IPO of Wachstums AG. Version

Transcription

1 Version IPO of Wachstums AG At the beginning of 1997, Dr. Jansen, chairman and CEO of Wachstums AG, was in the decision-making process of whether to list his worldwide operating mechanical engineering company on the stock exchange by the means of an initial public offering (IPO). The aggressive expansion strategy the company was pursuing made it necessary to tap new financial resources for the development of new products in the coming years - for the purchase of new machines and installations, but also for planned acquisitions at home and abroad. Going public would provide the company with additional funds in order to finance repayments on loans taken out and planned investments. Following the successful start of the Neuer Markt in March 1997, Dr. Jansen therefore contacted his house bank, the Cologne Ullmann Bank, to get information about the possibility for his high-tech company to go public on the Neuer Markt. After negotiations with several banks lasting several months and a subsequent beauty contest, Dr. Jansen signed a contract with the CS Bank, assigning it to be the lead manager of the issuing consortium for the IPO. During the following months the company was carefully inspected by accountants, attorneys and staff of the bank within the framework of several due diligence audits. At the end of December 1997 the time finally arrived: the IPO department of the CS Bank had the task of determining the fair value of the company as the basis for fixing the subsequent book-building spread, basing its result on the planning data presented by the company and which the bank had analyzed. This case study was prepared by Prof. Dr. Bernhard Schwetzler and Dipl.-Kfm. Carsten Reimund as a basis for discussion in the seminar. It does not exemplify an effective or ineffective procedure within the framework of the described management situation. Copyright HHL, Department of Finance

2 Background Wachstums AG is a spin-off machine engineering company founded in 1983 out of a research group of the RWTH Aachen (University of Technology Aachen), which has specialized in the field of compound semiconductors. The company takes advantage of the novel MOCVD method (Metal Organic Chemical Vapor Deposition) for the production of compound semiconductors. This method was patented by a large electronics company, and Wachstums AG acquired exclusive rights for its use in On the basis of this technology, the company is developing a multitude of machines which enable manufacture of these compound semiconductors (wafers). Using Wachstums AG s Planet Reactor System (a unique variant of the MOCVD method), semiconductors in gas form are applied to the wafers. The metallic and non-metallic semiconductor materials that are used bond in this process and are deposited on the hot wafer as one or several ultra-thin layers. In comparison to conventional, silicon-based semiconductors, these semiconductors have a number of advantages: a controllable application to the wafer, a higher attainable velocity because of the faster conductivity of electrons, in conjunction with a lower energy input and a lower operating noise level. They also have the capability to receive and send light signals. Consequently, it can be reckoned with that the electronic industry in the near future will utilize the novel compound semiconductors for its new products and that the existing silicon chips will be replaced to an increasing extent. The various fields of application for the new chips are at present in the area of lightemitting diodes, solar cells, fiber optics communication, radar systems, lighting technology and memory chips. For Wachstums AG these markets are interesting, because they show very high growth rates. Experts estimate the market growth of this sub-area of semiconductors to be 30 to 40 % p.a. (Exhibit 1) in the next five years after going public - in contrast to a growth of 15 to 20 % p.a. which is expected for the silicon chip sector. The machines and installations made by Wachstums AG are modularly constructed and can thus meet customer-specific requirements as to wafer size, throughput volume and process chemistry. The installations are distributed worldwide to research and development centers on the one hand and to semiconductor manufacturers on the other. The machines are equipped, configured and serviced as desired at the customer site. With a share in the world market of 32%, Wachstums HHL, Department of Finance

3 AG is the global market leader in the field of manufactured goods for the wafer sector. The company s customer base includes the largest and most well-known companies in each sector. Some of these customers are the world s largest semiconductor, telecommunications and computer manufacturers. 230 machines have already been installed in 18 different countries. The total revenue of the company in 1996 was 28.2 M Euro spread over the electronics, laser, LED and solar cell sectors (Exhibit 2). In 1996, 80% of the total revenue was realized abroad, thereof 38.9% in the U.S. and 42.7% in Asia. The three main competitors of Wachstums AG are specialized machinery manufacturers from the U.S., Japan and the U.K. Emcore Inc., based in the U.S., develops wafers and process technologies as well as systems for the production of compound semiconductor wafers. In the market for MOCVD systems, Emcore has a market share of 22.7%, according to expert estimates. The second largest competitor of Wachstums AG is the Japanese Nippon Sanso. The company is specialized in the production of oxygenous gases, nitrogens and argon as well as the respective installations, and in 1996 achieved a market share in the MOCVD sector of 11.2%. The British competitor Thomas Swann concentrates on the sale of installations for research purposes and has a market share of 3.7%. In comparison to these companies, Wachstums AG is the market leader for both the U.S. and Japan. In particular the attractive Asian market is characterized by intensive competition with the three main competitors. Furthermore, worldwide there are a number of smaller, but insignificant competitors. Wachstums AG was able to achieve market leadership through its unique design know-how, its close customer contact and customer tailored solutions as well as constant research and development. Because the design of the machines is difficult to imitate, the customers have diverse advantages over the competition in production costs, quality and flexibility. The management is convinced that the company can secure its present market position permanently by consequently concentrating on its core capabilities. Therefore, components and subassemblies not connected with these core competences are obtained through outsourcing. Finally, Wachstums AG possesses a highly qualified staff. The approx. 90 employees at the time of the IPO (thereof 43 university graduates, some with a PhD degree) are active in the fields of technology, electronics, mechanics and construction. The board of HHL, Department of Finance

