Initial Public Offering Related Decisions of Warburg Pincus and EMGs - Case Study Example

Warburg Pincus and emgs: The IPO decision Table of Contents Table of Contents 2 Executive summary 3 Summary of facts 4 ment of the problem 4 Analysis 5 Recommendations 11 Reference list 13 Executive summary Initial Public Offering (IPO) can be defined as the process of selling equity stock of any private company to common people. It can be stated as the process of becoming public concern from private concern. In the era of globalization, IPOs are highly influential financial technique that are opted by small and medium sized enterprises (SME) and newly established companies that requires capital for of expansion of product or service line. Large private firms are converting into publicly traded firm in order to use risk free capitals. Firms are using equity capital for avoiding interest rate risk during the period of financial instability. Warburg Pincus and emgs case study outlined initial public offering related decisions of the Norwich firm. Warburg Pincus is a globally operated private equity firm who concerned for developing portfolio as publicly traded company and medium of exchange. The small private investment firm acquired Norway-based ElectroMagnetic GeoServices (emgs) in the year 2004. The managing directors, Jeffrey Harris and David Krieger have encountered three challenges such as the place of listing, amount or valuation and the timing of initiating IPO. In this study Initial public offering related decisions are developed by connecting with different aspects of Warburg Pincus and ElectroMagnetic GeoServices (emgs). Summary of facts Warburg Pincus acquired ElectroMagnetic GeoServices (emgs) from Norway’s state oil company and they continued initial operational activities. emgs key strengths are seabed logging (SBL), seismic mapping and sourcing hydrocarbon. Jeffrey Harris and David Krieger managing directors of Warburg Pincus planned to make an initial public offering for emgs for raising funds that will be helping in developing operational facilities of the Norwich Company (Brealey, Myers and Allen, 2006). Hydraulic activity has been proposed to improve by $100 million that could boost the revenue generation by $110 million during 2006 only (Hardymon and Ann, 2007). Furthermore, investments required to implement market-leading technologies of emgs. The managements were aiming to invest in the undersea rock-formation oil exploration. Drilling activity had shown high-growth characteristics in terms of profits and revenues (Broussard and Vaihekoski, 2012). Typical oilfield services of the company require more investment and publicly trading option which are beneficiary in terms of lower risk and high availability of funds. According to the managing directors of Warburg Pincus, floating on the NYSE (New York Stock Exchange) or LSE (London Stock Exchange) are more advantageous as it shows more liquidity and valuations (DencicMihajlov, 2013). However, Oslo Bors (Oslo stock exchange) outlined possibility of low cost floating. Jeffrey Harris and David Krieger found that American stock exchange based floating of ElectroMagnetic GeoServices (emgs) involved higher compliance expense. Being one of the most experienced equity investor consultants in the world Warburg Pincus need to make most influential initial public offering. The case study also stated advantage and disadvantages that Warburg Pincus would encountered in the time emgs’s IPO process along with the float valuation and place (Grinblatt and Titman, 2002). Statement of the problem American stock exchange based floating requires transition of management team along with relocation of entire administration setup to the area. It is quite complex for switching entire Norwich company to New York or Houston or London, whereas some managers and skilled engineer teams were reluctant to move (Hardymon and Ann, 2007). Mainly the partners were confused to decide the process of IPO along with the valuation of the energy-related index. According to the managing directors IPO is used as a source of financing or raining capital funds. Warburg Pincus evaluated that the ElectroMagnetic GeoServices (emgs) faced certain challenges like reducing profitability and inflated oil prices. Recently oilfield services started to use innovative technologies in order to ascertain presence of hydrocarbons like oil and natural gas (Gurun, 2013). The ElectroMagnetic GeoServices (emgs) started to use 3rd dimensional seismic mapping systems to ascertain location of hydrocarbons. During