INITIAL PUBLIC OFFERING (IPO) PROCESS IN THE PHILIPPINES: AN UNDERWRITER’S VIEW Some pointers for companies that plan to GO-PUBLIC By Prof. Dr. Eric Y Nasution

DEFINITION OF AN INITIAL PUBLIC OFFERING OR IPO An Initial Public Offering or IPO is the process by which a private company, or in our case the small & medium enterprises (SMEs) in Silang, transform itself into a public company by selling some of its authorized shares and become listed companies at the Philippine Stock Exchange. DEFINITION OF AN INITIAL PUBLIC OFFERING OR IPO

MOTIVATION OF WHY SMEs ARE GOING PUBLIC FINANCING GROWTH AND EXPANSION OWNERS CASHING OUT OWNERSHIP WHEN STOCKMARKET AT PEAK, TAKE ADVANTAGE OF THE GOOD PRICE PAYING EXISTING DEBTS TO BE A LISTED COMPANY IS A PROMOTIONAL STRATEGY OTHERS ________________________ MOTIVATION OF WHY SMEs ARE GOING PUBLIC

MAJOR PHASES IN THE IPO PROCESS 1st PHASE: CORPORATE CLEAN-UP AND RE-ORGANIZATION 2nd PHASE: HIRING PROFESSIONALS 3rd PHASE: DUE DILIGENCE AND DRAFTING 4th PHASE: PRICING THE COMPANY 5th PHASE: MARKETING EFFORT 6th PHASE: ADJUSTMENT (RE-ALLOCATION) MAJOR PHASES IN THE IPO PROCESS

CORPORATE CLEAN-UP EXAMPLES IMPLEMENTATION OF GOOD GOVERNANCE COMPLIANCE OF ALL GOVERNMENT REGULATION AND DIRECTIVES (LOCAL and NATIONAL) INSTALLATION OF ALL TECHNICAL SYSTEMS and PROCEDURES (ACCOUNTING, INFORMATION, etc.) RATIONALIZATION/REORGANIZATION, INCL. SPINNING OFF CERTAIN DEPARTMENTS, UNITS or PRODUCTS RESEARCH & DEVELOPMENT OF PRODUCT LINES PROPER IMPLEMENTATION OF STRATEGIC PLANNING IMPLEMENTATION OF PRUDENT TAX PLANNING SYSTEM COVERING EMPLOYEES, PROPERTIES, INCOME, etc. PLANNING and IMPLEMENTING FAIR EMPLOYEES COMPENSATION ETC. CORPORATE CLEAN-UP EXAMPLES

ISSUER  PROFESSIONALS: Underwriter (FIRST APPOINTMENT), auditor, legal counsel, financial adviser, appraiser, notary, printing company, depository. INVESTORS HIRING PROFESSIONALS

LIST OF PHILIPPINE UNDERWRITERS ABACUS CAPITAL ATR-KIM ENG CAPITAL BDO CAPITAL BPI CAPITAL CITICORP CAPITAL FIRST METRO INVESTMENT RCBC CAPITAL STATE INVESTMENT TRUST PENTACAPITAL EBC INVESTMENT AMALGAMATED INVEST ING BARINGS MULTINATIONAL INVEST UNICAPITAL SOURCE: I.H.A.P. LIST OF PHILIPPINE UNDERWRITERS

DUE DILIGENCE AND DRAFTING FOR THE MANAGING UNDERWRITER TO FULLY UNDERSTAND THE COMPANY’S BUSINESS, incl. THE FOLLOWING: * PREPARATION OF PROSPECTUS(offering memorandum in compliance with the Securities Regulation Code) * FILING LEGAL DOCUMENTS WITH THE SECURITIES & EXCHANGE COMMISSION (SEC) * OTHER RELATED DUE PROCESSES DUE DILIGENCE AND DRAFTING

IN PRACTICE THE FOLLOWING ARE THE PRICING METHODS USED BY THE UNDERWRITERS: * A SIMPLE BOOK VALUE (NET WORTH) * A NET ASSETS VALUE (MARKET VALUE) * A SIMPLE PRICE-EARNING (P/E) * NET DISCOUNTED CASH FLOWS * DIVIDEND DISCOUNT MODEL PRICING THE COMPANY

MARKETING EFFORTS THE PRE-MARKETING OF THE PROPOSED COMPANY’S SHARES IS IMPORTANT! (Especially by the managing underwriter) Segmentation of the target investors Target/positioning of segments with stronger purchasing power Formulation of stock mixes: Promotion materials, distribution through selling agents, road shows, attractive price discount thru fees allocation, etc. MARKETING EFFORTS

