Category Archives: Roadmap for an IPO

Merger

Definition of ‘Merger’


The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

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Investopedia explains ‘Merger’

Basically, when two companies become one. This decision is usually mutual between both firms.

7. Other Considerations 59

Compensation planning and design
Basic considerations
Companies considering a public offering should ensure the placement of a well- conceived compensation program which will support the company’s strategy and competitive positioning. The critical reasons why companies should look at compensation are to:
Support the company’s strategy via compensation programs
Compensation programs exist to effectively attract, motivate, and retain personnel to execute corporate strategy. As a public company, a key strategy is to increase shareholder value. The compensation program, therefore, should adequately communicate the performance measures that drive value, and share a portion of the value creation with employees.
Consider competitive pay levels and mix
Company salary data for top executives will be available to shareholders and the general public for what is probably the first time. Registration statements and annual proxy disclosures require detailed reporting of base salaries, annual cash bonuses, perquisites and benefits, stock option grants, and any other long-termincentive grants. Specific data is required for the CEO and the four other most highly paid officers, as determined by salary and annual bonus. It is critical that compensation is reasonable, relative to industry practices and to the company’s strategy and performance. Unreasonably low pay will attract recruiters, while high pay will attract unwanted criticism by investors and analysts.
Satisfy investor desires for management “ownership”
Investor groups generally want management and directors to hold an ownership interest. This helps ensure that adequate management attention is given to increasing shareholder value. It also provides retention incentives for key executives, particularly if grants vest over time. In fact, in a special study reported in The New York Times on executive pay published in April 2000, indicated that most companies require chief executives to own stock worth three to five times their annual salary. The ratio declines for lower-level executives, usually down to one and a half times salary. The ownership interest may be actual shares, or more commonly, options to purchase shares in the future.
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6. Life as a Public Company 57

Fiduciary laws must be carefully observed after a public offering due to the interests of the new shareholders. Whenever there is a potential conflict of interest between the company and its fiduciaries, management should obtain independent appraisals or bids and independent director approval (or even shareholder approval), depending on the nature and significance of the transaction.
Costs
As mentioned previously, a further consequence of a company’s being publicly held is the expense it entails. Significant costs and executive time is often incurred when periodic reports are prepared and then filed with the SEC. Board and shareholder meetings/communications may also be expensive.
Because of its responsibilities to the public shareholders, the board of directors and the audit committee are significantly more important in a public company. If the board were previously composed entirely of insiders, a number of outside directors would need to be added (which will likely result in incurring additional costs) to satisfy the NYSE or the NASDAQ National Market listing requirements.
Sample compliance calendar – assumes that the registrant is an accelerated filer
6/30/04
Fiscal Year 2004 Second Quarter End
7/17/04
Effective Date of Registration Statement – Company becomes a reporting
company
8/09/04
Second Quarter Form 10-Q due (unless 6/30/04 financials are included and
discussed in Registration Statement)
9/30/04
Fiscal Year 2004 Third Quarter End
11/09/04
Third Quarter Form 10-Q Due
12/31/04
Fiscal Year 2004 Year End
2/15/05
Schedule 13Gs due at SEC
2/15/05
Form 5s due at SEC
3/01/05
Initiate Proxy search
3/15/05
File Preliminary Proxy Statement, and form of Proxy with the SEC and NASD,
if necessary
3/01/05
Fiscal Year 2004 Form 10-K due
3/30/05
Fiscal Year 2005 First Quarter End
4/02/05
Record Date – Annual Meeting of Stockholders
4/16/05
File Definitive Proxy Statement, form of Proxy and Annual Report to
Stockholders
4/16/05
Mail Definitive Proxy, form of Proxy and Annual Report to Stockholders
5/05/05
First Quarter Form 10-Q due
5/30/05
Annual Meeting of Stockholders
Section 11(a) Earnings Statement available to security holders as soon as
7/16/05
possible covering a period of at least 12 months beginning after the effective
date of the Registration Statement
Note: If a filing date falls on a Saturday, Sunday, or holiday, the document may be filed on the next business day (Rule 0-3(a)).
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6. Life as a Public Company 56