the time of planned IPO it has been observed that emgs planned to explore seabed hydrocarbons. It required technologies for drilling underwater bases that are almost 300 meters deep (Komatsu and Makimoto, 2015). These types of technologies cost nearly $20 million to$100 million and such patented technologies helped to increase accuracy of assessment of hydrocarbon presence to more than 90%. It proved to be a vast investment, which increased troublesome for Warburg Pincus so they selected publicly traded tool kits for raising funds (Latham and Braun, 2010). However, IPO process requires specific segment of market that can help in targeting specific customers. S&P Energy Index during 2004 enjoyed growth of nearly 28% whereas the S&P 500 index observed with a growth of only 8% (Hardymon and Ann, 2007). Analysis Pros and cons of IPO and reason of emgs float ElectroMagnetic GeoServices (emgs) is one of major Norwich power generators or global oil and gas equipment and service providers. In the 21st century the seabed mining process has faced drastically, change of technological equipments. In order to cope up with the challenges of huge investment they faced certain complexity. The most important advantage of initial public offering process is it could help the firm in raising risk free funds from common mass. Equity investment is not a fixed interest bearing security and financial risks are shared among the large investors group (Obizhaeva and Wang, 2013). Moreover, global share market listing is helpful in meeting vast range of investors all around the world. ElectroMagnetic GeoServices (emgs) would be able to explore investments from out of Norway or northern European area they can gain investments from UK, USA, Canada and many other developed countries (Hardymon and Ann, 2007). IPO can be defined as a financing event that ensures Warburg Pincus to hold their ownership position even after publicly traded conversion (Pochitaev, Yarovinskaya and Filippova, 2014). Managing directors of the owner firm concentrated on providing more value to both emgs and limited partnership. IPO will help the Norwich firm in developing seismic industry related services. According to Jeffrey Harris and David Krieger IPO will help in installing high-growth hydraulic or seismic technologies. Additional funding would help in increasing the profitability and revenues of emgs. It has been expected that the firm can $17 million net profit from $110 million revenue. It will also help in overcoming inflated oil priced related challenges and investors interested in investing into power industry. IPO also help emgs to enjoy S&P Energy Index growth of 28% in contrast with the S&P 500 growth rate of 8% (Hardymon and Ann, 2007). Initial public offering of ElectroMagnetic GeoServices has some limitations also that are reducing the scope of success (Ross, Westerfield and Jordan, 2000). Harris and Krieger faced more complexity in terms of the valuation and placing the initial public offering of emgs. In case of placing of the offering or listing the stock of the organization it has been observed that NYSE (New York Stock Exchange) and LSE (London Stock Exchange) offered greater liquidity and valuation however these stock exchanges impose high cost than Oslo’s stock exchange Oslo Bors. It will also reduce the efficiency of Norwich management team, financial reporting, investor relationship development, and stakeholder’s relationship (Hardymon and Ann, 2007). Selection of the LSE or NYSE also requires administrative set up in the countries, which is tough for the organization. Local ethnic groups reluctant to move overseas and cross-cultural conflicts can arise (Wegian, 2012. It will hamper the overall organisational structure and flat structured Warburg Pincus can face complexity of cultural differentiation. In addition, they can face certain complexity in selecting limited partners in more liquid markets, according to the managing directors NYSE is best listing place fresh listing but the administrative change could increase overall cost for the organization (Hardymon and Ann, 2007). Market condition and emgs’s overall situation Warburg Pincus adopted professionalized approach to serve their clients with privatized investment counseling but they are not listed in the NASDAQ or NYSE due to liquidity issue (Wegian, 2010). IPO of the emgs would lack professional experience. It can increase the overall cost of the owner and increase risk of vulnerability in the years. Publicly trading of Norwegian company emgs is the most crucial