| April 13, 2010, Businessweek article it was announced | | | | more weighted by market and the discounted cash |
| that the head of equities for TMX Group Inc. That | | | | flow reflects business dynamics. It has been found |
| operated the Toronto Stock Exchange and the TSX | | | | that when investment bankers apply multiples |
| Venture Exchange had high hopes for the Canadian | | | | valuation and use forecasts of future cash flows and |
| IPO or initial public offerings market and believed it | | | | earnings, they are more accurate than multiples |
| could top CAD 6.4 billion for the year. This amount he | | | | based on those metrics the year of IPO issuance. It |
| said would be the highest in over a decade and the | | | | has also been found that variations in methodology |
| new issue pipeline reflected the belief the recession is | | | | produce similar accuracy, although, the dividend |
| over as stocks and the economy rebounded. At the | | | | discount model can underestimate value. |
| end of May, a Reuters article noted that while a | | | | The Process |
| number of Canadian companies were ready to go | | | | Companies that go public on a stock market in |
| public, a handful would expose themselves to the | | | | Canada become a reporting issuer with one or more |
| market due to the recent turbulence. Despite this, | | | | of the Provincial Securities Commissions. The process |
| investors at the annual Canadian Venture Capital and | | | | of going public involves three stages: preparing to go |
| Private Equity Association meeting in Ottawa | | | | public, going public and life afterwards as a public |
| remained upbeat about the prospects of the IPO | | | | company. Going public can bring strategic advantages |
| market. The question whether should IPO investor | | | | and also associated costs such as the costs of |
| look for long term or short term gains depends on | | | | compliance, costs related to a new governance |
| whether investors are in for short term profits or | | | | structure and need to be responsible to shareholders. |
| long term gains. Given the volatility of the market, | | | | The benefits include the capital to grow and evolve, |
| the latter may be the more prudent approach. | | | | provide greater flexibility for execution of strategy, a |
| There is also a global push for increasing of listings on | | | | means to monetize and provide liquidity and wealth |
| the Canadian equities market. This is exemplified by | | | | to shareholders for their investments in the company, |
| the example of the North Carolina based online | | | | increased market value and the stature and security |
| publisher Lulu that chose to bypass the U. S. Stock | | | | of a public company and the ability to attract and |
| exchanges and go public in Canada instead. Of | | | | retain talent with share plans that are liquid. The |
| course, the company CEO is no stranger to Canada | | | | costs include compliance costs, the increased |
| having grown up in Canada. But, the fact that only 2 | | | | infrastructure such as board and audit committees, |
| companies went public in the US in 2009 might be a | | | | being open to regulatory scrutiny, some loss in |
| reason for this choice. It can be less costly to List a | | | | decision making flexibility, pressure to perform, stock |
| stock in Canada, which can involve a less regulatory | | | | market swings can effect share value and employee |
| scrutiny than a US listing. The health of the Canadian | | | | morale and restrictions on trading and the discussion |
| market was reflected in the largest amount raised | | | | of internal affairs. Generally an IPO process takes a |
| since 1999 that was raised this March by Athabasca | | | | little over 3 months or about 100 days to complete. |
| Oil Sands Corp. Which sold 75 million shares at CAD | | | | To make this process as smooth as possible you |
| 18 each, raising CAD 1.35. This was the richest debut | | | | need to get organized by bringing inhouse order, |
| since 1999, when Manulife Financial Corp. Raised CAD | | | | begin to manage like a public company, develop a |
| 2.48 billion. | | | | public profile, retaining key professional advisors and |
| The Toronto Exchange and the TSX Venture | | | | considering IPO options about the exchanges to be |
| Exchange are the eight largest exchange group in the | | | | listed on. Bringing order includes crating a realistic |
| world. They host the majority of publicly held mining | | | | business plan, reviewing internal processes and |
| companies, more oil and gas companies than any | | | | contracts, evaluate related party transactions, |
| other exchange, the second largest group of listed | | | | retaining an auditor and addressing tax issues and |
| companies and technology companies and the largest | | | | develop several years worth of financial statements, |
| group of public clean technology companies. Canadian | | | | evaluate litigation and potential claims and review of |