It should be noted that the safe harbor provision is not available to historical financial statements, nor to forward-looking statements included in IPO registration statements. However, the statutory safe harbor does not replace or alter the current judicial “bespeaks caution” doctrine on which the safe-harbor rules were modeled. The bespeaks-caution doctrine generally provides that, to the extent an offering statement (such as a prospectus) contains a forward-looking statement with sufficient cautionary language, an action brought about as a result of such a statement could be dismissed on those grounds.
The following discussion relates to the application of the rules subsequent to the offering.
To avail itself of the safe harbor provision, the forward-looking information must be clearly identified as such by the company, and must be accompanied by a cautionary statement identifying the risk factors that might prevent the realization of the forward-looking information. In meeting this criteria, two points should
be noted.
The forward looking statements should be specifically identified. A general statement such as “certain information contained in this annual report isforward-looking…” does not clearly identify the forward-looking statements.
Every risk factor need not be identified to gain protection under the safe harbor. “Boilerplate warnings,” however, will not suffice as meaningful cautionary language.
The statutory safe harbor does not require a company to update a forward-lookingstatement. While companies are not legally required to update such information, material changed circumstances may nonetheless have to be disclosed as dictated by MD&A disclosure requirements. Further, from a business and investor relations standpoint, companies should consider updating such information.
A new public company should ensure that, when disclosing forward-lookinginformation in annual reports and press releases, the requirements for using the safe harbor provision are appropriately met. Your legal counsel will be invaluable in providing the necessary guidance. Such guidance is particularly essential whenforward-looking information is communicated orally (e.g., in conference calls with analysts).
Restrictions of trading on non-public information
Until important information is made public, SEC rules prohibit company insiders from personally trading the company’s securities or passing this information to others. Within the company, material information should be kept confidential. Persons privileged to this information must treat it as confidential until it is released to the public. In the past, violators of this rule have been dealt with harshly (fined or otherwise penalized).
Fiduciary duties
Fiduciary laws require that transactions between a company and any of its officers, directors, or large shareholders be fair to the company. These laws apply to both privately and publicly held companies. However, since the officers and directors
of a privately held company are usually its only shareholders, the ramifications of fiduciary laws are less than what they might be for a publicly held company.
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6. Life as a Public Company 55

Filing deadlines for Forms 10-K and 10-Q have been shortened beginning in calendar 2004 for issuers once they meet the definition of an accelerated filer. The phasing in of accelerated flings is summarized below.
For Fiscal Years
Form 10-K Deadline
Form 10-Q Deadline
Ending On or After
December 15, 2003
December 15, 2003
75 days after fiscal year end
45 days after fiscal quarter end
December 15, 2004
60 days after fiscal year end
40 days after fiscal quarter end
December 15, 2005
60 days after fiscal year end
35 days after fiscal quarter end
Public companies are also required to provide annual reports to shareholders, and to include in them financial information similar to what is in Form 10-K when soliciting proxies relating to annual meeting of shareholders at which directors are to be elected.
To meet the various reporting requirements imposed on them, public companies must maintain an adequate financial staff, supported by legal counsel and knowledgeable independent accountants. See “Sample Compliance Calendar,” page 57, for more detail.
Timely disclosure of material information
A public company should disclose all material information (unless there is a legitimate reason for not doing so), both favorable and unfavorable, as promptly as possible. Information that is generally considered material includes: significant financial transactions; new products or services; acquisitions or dispositions of assets; dividend changes; and top management or control changes.
Disclosure of such information should be made as soon as (1) it is reasonably accurate, and (2) full details are available to your company. This information is usually disseminated by press releases; however, your company may decide to also send announcements directly to your shareholders. Generally, the need to disclose information should be discussed with your legal counsel.
It should be noted that where a release or public announcement discloses material nonpublic information regarding a registrant’s results of operations or financial condition of an annual or quarterly period that has ended, Item 12
requires that the release be identified and included as an exhibit to a Form 8-Kfiling. Note that Item 12 does not apply to disclosure in annual 10-K or quarterly10-Q report.
Safe harbor provisions
The Private Securities Litigation Reform Act of 1995 (Reform Act) provides a “safe harbor” for forward-looking statements, such as forecasts, projections, and other similar disclosures in the MD&A. A safe harbor encourages registrants to discloseforward-looking information and protects them from investor lawsuits
if the forward-looking information does not materialize. This protection does not extend to statements which, when issued, were known to be false. A safe harbor applies to any form of written communication (e.g., press releases, letters to shareholders), as well as oral communications (e.g., telephone calls, analysts’ meetings) that contain forward-looking information.
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6. Life as a Public Company 54