decision of the American based equity firm. They have made many investments in last few decades and they raised nearly 13 private equity funds. Furthermore, they have invested over $45 billion that invested 675 companies operated in 35 countries (Hardymon and Ann, 2007). Warburg Pincus acquired emgs during the year 2004 as a part of their operational strategies. The Norwegian power and hydraulics service provider is quite famous and economically strong company (Yang, Lin and Lu, 2000). ElectroMagnetic GeoServices AS (emgs) has faced some issues regarding operational and managerial aspects. Recently the firm went through a patent dispute which disturbed their Offshore Hydrocarbon PLC action. They have also faced certain problems regarding international oil industry hikes (Hardymon and Ann, 2007). Demands of crude oil increased so demand of the hydraulic drilling systems increased rapidly. Oil drilling facilities in the contemporary era increases rapidly and it has been observed that these firms recorded high prices. Revenue in this sector recorded nearly $125 billion during the year 2006. It has been observed that the service related to hydrocarbon exploration is quite growth generating generated almost 15% or $18 billion of the overall revenue (Hardymon and Ann, 2007). Warburg Pincus has observed that leading drilling platform producers enjoys almost 35% of the market share and according to their analysis emgs falls in the first category. Oil exploration market is expected to reach nearly $151 billion during the year 2011 and it is expected that the oil companies would act as a price taker. Leading petroleum companies in the world will be requiring low cost hydrocarbon exploration. ElectroMagnetic GeoServices serves with innovative seabed drilling facilities but it requires high end investment in the technology and logistics part. Nearly $100 million is required to implement new technologies and provide economic services to client firms (Hardymon and Ann, 2007). Calculation of Valuation Using Multiples Cost of Capital (WACC) Calculation of emgs= r(E) * w(E) + r(D) * (1-t) * W(D), where r(E) is the cost of equity, r(D) * (1-t) represents after tax debt cost, w(E) indicates weight of equity and w(D) weight of debt. Long term risk free rate = 9.58 Market risk premium of = 2.89 Average beta for education and software = 0.75 Average E/ (E+D) for education and software = 0.89 Therefore, cost of capital (WACC) = 9.81% Calculation of competitor company OHM in 2006 Enterprise value multiple = enterprise value / EBITDA 18.5/ (3.1) = (-5.97) Expected return= risk free rate + beta (return on the market –risk free rate) Long term risk free rate = 7.38 Market risk premium of = 1.98 Average beta for = 0.76 Expected return = 7.38 +.76 (1.98-7.38) = 3.276 Seabed logging unit project of Warburg Pincus outlined revenue of 29.9 million dollars, EBITDA of 7.8 and net income of 3.6 during the year 2004. However, the rate of the investment reported 8 million dollars. EBITDA margin for the particular period reported 26%. EBITDA of emgs = Revenue – Expenses (excluding tax, interest, depreciation, and amortization) The EBITDA of emgs reported inclining trend and the record outlined 2 (2003), -12 (2004), and -11 (2005) 25 (2006), and 43 (2007). After the IPO of the emgs, EBIDTA is expected to grow rapidly and record 102 (2008) and 170 (2009). Therefore, it can be said that 2004-2005 period is most suitable for initiating IPO. Price earnings ratio of emgs = Price per share/ Earnings per share = 2:5 IPO of emgs= UP= In (Pi/ Ei) – In (Mt/ M t,o), where M is the price if used market portfolio, t is the initial trading price of share I and (t, 0) is the market portfolio of day 0. IPO= 8.5 X Net Income of Warburg Pincus = dollar 24896 IPO of Warburg Pincus= In (Pi/ Ei) – In (Mt/ M t,o), where M is the price if used market portfolio, t is the initial trading price of share I and (t, 0) is the market portfolio of day 0. IPO= 17.3 X EBITIDA of Warburg Pincus= Revenue – Expenses (excluding tax, interest, depreciation, and amortization) P/E Valuation of Warburg Pincus= Price per share/ Ernings per share = 2:2 Geological studies outlined that ElectroMagnetic GeoServices must implement geophysics technologies in order to increase mineral searching ability. Seismic and seabed drilling facilities of the firm will improve rapidly by the help of sound wave usage. Three dimensional maps are the latest seismic method that is used by big drilling service provider firms. This method helps to increase the efficiency of seabed logging and seismic