Transcript Document 7347124

Corporate Governance and
IPO Case Study
Professor Alexander Settles
Faculty of Management, State University
– Higher School of Economics
Email: [email protected]
Corporate Governance and
Initial Public Offerings
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Corporate Governance is a principle
variable in evaluating risk / setting
discount for IPOs
Firms reaching the market make
significant CG changes to their
board structure and practices to
conform to market expectations
The First Wave (1996-2002)
Snapshot of the Issuers
VimpelCom, 1996
New York Stock Exchange (NYSE);
American Depository Receipts (ADRs);
$110,8 m Raised.
MobileTeleSystems,
2000
Insufficient volumes on Russian
Market;
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NYSE; ADRs;
$353 m Raised
Tatneft, 1996
Wimm-Bill-Dann, 2002
London Stock Exchange 144A (LSE);
Global Depository Receipts (GDRs);
$ 120 m Raised
NYSE;
ADRs;
$207 m Raised
Gazprom, 1996
LUKOIL, 2002
LSE 144A;
ADRs;
$ 430 m Raised
LSE 144A;
ADRs;
$775 m Raised
GoldenTelecom, 1999
RBC Information
Systems, 2002
NASDAQ;
Ordinary shares;
$144,2 m Raised
Why?
RTS/MICEX;
Ordinary shares;
$ 13,28 m Raised
Perception that without US
investors sufficient capital could
not be raised;
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NYSE was significantly larger and
more prestigious than LSE;
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Undeveloped legal regime in
Russia; and
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Recent History
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In 2006 LSE IPO Market exceeds NYSE IPO Market
2007 IPO pipeline from Russian companies reached
$28 bln. compared with $20 bln. in 2006
“We are very concerned about corporate
governance, transparency of company financials and
protection of minority shareholders and, with a
number of Russian companies, these things are
called into question”, Mr. Thair, the New York Stock
Exchange (April, 2007; www.ft.com);
Number of US listings of Russian companies since
2004: 2
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Mechel (2004)
CTC Media (2006)
Number of LSE/AIM listings of Russian companies
greater than $200 mln. during 2005/2006: >17
Listing Rules
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NYSE – SOX/NYSE Rules
LSE – UK Combined Code.
Governance Metrics International
(2005) ranks UK as leading country
in terms of Corporate Governance
LSE GDR/London AIM – Combined
Code not required but usually
insisted by underwriters as “Best
Practice”
Sarbanes Oxley
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Accounting regulation
 Public accounting oversight board
 Restricting consulting/auditing
Audit committee
 Independent financial experts
Internal control assessment
 Assessment by auditors and company (Section
404)
 Deemed costly and contested
 Cross-listing elsewhere…
Executive responsibility
 CEOs and CFOs must sign off on the company’s
quarterly and annual financial statements. If
fraud causes an overstatement of earnings,
these officers must return any bonuses.
Sarbanes Oxley
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Many argue that SOX is hurting U.S.
capital markets.
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SOX undermines CEO’s appetites for risk
SOX is a full employment act for Accountants
(404)
The Committee on Capital Markets
Regulation, set up by U.S. Treasury
Secretary Hank Paulson, advocates rolling
back the Sarbanes-Oxley Act.
Sarbanes Oxley
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U.S. is losing out on new international
listings…
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London is beating the U.S. in the number
of IPOs it draws.
Last year, the NYSE drew 192 IPOs and
Nasdaq 126.
The LSE, often cited as the example of
how SOX is chasing companies away,
attracted a robust 617 IPOs, 510 of which
were on the AIM, the exchanges small-cap
market.
Sarbanes Oxley
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However, the U.S. IPOs are larger.
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Of a total of $118.2 billion raised through IPOs
in 2006
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$17.5 billion occurred on the LSE, $4.2 billion on
AIM
$16.9 billion on the NYSE
$9.4 billion on Nasdaq
$0.2 billion on AMEX, according to Thomson
Financial.
NYSE Corporate Governance
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Listed companies to have boards of
directors with a majority of
independents
The compensation, nominating, and
audit committees to be entirely
composed of independent directors
The publication of corporate
governance guidelines and reporting
of annual evaluation of the board
and CEO
Cadbury Code of Best Practice
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Cadbury Code
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Boards of directors of public companies include
at least three outside (non-executive) directors
The positions of CEO and chairman of the
board of these companies be held by two
different individuals
Cadbury Code is not legislated into law
LSE requires companies to “comply or
explain.”
Empirical research suggests the code has
been effective despite not being
enforceable in courts…
Role of the Board in a Public Company
IPO / Listing Experience
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The Board
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Effectiveness
Talents and background of board
members
Tying board remuneration closely to
performance
Strategic thinking by the Board
Managing risk effectively
Role of the Board in Listing - IPO
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Developing a robust audit
committee
Taking corporate social
responsibility on board
Encouraging and active dialogue
with shareholders
The Effective Board
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Clear strategy aligned to capabilities
Vigorous implementation of strategy
Key performance drivers monitored
Effective risk management
Sharp focus on views of the capital
market and other key stakeholders
Regular evaluation of board
performance
The audit committee’s main
responsibilities
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To monitor the integrity of the financial
statements
To review the company’s internal
financial controls, internal control and
risk management systems.
