IPO Insights: Selecting an Underwriter for an IPO

Below you’ll find a set of questions to jump-start your conversations with the underwriters and help you determine which will best help lead to a successful IPO.

But, before we continue, a couple of definitions:

• An “underwriter,” in a firm commitment underwritten IPO, is typically an investment bank who buys the shares from the company and resells them to the public.
• The “bookrunners” are the lead underwriters, who are in charge of the process.
• There are also “co-managers,” who have smaller roles.  Often, co-managers are there to help with retail distribution at the IPO, as well as generally participating in the offering process.

Meetings with representatives from several underwriters in the months and years leading up to an IPO are common, and offer the opportunity to develop a relationship with both the investment bankers as well as the research analysts.  These may include informal meetings from time to time with the investment bankers to learn more about the company and for the investment bankers to share their views on the industry.  Oftentimes investment bankers will reach out to the company directly, and a company’s investors and legal counsel can also provide introductions to suitable investment bankers as well.  Before selecting underwriters and more formally beginning the IPO process, companies typically hold what is referred to as a “bake-off,” during which they meet and interview underwriting candidates and banks usually provide presentations explaining why they are best suited to take the company public and outlining to the company their views on the company, including its mission and goals, the markets and industries in which it operates, its financial performance, its strengths and growth strategies, measures it considers to be important and risks.

What follows below are the considerations for selecting the lead underwriter (often called the “left lead bookrunner”), and the co-lead (or “lead right”).  Sometimes they’re truly equal in economics and authority; they are then referred to as “joint lead bookrunners.” This isn’t intended to be comprehensive, but rather as a starting point for the company and its board as it begins the underwriter selection process.

Key Considerations

1. Understanding the business
Does the underwriter know what the company does, how it does it and its strategy?  Does the underwriter know the industry the company operates in?

• Is there a dedicated institutional sales team who covers the company’s industry?
• Is there a dedicated trading effort that covers the company’s industry?
• Does the underwriter’s view of the company align with the board’s and management’s view?
• Does the underwriter’s research analyst’s coverage of comparable companies in the same industry reflect insight into opportunities or challenges in the comparable companies and the industry?
• What are the underwriter’s views of the market for IPOs in the company’s industry, whether the company should attempt an offering in the near term, and the biggest risk factors to a successful completion?

2. Ability to position the company’s story and overall deal strategy
Can the underwriter tell the company’s story in such a way as to get a strong valuation and market reception?

• What is the list of peer companies to whom the company will most frequently be compared?  How would the bank market the company and its business against comparable or competitive companies? What are the key differentiators?
• What are the key points that the underwriter would want to highlight in the lead paragraph of the prospectus summary and in the “box” generally to best position the company for its IPO? What is the elevator pitch and the top selling points? How would the bank position the company’s equity story?
• What is the company’s total addressable market and which metrics and key performance indicators (KPIs) should be included in the registration statement?
• How are comparable companies currently being valued in the market today and how does the company’s valuation metrics compare to those?
• What type of investors would be most appropriate for the company’s stock (including institutional v. retail)?
• What are the key concerns, risks and challenges that the underwriter believes the company will need to “market through” on the roadshow and how would the underwriter guide that response?
• What are the banks views on deal size, potential upsizing, use of proceeds, valuation metrics and post-money valuation?

3. Reputation and experience

• The bank’s recent, relevant experience in executing comparable IPOs in the industry and its role in those IPOs. The number of IPOs in the sector within the past three years in which the bank participated and information about the “success” of those deals. This information could include the underwriter’s initial valuation approach; initial pricing range, final offer price and the change from the middle of the filing price range; information about the extent of over-subscription ; participation by existing stockholders as either buyers or sellers, utilization of overallotment option, any deviation or waiver from a 180-day lockup; and the market price after 1, 2, 7 and 30 days and the percentage delta to the offer price.
• The number of follow-on offerings done for companies whose IPO the underwriter has underwritten, and number of months after IPO before first follow-on?
• Any success in selling shares to institutional buyer list in each of the last five IPOs that the underwriter has lead/managed?
• Institutional and retail sales capability both U.S. and foreign, including market share and market presence?
• Any recent “failed” deals and insights into why they failed; in particular, transactions that were filed publicly and then were withdrawn or failed to price after the roadshow?
• Research coverage expertise for this sector and examples of initiating coverage reports for comparable companies.

4. Overall quality of the team

• Qualifications (including the name and number of IPOs worked on over the past three years) of the proposed investment banking and equity capital markets (“ECM”) teams for the IPO and level of involvement expected.
• The expected participation of each team member in the drafting, roadshow and allocation stages of the IPO process.
• Significant financings on which the day-to-day lead banker, and ECM and syndication professionals identified above have worked together as a team?
• How many concurrent transactions to which each team member expects to be assigned during the calendar year in which the IPO will occur.

5. IPO process

• What is the proposed IPO timetable and key milestones, assuming the company wishes to move as expeditiously as possible? Are there any calendar windows to avoid? Are there any other companies in the sector you expect to attempt to IPO in the next twelve months?
• Any recommendation for “test-the-waters” meetings prior to the roadshow and list of potential investors with whom the underwriter would propose the company meet, in either a non-deal roadshow prior to the IPO or a “test-the-waters” meeting in advance of launching the IPO roadshow?
• Views on the IPO roadshow schedule (timing/days) and attendees.
• Views on allowing the company’s investor(s) and/or management to participate in the offering?
• Timing and process of underwriter’s commitment committee in connection with the approval of the IPO and whether any member of the proposed team sits on the committee.
• How do you typically price the transaction to optimize how the stock trades when it opens? What is your target percentage for the first day increase in share price?
• Willingness to have multiple banks act as joint bookrunners and minimum economics for serving as lead manager, co-manager in the middle and co-manager on the right.

6. Other considerations

• Personality – The IPO managing underwriter team will likely also be working on the company’s follow-on offerings, so personality and fit is important for the success of a long-term relationship.
• Post-IPO support – Whether the underwriter’s research analyst has maintained research coverage on all underwriting clients over the past three years in the company’s industry for which the underwriter has led or co-managed. What is the bank’s typically process for stabilization? What conferences and investor events do you recommend the company attends?
• Conflicts of interest – What clients of the underwriter presently or in the future might be considered competitors?  How does the underwriter propose to manage potential conflicts, particularly in the case of another private company competitor seeking to go public at the same time as the company?
   

For more information, visit Orrick’s “Are You IPO Ready?” resource center.