4 Wachstums AG consists of the two founders, Dr. Jansen (CEO) and Mr. Schwan (CFO), who because of their specific expertise, are responsible for different areas. Thus, Product Management, Marketing and Sales, Process Technology and R&D are in the sphere of responsibility of Dr. Jansen, while Mr. Schwan is concerned with Production, Purchasing and Logistics, Quality Management und Administration, and Controlling. Even after the IPO, a large part of the shares remains held by management. The Free Float after the IPO should amount to at least 40%, whereby besides the management various private mutual funds hold larger shares of equity (Exhibit 3). Use of funds Wachstums AG first intends to use the financial resources expected from the new emission for comprehensive investments in tangible assets (plant and equipment), in order to provide for a long-term expansion of capacity and to replace technical installations that are already obsolete. Moreover, the amount of 25 M of existing old loans are to be amortized, thereby reducing the debt-equity ratio and the future interest burden. Mr. Schwan holds the view that an innovative growing company such as Wachstums AG is considerably restricted in scope through too high debt levels and the resulting interest expenses. The reduction of the debt-equity ratio corresponds to alignment of the capital structure to comparable companies. Mr. Schwan is aiming for a target capital structure (debt to equity) of 0.6. Even before going public, Wachstums AG agreed to pension terms for its top managers which must be upheld even in the future. Because of the expected increase in sales revenues, the CFO reckons additionally with a continual increase of the investment in current assets: growth leads to an increase of inventory and claims. In 1997 approx. 90% of the revenue was tied down in the current assets; Schwan hoped to be able to reduce this quota to 50% by Wachstums AG is financed to a considerable degree via customer advance payments and trade accounts receivable. The revenue growth therefore leads to an expansion of financing possibilities: presently the level of customer progress payments and liabilities from the trade accounts receivable is 1/3 of the turnover of the current year. Schwan assumes in his plan that this relation will continue to hold. Finally, from the emission proceeds a war-chest amounting to HHL, Department of Finance

5 50 M is to be built up out of fungible securities in order to give Wachstums AG the necessary financial flexibility for the acquisition strategy. From the planned capital increase, the war-chest, the repayment of the loan and 25% of the investments planned in the next 3 years for fixed assets and Net Working Capital are to be financed. The capital increase has a planned total spread of approx. 92 M (Exhibit 4). CFO Schwan is confident that the above plans will allow Wachstums AG to improve its Return on Invested Capital (ROIC) from projected 4.4% in 1998 to approximately 26% in 2003, promising investors a well-above average return on their investment in the company. In order to achieve this goal, firstly the company will have to substantially increase its turnover rate of total capital employed from projected 0.9 in 1998 to 1.6 in Secondly, its profitability in terms of operating margin will have to rise from 6.6% in 1997 (and 7.5% projected for 1998) to approximately 25% in HHL, Department of Finance

6 Assessment The center of the assessment of Wachstums AG by the CS Bank is a detailed Discounted Cash Flow (DCF) valuation. It is based on the following forecasts, which were made by Wachstums AG and validated by the IPO department of the CS Bank: - the profit and loss statement from Dec. 31,1997 (Exhibit 5) - the balance sheet from Dec. 31,1997 (Exhibit 6) - the planned development of the profit and loss statements for the years 1998 to 2003 (Exhibit 7) - the planned development of short-term liabilities/advance payments for the years 1998 to 2003 (Exhibit 8) - the planned development of the net current assets for the years 1998 to 2003 (Exhibit 9) - the planned development of bank liabilities for the years 1998 to 2003 (Exhibit 10) - the planned development of the pension reserves for the years 1998 to 2003 (Exhibit 11) - the planned development of the fixed asset movement schedule (investments and depreciation) for the same time period (Exhibit 12) The DCF valuation is based on a detailed plan for the years 1998 to 2003 (Phase 1) and an annuity phase from 2004 (Phase 2). The valuation should take place within the framework of the Entity Approach (WACC). Cost of capital For the estimation of the weighted average cost of capital of Wachstums AG (WACC: Weighted Average Cost of Capital), the CS Bank has the following information about the capital market conditions prevailing at the end of 1997: The historical development of the current yield of bonds issued by the government (Exhibit 13) - empirical estimation for the risk premium on the German capital market (Exhibit 14) [the basis is to be a 40-year holding period] - beta factors (asset betas) of comparable companies (Exhibit 15) HHL, Department of Finance

7 The CS Bank is faced with the task of valuating Wachstums AG on the basis of the planning data that has been provided. HHL, Department of Finance