findings and it results $2.5 billion. Oil mills are using electromagnetic signals in order to increase the efficiency of oil resource finding (Hardymon and Ann, 2007). In this case study it has been observed that the ElectroMagnetic GeoServices’s seismic mapping facilities are major source of revenue. Existing products and service line are using conventional seismic mapping that valued nearly $90 million. It has been observed that while acquiring emgs Warburg Pincus invested nearly $10 to $20 million for covering operating losses (Hardymon and Ann, 2007). However, in the post acquiring time emgs has shown positive trend of their financial figures. According to the managing directors of Warburg Pincus risk elements of the venture capital investment was reduced due to 40% oil presence in the last year (Hardymon and Ann, 2007). Selection of listing venues for emgs IPO Global analysts have ascertained that the IPO of the ElectroMagnetic GeoServices is quite unique as it provides high growth characteristics. In the NYSE index, price index ratio of the firm reported 17.3x and in the Norway’s stock exchange it is only 14.8x. Finally, the most attractive thing for Warburg Pincus was improving performance of emgs during the year 2006. It has been observed that after facing loss of $15 million and $17 million in last two years they are now improving profitability (Hardymon and Ann, 2007). According to the decision of the Warburg Pincus’s managing directors Harris and Krieger ElectroMagnetic GeoServices (EMGS) can launch initial public offering. It can be said that they can select the NYSE (New York stock exchange) for better liquidity and investment opportunity (Hardymon and Ann, 2007). American investment or share market provides better prospects than many other equity or stock exchanges. Furthermore, goodwill of Warburg Pincus would help the new venture or business operations will help the firm to collect investment quite easily. However, it will charge them higher listing cost and demands more liquidity. Thus, for achieving better profitability success the IPO of emgs must promote shares for trading on the Oslo Stock Exchange. It will help them to cut cost of promoting shares as well as they can use existing Norwegian headquarter to operate equity investment portfolio (Hardymon and Ann, 2007). Valuation of emgs IPO The initial public offering of ElectroMagnetic GeoServices can consists of nearly 5.5 million new shares so that they can raise the required amount (Hardymon and Ann, 2007). As per the financial strengths the Warburg Pincus must initiate IPO during the year 2007 in order to maintain proper return from the investment. It will be more influencing to offer nearly 13 million shares to the exiting Warburg Pincus shareholders. The managing directors of the firm expect to gain nearly $80 million to $100 million with the IPO activity. The public offering need to target the retail and power sector investors of Norway and institutional investors all around the world. Warburg Pincus and emgs relationship was developed during the year 2002 and after that financial relationship developed rapidly as 200 commercials were promoted to attract the investors from all around the world (Hardymon and Ann, 2007). The case study depicted that that the Warburg Pincus managing directors faced certain complexity for listing, valuating and policies emgs. The managing directors Harris and Krieger can use IPO plans that set initial share sales that raise $100 million for the entire ownership group. ElectroMagnetic GeoServices can start with 18.5 million shares that will help the firm to raise required share capital. In addition, emgs can be introduced in the indicative price of 100 to 125 Norwegian Krone, which is the national currency of Norway. Overall share issue will be generating $80 to $100 million (Hardymon and Ann, 2007). The case study of Warburg Pincus and emgs’s IPO decision is guided by different factors like the place, valuation and timing of initiating offer. It can be said that offer can consist of 13 million shares for the Norwegian market investors. They have the options of London stock exchange and New York stock exchange but these places increases overall cost structure (Hardymon and Ann, 2007). However, American equity market is negotiated by policies set by the Goldman Sachs and Lehman Brothers. It has been observed that nearly 1.8 million shares are mandatory to meet strong demand of American investors. The IPO of emgs will offer nearly 4 percent shares to the senior management of Warburg Pincus. Warburg