Meeting reporting requirements
As a public company, you are now required by the SEC, under the 1934 Act
and the Sarbanes-Oxley Act of 2002 (see Appendix A — The SEC and Securities Regulations, page 79, for more detail) to file certain periodic reports to keep the investing public informed. This requirement will continue as long as the investor and asset tests are met. In fact, you should have discussed your obligations under the various regulations with your attorneys and accountants, even before starting thegoing-public process, to be certain that these obligations can be met.
Legal counsel should also be consulted to confirm the SEC requirements pertaining to the form, content, and timing of specific reports. Your financial public relations firm can assist with annual reports to shareholders. The table below presents an overview of the basic SEC reporting requirements for public companies.
Basic SEC reporting requirements
Annual report to stockholders (conforming to SEC specifications).
Form 10-K or
It discloses, in detail, information about the company’s activities,
10-KSB
financial condition, and results of operations. It also contains the
company’s audited annual financial statements.
Quarterly report required for each of the first three quarters of the fiscal
Form 10-Q or
year. It includes condensed financial data and information on significant
events. In addition, SEC rules require that the interim financial
10-QSB
information included in the quarterly report be subject to a review by an
independent accountant prior to filing.
Report filed for significant events such as: an acquisition or disposal
of assets; a change in control; bankruptcy; a change in independent
accountants; or resignation of directors because of disagreement with
the registrant. In March 2004, the SEC issued final rules relating to
additional Form 8-K disclosure requirements, which are effective on
August 23, 2004. These rules expand the number of events that are
Form 8-K
reportable under Form 8-K and shorten the deadline for the filing of
the Form 8-K for most events to four days subsequent from the day of
the event. Among the items that are required to be reported on Form
8-K that were not reported under the form previously are the entry
into a material definitive agreement, creation of direct obligations or
obligations under off-balance sheet arrangements, a commitment to a
plan involving exit or disposal activities, and asset impairments.
Due within 5 to 15 days of event.
Proxy or
Data furnished to shareholders so they can decide how to assign their
Information
proxies (votes).
Statements
Due dates vary.
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6. Life as a Public Company 53

Maintaining investor enthusiasm
Once your company has been taken public, considerable effort must be expended to maintain its market position. If investor enthusiasm for your company is not maintained, trading will decline. Should that happen, and as a consequence your company’s shares are thinly traded, the benefits sought from the IPO (such as liquidity through a future secondary offering) will not be realized. Thus, effective distribution and support of the stock, as well as continuing security analyst interest, is necessary after the IPO.
A strategy for after-market support can be determined with the assistance of a financial public relations firm. This strategy usually includes choosing an individual within your company to handle shareholder relations. This process
ensures that your company will release information that is uniform and accurate.
A public company’s performance, as perceived by the market, is reflected in the value of its stock. Management faces the pressure of balancing short-termproductivity with long-term goals. Negative developments, such as the release oflower-than-expected earnings, may adversely affect the stock’s value. Management will need to ensure that all communications with external parties
explain fully the results of the company. This transparency in reporting will in turn create greater market trust.
Earnings are not the only factor that affects the public’s perception of your company. Even after your company goes public, it should strive to maintain (or improve) the characteristics that it desired to possess prior to becoming a public company.
These characteristics, modified for a post-IPO company, are:
Is your company demonstrating a sustained or increasing growth rate that is high enough to attract/satisfy investors? Your company must continue to grow at a rate satisfactory to investors; its share value will be determined to a large extent by the earnings potential of your company.
Are your company’s products or services highly visible and of interest to the consuming and investing public? Your company should project a positive image to its investors, customers, and community. This is important, since the attitude of the public may sway the stock’s value.
Is management capable and committed? Management plays a key role in the way a company performs; therefore, it is essential that management remains innovative, committed, and capable.
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5. The Going-Public Process 51

Market perceptions of the risk inherent in a company’s stock are sometimes related to the per-share price. That is, a company that offers its shares at a price of $8 may be perceived to be offering a more speculative stock, while a $15 stock price may not be so perceived. At the other end of the spectrum, an IPO price of $25 may be considered overpriced.
In addition to the price, the number of shares offered should be sufficient to ensure broad distribution and liquidity.
Upon completion of negotiations with the underwriter — usually about the time the registration statement is ready to become effective and the road show schedule is over — the underwriting agreement is signed by authorized representatives of your company and the underwriter. Also at this time, the final amendment to the registration statement is prepared, including (as applicable)
the agreed-on offering price, underwriter’s discount or commission, and the net proceeds to the company. This amendment is called the price amendment and is filed with the SEC.
In an effort to simplify the filing requirements associated with the final pricing amendment, the SEC passed a rule allowing companies to omit information concerning the public offering price, price-related information, and the underwriting syndicate from a registration statement that is declared effective. In such cases, the information omitted would either be included in the final prospectus and incorporated by reference into the registration statement or included in a post-effective amendment to the registration statement.
If the staff of the SEC’s Division of Corporation Finance has no important reservations with respect to the registration statement, your company and underwriter will customarily request that the offering be declared effective immediately — referred to as requesting acceleration. If acceleration is granted, the underwriter may proceed with the sale of securities to the public.
The offering
7 DAYS AFTER THE OFFERING – Holding the closing meeting
The closing date — generally specified in the underwriting agreement — is usually within three to five business days after the effective date of the
registration statement. At closing, your company delivers the registered securities to the underwriter and receives payment for the issue. Various documents, including an updated comfort letter prepared by the independent accountant, are also exchanged.
TIP
There is no room in your new life as a public company for capriciousness in regard to your use of proceeds from your offering. Use proceeds on the items listed in the prospectus. If you do otherwise, you risk losing credibility for future financings and you may have to explain differences to the SEC.
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5. The Going-Public Process 50