8 Exhibit 1 Market growth Misc. Film Tools & Traditional MOCVD Tools Exhibit 2 Revenues per sectors in 1996 Solar cells 20% Electronics 20% LEDs 29% Laser 31% HHL, Department of Finance

9 Exhibit 3 Shareholder structure (after IPO) Shareholder Share Free shareholders 42% Dr. Jansen, CEO 23.4% CS-Bank 14.2% HaWECo investment company 4.7% Private shareholders 4.4% Mr. Schwan, CFO 6.6% Company managers 4.7% Exhibit 4 Planned funding requirement Funding need next To be covered by Share Position 3 years capital increase Investment Net Working Capital 14, , % Investment fixed assets 52, , % Amortization 25, , % Build up war chest 50, , % Total 141, , % Exhibit 5 Profit and loss statement Dec. 31,1997 Profit and loss statement 1997 (in thousands of ) Revenues Material costs Personnel expenses Depreciation Other operat. expenses Interest expenses Pre-tax earnings Total taxes After-tax earnings HHL, Department of Finance

10 Exhibit 6 Balance sheet from Dec. 31, 1997 Wachstums AG balance sheet Dec. 31, 1997 Real estate/buildings Shareholders equity Installations/machines Reserves Financial assets Equity Fixed assets Advance payments Inventory Liabilities L+L Accounts receivable short-term liabilities Other tangible assets Pension reserves Cash Bank debt Current assets long-term liabilities Total assets Total liabilities (in thousands of ) Exhibit 7 Planned profit and loss statements Year 1998E 1999E 2000E 2001E 2002E 2003E Revenues , , , , , ,00 Material costs , , , , , ,00 Personnel expenses , , , , , ,00 Other operating expenses , , , , , ,00 Depreciation , , , , , ,00 Allocations to PR , , , , , ,00 Interest PR -456,00-468,00-486,00-498,00-504,00-504,00 Interest old loan ,00-168,00-168,00-168,00-168,00-168,00 Pre-tax earnings 2.232, , , , , ,00 Taxes (60%) , , , , , ,20 After-tax earnings 892, , , , , ,80 (in thousands of ) HHL, Department of Finance

11 Exhibit 8 Planned development of short-term liabilities / advance payments Year 1998E 1999E 2000E 2001E 2002E 2003E Revenues , , , , , ,00 Short-term liabilities/advance payments , , , , , ,00 (in % of turnover) 33,33% 33,33% 33,33% 33,33% 33,33% 33,33% Change to previous year 5.266, , , , , ,33 Exhibit 9 Planned development of the current assets JYear 1998E 1999E 2000E 2001E 2002E 2003E Revenues 52, , , , , , Net investment in current assets 44, , , , , , (in % of revenue) 85.00% 76.50% 68.85% 61.97% 55.77% 50.19% Change to previous year 2, , , , , , Exhibit 10 Planned development of the bank debt Year E 1999E 2000E 2001E 2002E 2003E Change old loans Change new loans , Bank debt , , , , , , ,00 Exhibit 11 Planned development of the pension reserves Year 1998E 1999E 2000E 2001E 2002E 2003E Pension reserves 7.800, , , , , ,00 Allocation pension reserves 1.944, , , , , ,00 Interest pension reserves 456,00 468,00 486,00 498,00 504,00 504,00 Annuity payments , , , , , ,00 (in thousands of ) Exhibit 12 Planned development of the investment holdings Year 1998E 1999E 2000E 2001E 2002E 2003E Investment , , , , , ,00 Depreciation 8.000, , , , , ,00 Fixed assets , , , , , ,00 HHL, Department of Finance

12 Exhibit 13 Historical development of returns from government bonds 10 7,5 8,7 8,5 7,8 6,5 6,9 6,9 6,2 6 Return (%) 5 2, Year Exhibit 14 Empirical estimation of the risk premium on the German stock market 7,00% 6,00% 6,06% 6,40% 6,18% 6,37% 6,37% 6,02% 5,62% 6,37% Risk premium (%) 5,00% 4,00% 3,00% 2,00% 4,16% 3,65% 3,77% 4,30% 1,00% 0,00% Holding period (years) [In the observation period from January 1950 to December 1992, the risk premiums were measured and based on their geometric average; a 3-year holding period means that from the total possible 3-year periods ( ; etc.) were averaged. Source: Morawietz, M. (1994), p HHL, Department of Finance

13 Exhibit 15 Asset betas from comparable companies Comperable companies Asset beta Emcore 1.38 Applied I Materials 1.47 Novellus I Systems 1.69 ASM I Lithography Holding 1.46 LAM NV Research 1.43 Silicon C Valley 1.49 Ultratech G Stepper 1.32 FSI I International 0.94 Integrated I Process Equipment 1.73 ASM C International 1.65 Speedfam NV International 1.41 Watkins I Johnson 1.41 CFM C Technologies 1.54 Gasonics I International 1.56 Mattson C 1.59 Tegal T h Corp. l 1.75 Average HHL, Department of Finance