have not yet "reached" up to the target bar of adequate market valuation.

Preparing for an IPO often takes a fairly long period of time and not always in terms of the current comparison of costs and benefits, an IPO appearance seems economically justified. The strategic goals of the owners should be taken into account. For example, a development company (a diversified company working on the real estate market) - Sistema-Hals " spent 1.5 years restructuring the business and building an understandable to investors two-tier asset ownership structure without shadowy grandsons and beetle & quot ;. In particular, consolidation of blocks of shares in OJSC "TRK Kazan", CJSC "Kuntsevo Invest", OJSC "System-Temp" was carried out. In 2006, the company conducted an initial public offering; 80% of the funds attracted was invested in the projects being implemented, and the rest are directed towards acquiring rights to land and are reserved for new undertakings. "Credits would have been cheaper. But when the company has a large portfolio of projects - and we have about 64 in the work and about 40 under consideration - they need money to develop them. To get a loan, you need to invest about 30% of your own funds in the project, i.е. or take them out of their pockets, or go to the stock exchange. In addition, the IPO gives us greater transparency in business, company manageability, control over daily operations. "

The presence of operational losses in the understanding of the potential growth prospects by the market allows you to raise capital through the sale of own shares of additional public issues (so-called secondary placements - SPO). In 2007, the company Power Machines successfully attracted to finance the investment program, estimated at $ 145 million this year and $ 1 billion in the segment up to 2010, $ 274.4 million in the SPO (the share of the additional issue was more than 17% of the increased authorized capital) . The success of the placement is confirmed by placing on the upper boundary of the price range set by the underwriter and the organizer, and also by the "oversubscription" book applications three times. The attraction of capital in excess of the company's expectations, despite the net loss for 2006 of $ 132.2 million, is due to high expectations of investors of the prospects for the development of energy in the United States and in the world.

With the exhaustion of work opportunities on borrowed capital due to high financial leverage and loss-making activities, additional share issue becomes the only option for financing further growth. This path was followed in 2007 by the company Pharmacy Chain 36.6 - the largest United States pharmaceutical retailer. The market of pharmacy retail in 2007 grew by almost 40% in value terms. It is expected that this trend will continue in the next few goals. Pharmacy Chain 36.6 is the only pharma retailer whose shares are available in the public market, which was certainly taken into account when deciding on a secondary placement (SPO). The network has 936 pharmacies in 26 regions, it includes five stores "Center for Early Development ELC", European Medical Center. Consolidated revenue for the first half of 2007 was $ 390.5 million, consolidated gross profit of $ 130.9 million, EBITDA - $ 15 million, a net loss - 16.9 million dollars. With a capitalization of 14.9 billion rubles. net debt of the company is more than 6 billion rubles. ($ 247.1 million).

In November 2007, OAO "Pharmacy Chain" 36.6 year ended the secondary placement of shares on United States exchanges. The company issued 1.5 million new shares - about 15.8% of the increased authorized capital. As a result of SPO, the company was able to raise 2.8 billion rubles. (about 109 million dollars, with plans - 114 million dollars); 3.17% of the additional issue was bought back by existing (so-called old) minority shareholders by pre-emptive right.

When deciding on the transition to a public company, one more aspect should be considered: which investors will become co-owners of the company. For owners - founders of business often this issue becomes the key. On the reasons for the transfer of the IPO of the insurance company "RESO-guarantee"; one of its owners and the founder of the business S. Sarkisov expressed this: "... two reasons. The price range before the placement was the same - $ 1.8-2.2 billion for the company. As a result of preliminary meetings with investors, we were afraid that the IPO could pass along the lower border of the corridor. The second and main reason - among potential investors, as the road show showed, there were some hedge funds. It was absolutely not part of our plans. Undoubtedly, this is a drawback of the banks, because hedge funds do not buy securities in order to keep them. We do not want shares "RESO-guarantees" were subject to short-term speculation, we are a financial institution, and due to sharp fluctuations in quotations, customers and partners may be nervous.