The “road shows” represent a critical part of your company’s selling efforts, since it is here your management team promotes interest in the offering with the institutional investors. This can be a very grueling process since the span of time can last up to two weeks with a number of presentations a day. In addition, you can not discount the fact that in an active market it becomes more difficult to pique institutional investors’ interest if they are going through three to five “dog and pony” shows a day.
Undoubtedly, your underwriters will play a significant role in preparing your management team for these presentations. Additionally, some companies have sought assistance from professional investor relations organizations. Although you may have a good “story” to tell, these advisors can help focus it to an investor’s orientation.
Negotiating and signing the price amendment and the underwriting agreement
By the time the registration statement has been filed, your company and the underwriter have “generally” agreed on the securities — both in number of shares and dollar amount — to be sold. However, as mentioned in Chapter 4, the final price at which to offer the securities to the public, the exact amount of the underwriter’s discount, and the net proceeds to the registrant have not yet been determined. The negotiation and final determination of these amounts depend on a number of factors, including past and present performance of your company, current conditions in the securities markets, and “indications of interest” received during the road show.
For example, in establishing an offering price, the underwriters will look at a multiple of earnings or cash flow based upon that experienced by similar companies. These multiples may be applied to the company’s most recent
results of operations or projected future earnings based upon the outlook of the company’s growth curve. The underwriter will also examine the current stock market price and multiples of companies comparable to your company.
Timing also plays as important a part as any other factor in determining the final offering price of the shares. Almost any company that went public during the late 1960s and mid-1980s (great bull markets) would have done so at a higher offering price than in the mid-1970s (the worst bear market since the 1940s). In addition to cyclical market factors, particular industries go through “hot” and “cold” periods. Unlike the private sale of stock, where negotiations can be in the form
of face-to-face meetings, stock sold through the public market is often priced by market psychology.
Another consideration is the anticipated aftermarket share value. That is, after a period of trading, the stock should settle at an aftermarket share value,
and ideally, the offering price should reflect a discount from this aftermarket share value. In other words, the initial offering price should allow for a small appreciation of the price per share in the aftermarket immediately subsequent to the IPO. An offering at the high end of a range may not provide adequate investor return, resulting in a weak or depressed aftermarket, while pricing at the low end may result in a run-up immediately following the offering (thus lost opportunity for the company or selling shareholders).
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SEC rules require that this prospectus substantially conform to the requirements of the 1933 Act and that the cover page bear the caption “Preliminary Prospectus.” Prior to the full implementation of EDGAR, this language was required to be printed in red ink (hence the term red herring). The following statement must be printed on the cover in type as large as that generally used in the body of the prospectus:
{Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any State in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such State.}
SEC rules also stipulate that the preliminary prospectus may omit the offering price, underwriting discounts or commissions, discounts or commissions to dealers, amount of proceeds, or other matters dependent on the offering price.
Tombstone ads
Companies may place tombstone ads in various periodicals announcing the offering and its dollar amount, identifying certain members of the underwriting syndicate, and noting where and from whom a copy of the company’s prospectus may be obtained. Tombstone ads are not intended to be a selling document; their main purpose is to assist in locating potential buyers who are sufficiently interested in the security being advertised to obtain a statutory prospectus. Tombstone ads may be published once the registration statement has been filed; however, typically they are not published until after the effective date of the registration statement.
Financial analysts’ meetings or “road shows”
For potential investors to learn about the company, your underwriter will arrange meetings, called “road shows,” with financial analysts, brokers, and potential institutional investors. These meetings are generally attended by your company’s president and key management (such as the chief technical officer or chief financial officer) and may take place in many different locations throughout the country or the world, if you have an international offering.
It is vital that your management team be well prepared for these meetings. This can not be emphasized enough. You should not assume that the prospectus is able to “stand on its own” — anticipate potential questions concerning
specifics on your company and its plans and know the answers, as the credibility projected by your management team in its presentation and their ability to respond to potential investors’ and brokers’ questions will be a major influence in the success of the offering.
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