Pincus aimed to employ promotional management teams to increase the efficiency of attracting more potential investors from Norway and other north European countries. US listed shares of the emgs must requires better currencies to increase liquidity of the funding (Hardymon and Ann, 2007). Recommendations Warburg Pincus made the decision to initiate the IPO of ElectroMagnetic GeoServices (EMGS) in the Oslo stock exchange. However, there are certain limitations in growth and liquidity that reduces potentials of raising capital in the organization. Following recommendation will be helpful in improving feasibility of the initial public offering. Seismic capability promotion: ElectroMagnetic GeoServices have used game changing technologies in the seismic drilling operations. They are using 10 year life cycle is quite long to meet the technical changes. It should be reduced to 3 to 4 years. This strategy can help emgs to meet competition of London based Offshore Hydrocarbon Mapping (OHM). Warburg Pincus must promote their capabilities like third dimensional seismic mapping, infrared based seabed logging and electromagnetic searching of hydrocarbons. Use of better currency: the IPO has been priced in Norwegian Krone, which reduces the rate of growth in the currency system. This currency could hamper the rate of liquidity of the equity funding of the company. It has been observed that currencies like US dollar and pound have more weight and it reduces the ability of the free float of the investment option. Thus, the IPO must valued in strong currencies in order to reduce the vulnerability of the organization to different situations. Long-term liquidity: Warburg Pincus have decided to sell their Oslo listed shares to become liquid to meet the financial obligations. On the contrary, it reduces the financial strengths by reducing the risk free securities. The owner firm needs to reinforce their existing capital sources along with issuance of new capital raising tools. Oslo Bors is inefficient than the NYSE or LSE and the liquidity issues are higher here. Improvement of Oslo based equity index: Warburg Pincus aimed to start trading of emgs in the Oslo Stock Exchange. However, there are certain limitations like liquidity of Oslo Bors stock exchange is less than 11% of NYSE. Warburg Pincus have strong reputation in the US stock exchanges but they lead the more than 100 IPO in the NYSE and NASDAQ but in European exchange they are quite inactive. Thus, Oslo based activities need to be improved in order to make the initial public offering more efficient. Reference list Brealey, R., Myers, S. and Allen, F., 2006. Principles of corporate finance. New York, NY: McGraw-Hill/Irwin. Broussard, J. and Vaihekoski, M., 2012. Profitability of pairs trading strategy in an illiquid market with multiple share classes. Journal of International Financial Markets, Institutions and Money, 22(5), pp.1188-1201. DencicMihajlov, K., 2013. Marketing of initial public offering. Marketing, 44(2), pp.137-148. Grinblatt, M. and Titman, S., 2002. Financial markets and corporate strategy. Boston: McGraw-Hill Irwin. Gurun, A., 2013. Business strategy and financial consequences: The case of antidumping filings. Journal of International Financial Markets, Institutions and Money, 24, pp.127-138. Hardymon, G. and Ann, L., 2007. Warburg Pincus and emgs: The IPO Decision (A). Harvard Business School Case, 5(07), pp.807-092. Komatsu, T. and Makimoto, N., 2015. Dynamic Investment Strategy with Factor Models Under Regime Switches. Asia-Pac Financ Markets, 22(2), pp.209-237. Latham, S. and Braun, M., 2010. To IPO or Not To IPO: Risks, Uncertainty and the Decision to Go Public. British Journal of Management, 21(3), pp.666-683. Obizhaeva, A. and Wang, J., 2013. Optimal trading strategy and supply/demand dynamics. Journal of Financial Markets, 16(1), pp.1-32. Pochitaev, A., Yarovinskaya, M. and Filippova, I., 2014. Some Aspects of the Formation a Financial Strategy in Emerging Markets. MJSS. 10(24), pp.367-381. Ross, S., Westerfield, R. and Jordan, B., 2000. Fundamentals of corporate finance. Boston: Irwin/McGraw-Hill. Wegian, F., 2010. Effect of seawater for mixing and curing on structural concrete. The IES Journal Part A: Civil & Structural Engineering, 3(4), pp.235-243. Wegian, F., 2012. Strength properties of lightweight concrete made with LECA grading. AJCE, 10(1),pp.125-137. Yang, C., Lin, C. and Lu, Y., 2000. Investment Strategy, Dividend Policy and Financial Constraints of the Firm. Rev. Pac. Basin Finan. Mark. Pol., 03(02), pp.235-267. Read More