To monitor/review the effectiveness of
the internal audit function.
To make recommendations to the board
on the appointment/removal of the
external auditor
The audit committee’s main
responsibilities
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To monitor/review the external auditor’s
independence/objectivity and the
effectiveness of the audit process.
To develop/implement policy on the
engagement of the external auditor to
supply non-audit services
To review arrangements by which staff
may raise concerns about possible
improprieties (‘whistleblowing’)
Stakeholders in the IPO Process
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Owners & employees
Stock Exchange
Government (SEC, FSFM, etc.)
Institutional shareholder
Public Investors
Google: Time to Cash Out?
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Reports valued Google’s IPO at $16
billion
Estimated 2003 revenue: $1 billion,
profit: $300 million
In order to compete with the giants
(Yahoo! and Microsoft), it would be
in Google’s best interest to raise
more money
Google’s naïve attempts to stay private
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Why stay private?
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However, Google was bound to become
publicly traded
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Eric Schmidt: “We’re generating cash. We don’t
ever need to go public.”
Google didn’t want to become a “short-sighted”
company
SEC regulation forcing them to report because of
stock options offered to employees
Companies funded by venture capitalists almost
always result in IPOs
During 2003, they unsuccessfully toyed with
different strategies to remain private
Google’s IPO Process
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Decision to become public in early
2004
Debate over filing for public offering
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Using investment bank vs. auction
method
Ended up using a Dutch auction
Proposed S1 (formal public offering
document)
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Sell $2,718,281,828 worth of shares
S1 “An Owner’s Manual for Google’s Shareholders”
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Outlined how Brin/Page planned on
running the company
Claimed Google was different, so it would
not act as a traditional public company
Proposed corporate structure that
protected Google’s ability to “innovate
and retain its distinctive characteristics”
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“Dual class shareholding structure”: Founders
and executives have far more control than
common shareholder (common in media
companies)
Google’s IPO Process
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Google IPO did not follow Wall
Street practices:
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S1 represented a destruction of the
traditional share selling, corporate
governance, investor communications,
and management structure of public
companies
However, it showed tremendous
numbers in the income statement
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Profits, Cash, Operating Margins
Google’s Struggle to IPO
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Bad Reputation
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Relentless scrutiny (SEC)
Companies uneven management of
overwhelming growth
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Google increased Secrecy
Slow amendments to S1 and entire process
Playboy Interview
Reporting requirements would require a great deal
of restructuring (e.g. Advertising)
Founders’ reluctance about the public path
Initial Public Offering (Finally)
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Auction on August 12, 2004
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Revealed market price range: $85 to
$108
Public on August 19, 2004
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Price was $85/share
Post-IPO steps?
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Created “Tablets” (declaration of what
makes Google itself)
Post-IPO Organization (core groups)
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Core search
Advertising Products
“20 Percent” (Gmail, Google News, Orkut)
“10 Percent” (Google Keyhole, Picasa)
Could now execute on its two core
businesses, while other groups could pursue
projects that could potentially turn into core
businesses or useful products
Brin and Page: Still in Power
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Brian Reid (former senior manager)
sued Google for age discrimination
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“Google is a monarchy with two kings”
Culture: “youth obsessed”
However, somehow they have
succeeded
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5 year revenue growth is 400,000%
Fastest growing company ever
Russian IPO Examples - VTB
VTB Overview
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The Group has three principal areas
of business:
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Corporate banking
Retail banking
Investment banking
Offering Size
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1,399,835,420,000 shares or
20.82% of the capital of VTB was
offered as GDRs
79.15% was retained by the Federal
Property Administration
Investment Banks
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Joint Global Coordinators
Citi
Deutsche Bank
Goldman Sachs
International Joint Bookrunners
Citi
Deutsche Bank
Goldman Sachs International
Renaissance Capital
Corporate Governance Issues
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The interests of VTB’s principal shareholder may
conflict with those of other shareholders;
VTB’s management has recognised a material
weakness in the Group’s internal controls;
Some interested party transactions of Russian
banks in the Group require the approval of
disinterested directors or disinterested
shareholders;
Shareholder liability under Russian law could
cause the Group to be liable for the obligations of
its subsidiaries;
There are weaknesses in legal protections for
minority shareholders and in corporate
governance standards under Russian law;
Corporate Governance Issues
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Of the eleven seats on VTB’s
Supervisory Council, six are held by
representatives of various
Government ministries and
agencies, one is held by
representatives of each of the CBR
and the Russian President, one is
held by VTB’s President-Chairman,
and two are held by independent
directors.
IPO Process
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Global Offering:
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Russian securities legislation does not permit
VTB to sell more than70% of the total number
of ordinary shares authorised in the Global
Offering in the form of GDRs.
Retail Offering - retail investors in Russia
“People’s IPO”
The Institutional Offering
13.60 Kopecks or $0.00528 per Share
and $10.56 per GDR.
Dec 2, 2008 share price is $2.05
Good deal announced – bad deal
delivered?
VTB GDR price
140
rebased to 100
130
120
110
100
90
80
70
Jun 2007
Source: Factset
Aug 2007
Oct 2007
Dec 2007
Russia RTS
VTB Bank
Feb 2008