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1、IPO Workshop NetFlix Case Study - May 23, 2002Class Notes, Based on a presentation by Merrill LynchOverview of the IPO Process4. The 4 Steps of IPO1. OriginationMarketing to convince corporate clients to utilize ML as a bookrunnerDiscuss company positioning, potential valuation, structure and execut
2、ion2. PreparationDue DiligenceDrafting of disclosure document S-1 Registration StatementExchange listing applicationDrafting of marketing materials and preparation for anticipated investor Q&AOther organizational steps: new board appointments3. ExecutionMarketing to investors via one-on-one and grou
3、p meetingsBookbuilding and pricingAllocation of shares to investors4. AftermarketTradingFeedback from sales and capital marketsFollow-on financingAdvisory work5. Key PlayersFinancial sponsors / VCUnderwritersCounselAuditorSECLenders and BondholdersRating AgenciesPrinterPR/IR Firm6. Role of the under
4、writerResearch (Research compliance)Issuer I-Banking Equity capital markets Sales Investors Trading SpecialistsFor issuer, I-banking, Eq. cap. markets and sales there is research involved, regulated by independent bodies.There is a shift from I-banking to by-side firms doing research.7. “Typical” IP
5、O Timetable (weeks)0-1 Organizational meeting0-4 Draft Prospectus, Due Diligence3-4 file Registration Statement with SEC4-10 SEC Review/Response Period8-10 Prepare roadshow presentation10 Deal Launch10-11 European Roadshow (Optional) (2-3 days)11-12 U.S Roadshow (8-10 days)12 Pricing13 Closing13+ Tr
6、ading8. Transaction FlowchartSteps on the way, all critical, treated as black boxesFinal Pitch/RecommendationMandateOrganizational meetingDue DiligenceDrafting, Prospectus, Underwriting agreement, other agreements9. Key Structural Considerations Timing - Company performance- Market and sector perfor
7、mance- IPO calendar Jan-1 through mid-may / Mid-may onwardsThe convention is that (depending on year, market) from June you have half of the year “in the bag” and youll get credit for the next year.There is meaningful valuation variation, especially with high-growth companies Size- % of company sold
8、- Primary vc. secondary shares- Use of proceeds- Investor liquidity Distribution- Institutional vs. retail- Domestic vs. international Underwriting group Underwriting discountNote: High switching costs for the company to switch underwritersCase Study NetflixInitial Public offering: May 23, 2002260 f
9、ull-time employeesNetflix is a software company. CEO sold previously another company (100s of $M).Block-buster 85% of rents is new-releases, and its the least profitable portion (but easiest to find in store).Netflix builds the personalized video store interactively, according to their past rentals.
10、 CineMatch technology generates personalized recommendations.13. Pre-IPOPre-IPO ownership77% VC23% ManagementRevenues (3 months)$18.4, $18.9, $21.6, $30.5Last 12 months - $89.4 mmEBITDA -$5.0mm (LTM)- can management execute its business plan?Total Capitalization: $15.1Debt - $4.1Debt/Cap = 27%14. Th
11、e “Pitch”1. Executive Summary2. ML credentials3. Netflix Positioning4. Preliminary Valuation5. Execution Considerations15. Executive SummaryKey Message: If you had 60 sec. with the CEO in a taxi, what would you say?- Positioning- Valuation- Structure- Marketing- Why ML?16. Phase I OriginationPresent
12、 ML credentialsPositioning- Why invest in Netflix Now?- Leverage DVD Explosion- Proven Growth Strategy- $29 billion in-home entertainment market opportunity- 600k+ subscribers generate recurring revenue- 50% gross margins- Positive EBITDA and Free cash flowPreliminary ValuationNetflix valuation appr
13、oachThe valuation analysis is impacted by a variety of key factors:- Management projections- Industry trends, including secular trends and the competitive landscape (No real comps!)- Current equity market conditions, including precedents IPO analyses and after-market performance- Current valuation l
14、evels and metrics of comparable companies- Inpus from experienced research , i-banking, equity capital markets and sales professionalsAnalysts and investors will focus on key metrics including:- Subscriber growth and churn which will drive revenue growth- Full year adjusted EBITDA and net income bre
15、akeven“As Amazon is to BAM retailers, Netflix is to BAM movie retailers”Method 1:- Enterprise Value/Revenue- 2003E revenue multiple analysisMethod 2: Subscriber multiple analysis (Comparable analysis, margin sensitivity)Comps: AOL, HBO, Tivo, CVC, Charter, Comcast, Cox (mainly subscription services)
16、Method 3: DCFDerive multiples and match with previous methodsValue in concensus: $430mm (average)23. Execution Considerations (Term sheet for the offering)Proposed deal size: $75Primary/Secondary mix: 100%Overallotment: 15% of offering for up to 30 daysUse of proceeds: Repay existing indebtness and
17、fund working capitalLock-up provisions: Standard 180 days for Netflix, senior executives, directors and all other insidersGeographic distribution: 90% US / 10% international Institutional/Retail mix: 75% institutional / 25% retailMarketing: 12 days US roadshow, complemented by internet roadshow and