| indices have outperformed world benchmark indices | | | | the strength of the management team. As |
| according to stats from 2002-2006.The World | | | | International Reporting Standards, acronym IFRS, will |
| Economic Forum has listed Canada for two straight | | | | be applied in Canada from January 1, 2011 confer |
| years as having the safest and most sound financial | | | | with the auditor to ensure system can provide |
| system in the world. Over 50 percent of Canadians | | | | information that will need to be supplied. Public |
| are equity owners reflecting a high equity ownership | | | | companies are expected to provide detailed |
| culture. Listing in Canada is a sound choice. | | | | discussions of their preparations for the changeover |
| An Initial Public Offering is an important juncture for a | | | | in their periodic filings and to track IFRS financial |
| company. The injection of capital brings funds to | | | | information during 2010, to be able to provide the |
| grow and thrive. The stakes are also high for the | | | | required one year of comparative financial data in |
| other parties involved. Company owners and | | | | 2011 financials. |
| managers, the venture capitalists who may have | | | | Companies can go public and become reporting |
| invested in the firm, and investment bankers who | | | | issuers through a prospectus. There are two types |
| underwrite the sale have an interests on a profitable | | | | of prospectus. One is an offering prospectus that is |
| IPO. Generally, institutional investors typically | | | | used in a public sale or a non-offering prospectus that |
| constitute purchasers of about 75 percent of an | | | | is not used in a public sale. The IPO prospectus is of |
| issue. A successful offering depends on attracting a | | | | the former type. Both these types of prospectuses |
| sufficient investor interest. This in turn is affected by | | | | must contain full disclosure about the company for |
| the stock market. Offerings may be put off or | | | | the information of investors and the public. |
| scrapped if there is insufficient amount of investor | | | | The IPO How or How to IPO |
| interest. Generally in valuation there three basic | | | | The following are the basic procedural steps that are |
| approaches that can be classified as the Cost | | | | undertaken. The Board approves an initial public |
| Approach, the Income Approach or the Market | | | | offering and engages an underwriter. There is primary |
| Approach. The Cost Approach focuses on what was | | | | due diligence conducted by the underwriter and the |
| spent on the valuation object plus or minus a | | | | auditor. Begin the drafting of the preliminary |
| discount or premium as the case may be. The | | | | prospectus. The Board approves the prospectus. Filing |
| Income Approach focuses on the cash flow | | | | of the preliminary prospectus and other material |
| generated from the object of valuation. The Market | | | | documents. Printing of commercial copies of the |
| Approach places emphasis on what someone is willing | | | | prospectus. Receive and respond to comments from |
| to pay for such an item. Fair Market is the generally | | | | securities regulators. Do a dry run of a road show |
| accepted standard for IPO valuation. In addition to | | | | preparation. Meet with institutional and retail investor |
| these three, another approach that has gained | | | | groups. Pricing of the initial public offering. The final |
| prominence in recent years is the use of option | | | | due diligence session. Board approves the final |
| pricing techniques. Business valuation models can also | | | | prospectus. Filing of the final prospectus and the |
| be constructed that use different methods under the | | | | exchange listing agreement. Printing of commercial |
| three business valuation approaches. For instance, | | | | copies of the final prospectus. The offering is closed |
| venture capitalists and private equity specialists have | | | | and the trading period commences. It is not unusual |
| long used the First Chicago method which combines | | | | to see the froth of exuberance with an IPO Canada |
| the income approach with the market approach. | | | | announcement. As time goes on and the more |
| Generally they can be specified as discounted free | | | | company plans and finances are considered, the price |
| cash flow reflecting the income approach, the | | | | may go down. Whether the shares will fall below their |
| dividend discount method reflecting the cost | | | | IPO or initial public offering price in the coming days is |
| approach, price to earnings, price to cash flow and | | | | a possibility as share prices can plunge after the |
| other multiples valuation methods reflecting the | | | | company is publicly launched initially. |
| market approach. Valuation based on multiples is | | | | |