THE ACTUAL PRIMARY MARKET PROCESS THE ACTUAL PRIMARY MARKET PROCESS REFERS TO THE ACTUAL SELLING OF SHARES FROM THE COMPANY’S AUTHORIZED CAPITAL (ranging from 1 to 3 weeks, depending how prepared is the underwriter in the pre-marketing period) In selling, the underwriter/s is assisted by the selling agents (brokers, members PSE) The investors are normally the pension funds, insurance companies, investment houses, etc. After selling, adjustment/re-allocation of shares is to be done among the underwriters THE ACTUAL PRIMARY MARKET PROCESS

ADJUSTMENT (UNDERWRITTEN SHARES RE-ALLOCATION) DUE TO THE DIFFERENT FORMULATION/IMPLEMENTATION AND EFFECTIVENESS OF THE MARKETING STRATEGIES OF THE INDIVIDUAL UNDERWRITER, *SOME OVER SUBSCRIBE THEIR PORTION *SOME UNDER SUBSCRIBE THEIR PORTION AN ADJUSTMENT (RE-ALLOCATION) OF AN UNDERWRITER’S PORTION IS NECESSARY ADJUSTMENT (UNDERWRITTEN SHARES RE-ALLOCATION)

PROFILE OF AN UNDERWRITING BOOK Underwriter Amount Actual Sale Under Over ( M I L L I O N P E S O S )   BPI Cap.* 15.0 20.0 5.0 JP Morgan 10.0 5.0 5.0 Abacus Cap. 5.0 4.0 1.0 ---------- -------- Total 30.0 29.0 * Manager Under subscribed 6.0 Over subscribed 5.0 SELLING AGENTS: Stockbrokers and securities dealers (Members of the Philippine Stock Exchange or PSE)

PAYMENT OF UNDERWRITING FEE   All underwriters will receive the underwriting fee for guaranteeing the availability of the issue amount according to their respective portions. PAYMENT OF UNDERWRITING FEE

PAYMENT OF MANAGEMENT FEE The manager of the syndicate of underwriters will only receive this fee, without sharing it with the other underwriters. It is a fee for organizing and managing the issue, including preparing the prospectus and making the registration statement effective. PAYMENT OF MANAGEMENT FEE

Selling fee (0.75% to 1.25%)   Underwriters and selling agents that participate in the selling of the issue will receive this fee according to the amount of sales they make. PAYMENT OF SELLING FEE

OTHER PROFESSIONAL FEES IN ADDITION TO THE PHILIPPINE STOCK EXCHANGE FEES (P 20,000 non-refundable processing; P 50,000 fixed listing fee and annual listing maintenance between P 20,000-P 200,000 ,P 100 for every P 1 million market cap value) OTHER PROFESSIONAL FEES (auditor, legal counsel, notary, printer, etc.) ARE TO BE PAID IN ADVANCE BY THE COMPANY OR TO BE DEDUCTED FROM THE I.P.O. PROCEEDS. ALL THESE TOTAL FEES RANGED FR. 8% TO 12% FROM THE IPO AMOUNT, DEPENDING ON THE TOTAL AMOUNT RAISED BY THE SMEs. OTHER PROFESSIONAL FEES

SOME FREQUENTLY ASKED QUESTIONS When the primary market process led by the investment banks (underwriters) is over, are these underwriters still responsible for the trading of shares in the secondary market (Philippine Stock Exchange)? Answer: Legally? ___ morally? ___. Whom should the listed company consult when problem/s pertaining to the performance of the shares arise/s? Answer: _ PSE _ Underwriter _ Consultant _ All SOME FREQUENTLY ASKED QUESTIONS

SOME FREQUENTLY ASKED QUESTIONS If the company’s shares doesn’t perform in the PSE, whom should it consult and what should it do? WHOM: _ PSE _ Brokers _ Consultant _ All WHAT TO DO: 1. Upgrade the performance of the company. 2. Ask the advices of brokers 3. Other Will the company’s shares always be listed at the PSE? Answer: If it doesn’t perform (no transaction, stagnant, etc), a possibility of DELISTING. SOME FREQUENTLY ASKED QUESTIONS

For an IPO (equity financing), a company goes to an investment bank (underwriter) and not to a commercial bank for loan. Depending on how the company manages its financing, equity can be a financing strategy with a cheaper cost. The process of the primary market ranges from 2 to 3 months, relatively. SUMMARY

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