We did not close the IPO theme for ourselves, there were plans for possible placement in the fall, but given the current situation in the markets, we decided it was premature. "

The United States market allows us to draw important conclusions but unsuccessful examples of conducting an operation to transfer a portion of shares to free circulation. For example, an attempt through the London Stock Exchange to sell part of the shares from the package of the largest owner of the potash fertilizer producer OJSC "Uralkali" in 2006, was unsuccessful, despite all the favorable external market factors (increased export prices for potassium chloride, relatively low interest rates, the normal liquidity of the financial market). The reason for failure is an aggressive exit with ignoring the signal effects of selling the controlling owner's share. There are three errors in this posting attempt:

1) a large proportion of shares lump sum put up for sale (20.84% ​​of the authorized capital);

2) the company's overvaluation at that time (the placement was expected with an estimate of the company in the range of 4.3-5.2 billion dollars, when the market capitalization for already listed shares did not exceed $ 4 billion);

3) negative perception by the market of the owner's sale of a part of the owned package without attracting money actually to the company (for investment decisions).

In 2006, investors in the market very low valued the company, so the owner had to abandon the announced sale of shares. The account of misses allowed to realize an output on the London stock exchange in the autumn of 2007 with a formally positive assessment. The transaction amount for Uralkali amounted to 947.97 million dollars with the sale of a package of 12.5% ​​of the authorized capital.

Traditionally, positive IPO results are recognized as transactions for the public sale of shares, if: the company has met the announced price range; the placement took place at the upper end of the price range.

This often ignores such an important point as the gap in supply and demand, in other words, "over-subscription". For example, in 2007, for the shares of "Uralkali there was a record oversubscription: the demand was 23 times higher than the offer, which led to the fact that in the preliminary auction after the 1RO transaction the shares went up by 25% compared to the placement price. However, the owner of the company can no longer receive these benefits from a higher market valuation of his business compared to the conservative estimate that was laid when forming the chain of transactions.

For an IPO and an SPO, the important point is to choose the time when investors have enough money to invest in the stock market. This implies the ability to monitor the sentiments of both strategic and portfolio investors. Ignoring this rule creates a disruption in the operation to attract capital or the formation of a minority shareholders' client base that does not meet the interests of existing owners, which can subsequently generate agency conflicts. The United States companies demonstrated a check for the time-to-market timing rule taking into account the analysis of investors' demand in the summer of 2007, when the global financial market faced a liquidity shortage caused by the mortgage crisis in the US. A number of companies announced the postponement of the planned IPO at least until the end of 2007 (for example, UC Rusai, NCSP, Synergy Soako Development, /strong> Bank Zenith ). The decision to go against the market led to the failure of the IPO OGK-2 In the autumn of 2007, conducted in the framework of privatization of the electric power industry. Of the 12 million new shares offered to investors, only 6.2 million units were sold. Because of this, the company did not receive more than $ 700 million invested in the capital raising operation. Two factors contributed to the failure of the IPO: a complicated liquidity situation in the global financial market, which prevented participation in many investment companies; the controversially set price of the share, which was based on the deals of the beginning of 2007 (for MMC "Norilsk Nickel", Enel, E.Op). In 2006, energy assets were sold on the market with a multiplier of $ 300-400 per 1 kW of capacity, in 2007 the multiplier increased to $ 750, which allowed for OGK-2 To set the bar at the multiplier level, exceeding $ 500 per 1 kW of power. Taking into account a number of other fundamental factors, investors found the price too high.

Direct financing ("direct equity" or "private equity") and its variety - venture financing ("venturc capital") to date, most developed in countries with a common law system, first turn in the US, UK, Canada and Australia. The watershed between venture and other over-the-counter (often used by the term - direct) investments in equity capital of the company is based on the presence or absence of so-called controlling (strategic) participation and capital application spheres.

The first characteristic of venture investment is the requirements of the investor in order to reduce the risk of misuse of the funds attracted to the company (in most cases without security) the entry of one or more of its representatives into the board of directors. This allows him to keep the "hand on the pulse" the company (hands on). Given the active position of venture investors, venture capital financing should be viewed not simply as a form of non-public (direct) attraction of financing, but as something more, including involving experience from the venture investor, connections in the business world and an uncontrollable managerial talent.

The second characteristic of venture financing sources relates to the areas of investment. These are either companies demonstrating significant growth potential, at the stage of initial development, expansion or transformation, or projects with a great potential for creating value for the company.

Venture financing is often divided into formal and informal venture capital markets (venture-type investors) for institutional entities (venture capital funds and venture capital companies) and individual investors (so-called business angels).

In the US, business angels invest in smaller amounts than institutional venture investors, but their sphere of investment is fundamentally different and this is very important for the country's innovative development. Business angels invest in earlier stages, most often they finance those projects that under no circumstances will institutional investors finance, primarily because of high (relative to the total investment) costs for various examinations and overheads, as well as high the level of uncertainty of the final result.

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