18、conference calls to international accounts.- usually never allocate more than 20% to institutional. Retail will take the deal at any price.- Here there was a huge institutional demand.Norm is to take public 25%-35%.Phase II: Preparatoin25. Due DiligenceInvestigation into a companys business conditio
19、n, financial condition and prospectsPurpose is to ensure disclosure documents provide a complete balanced and accurate picture of a company.Help determine and shape the marketing messages.Process for Netflix:- Operations- Strategy- Financial history and plan- Legal proceedings- Competitive landscape
20、- End market dynamics- Detailed financial due diligence (historical results and projections)- Facility tours- Legal due diligence- Accounting due diligence- Intellectual property diligence- Management background check by 3rd party investigator- Drafting sessions26. Documentation ProspectusPrincipal
21、method of communication to investorsBalanced disclosureKey selling messages need to come throughEverything must be verifiedDeal structure: use of proceeds, capitalizationCompany descriptionIndustry overviewStrategyRisk factors (good defense for securities litigations, 2nd line of defense after due-d
22、iligence)Historical financialsManagements discussion and analysisLegal and tax matters27. Drafting process- edit and re-check documentProcess considerations: - Starting point varies considerably by issues- Issuers counsel typically keeps the “master” copy- Lead bookrunner always uses own style- Orde
23、r of prospectus contents largely identical28. The SEC review process3/6 Initial S-1 Filing3/15SEC Comment letter received3/20First S-1 amendment filed4/1SEC comment letter received4/10Clarifying conversation with SEC4/16Second S-1 amendment filed5/7Third amendment filed (red herring)5/16Fourth S-1 a
24、mendment filed5/20Fifth amendment filed (declared effective)5/23Final prospectus filed29. Other key stepsAdditional documentation: underwriting agreement, comfort letter, legal options, Internal approval: equity commitment committeePreparation of marketing materialsRoadshow presentations (30 min.)In
25、vestor Q&A (30 min.)Institutional salesforce memorandum (research analyst will explain the deal to the sales force)Retail information memorandum (explain the investment opportunities to the retailers)Choose exchange and obtain listing approvalCoordinate private plane and other roadshow logisticsUpda
26、te company and board periodically on market and industry backdropPhase III : ExecutionThe three stages of marketing1. LaunchInvestor targetingManagement kick-off2. Roadshowone-to-onesGroup functionsconference callsInternet management roadshows3. Feedback (from investors)Book-building (from feedback,
27、 questions, indications of interest, etc.)待添加的隐藏文字内容2AllocationPricing Equity capital markets Investment communityRoashow (8-10 days, 20 events)- NY launch (or two)- Boston launch- San Francisco- Los angeles- Denver- and more- Internet roadshowAssociate responsibilities during roadshowCoordinate roa
28、dshow itinerary with ECM Confirm flights, hotels, carsArrange audio/visual requirementsProvide prospectuses to all investorsCater to issuers preferences: meals, hotels, entertainment, etc.Communicate investor feedback to ML teamIntroduce management team and highlight deal terms and timing to investo
29、rsKeep company on schedule- Executives should only concentrate on showing up and selling stocks.Key selling themesInvestment highlights- Market leader in segment- Robust subscriber growth- etcInvestor concerns- competition- Limited operating history and history of net losses- Subscriber churn- Limit
30、ed earnings visibility- Dependence on studios and DVD adoption looking for reasons not to investBookbuilding and pricingCriteria:- Comparable holdings / sector experience- Salesforce feedback- Participation in roadshow- Timing of order entry- Price limits- Size of order relative to avg. holding size
31、- ML experience with investor likely aftermarket behavior Maximize allocation to investors who will buy, hold and buy moreNetflix offering summaryInitial base offering: 5,500,000Overallotment (“Greenshoe”) : 825,000Total shares offered: 6,325,000Offering price: $15Gross spread: $1.050 (Selling conce
32、ssion 0.630 + underwriting fee 0.203 + management fee 0.217)Net proceeds per share: $13.950Gross proceeds (mm): $94.9Net proceeds (mm): $88.2In addition the company has legal, printer, travel, and other expenses (after net proceeds)Greenshoe explainedThe overallotment of stock at the time of allocat
33、ion creates a short positionIf the stock trades above issue price, stabilization or buying doesnt occur. The short position is the covered by exercise of the option over stock from the issuerIf stabilization or buying does occur, the option is then retired an cannot be exercised.Overallotment size i
34、s 15% of issue up to 30 daysBuying price must be at or below issue priceWhy do it?- Provides immediate aftermarket support for the issue- Increases confidence for both the issuer and investors- Provides a safety net against temporary netgative market turbulencePhase IV: AftermarketAftermarket activi
35、ty:- Trading- Execution of orders for institutional clients- Monitoring of aftermarket buy/sell activity- Sales- Regular feedback from sales/ECM regarding companys performance and perception- Investment banking- Post-IPO events and procedures- Advise of further monetization/capital raising strategies- Strategic advice: M&A, other
