1. Prof. Ian Giddy New York University Financing Growth Companies DBS Bank

2. Copyright ©2000 Ian H. Giddy Financing Growth Companies 2 Corporate Finance CORPORATE FINANCE DECISONS CORPORATE FINANCE DECISONS INVESTMENT RISK MGT FINANCING CAPITAL PORTFOLIO M&A DEBTEQUITY TOOLS MEASUREMENT

3. Copyright ©2000 Ian H. Giddy Financing Growth Companies 3 The CFO Questions l How fast can we grow? What criteria for spending money? Acquisitions? Divestitures? l How should we finance our growth? What kind of equity? What’s our exit plan? Private or public? l How much (cheap) debt should we have? l What kind of debt should we have? Maturity? Fixed/floating? Currency? Asset-backed? Hybrids, such as convertibles? l How should we manage our financial risks?

4. Copyright ©2000 Ian H. Giddy Financing Growth Companies 4 Financing X Inc

5. Copyright ©2000 Ian H. Giddy Financing Growth Companies 5 Financing X Inc

6. Copyright ©2000 Ian H. Giddy Financing Growth Companies 6 Financing X Inc

7. Copyright ©2000 Ian H. Giddy Financing Growth Companies 7 Corporate Financing Life-Cycle Growth companies Mature companies Leverage

8. Copyright ©2000 Ian H. Giddy Financing Growth Companies 8 Firm Characteristics as Growth Changes VariableHigh Growth Firms tend to Stable Growth Firms tend to Riskbe above-average riskbe average risk Dividend Payoutpay little or no dividendspay high dividends Net Cap Exhave high net cap exhave low net cap ex Return on Capitalearn high ROC (excess return)earn ROC closer to WACC Leveragehave little or no debthigher leverage Earnings Gearing 0

9. Copyright ©2000 Ian H. Giddy Financing Growth Companies 9 Financing Growth Companies: The Agenda l Where can we get the initial equity financing we need to grow? l Do we want money, management, or more? l When do we want to sell out, and how? l When is the right time for debt for a growth company? What kind?

10. Copyright ©2000 Ian H. Giddy Financing Growth Companies 10 First, Why Equity? l Benefits of Equity  Flexibility: cannot afford to have fixed obligations  Strategic partners  Interventionist partners l Disadvantages  No tax shield  Expensive!

11. Copyright ©2000 Ian H. Giddy Financing Growth Companies 11 What Kind of Equity? l Sources of Equity  Private investors  Strategic investors  Interventionist investors  Public market l And Kinds  Common stock  Stock with restricted voting rights  Hybrids, including convertibles

12. Copyright ©2000 Ian H. Giddy Financing Growth Companies 12.comfax l Started in September 1997,.comfax enables users to send faxes and receive faxes over the internet at a low cost. l By June 1998 the company had expanded its services and was signing up subscribers at the rate of 100,000 a day. l Initial funding was “Angel” finance, but now the expansion was exceeding the company’s financial, physical and managerial capacity. On two occasions it had literally run out of money. l What form of equity financing would be appropriate for.comfax?

13. Copyright ©2000 Ian H. Giddy Financing Growth Companies 13 Pre-IPO Equity Financing l Friends and family l Angel l Venture capital l Strategic partners

14. Copyright ©2000 Ian H. Giddy Financing Growth Companies 14 Pre-IPO Equity Financing l Friends and family l Angel l Venture capital l Strategic partners asiajack.com

15. Copyright ©2000 Ian H. Giddy Financing Growth Companies 15 Private Equity Funds l Private equity funds are generally structured as partnerships specializing in venture capital, leveraged buyouts, and corporate restructuring. l The private equity fund mobilizes funds, selects and monitors investments, eventually exiting the investment and paying back the investors.

16. Copyright ©2000 Ian H. Giddy Financing Growth Companies 16 Silipos Inc

17. Copyright ©2000 Ian H. Giddy Financing Growth Companies 17 Silipos Inc, 1999 Where do you want to go? Debt? Acquisition? IPO? Sell?

18. Copyright ©2000 Ian H. Giddy Financing Growth Companies 18 IntraLinks

19. Copyright ©2000 Ian H. Giddy Financing Growth Companies 19 IntraLinks’ Choices  Issue debt, either by borrowing from one of the big New York banks keen to get more involved in promising Internet businesses, or by means of a private placement of debt notes, possibly with “sweeteners” such as warrants to attract a lender.  Seek out one or more private equity investors, ones who believed in the company’s product and its management.  Do an initial public offering (IPO).  Find another corporation who would be willing to acquire IntraLinks.

20. Copyright ©2000 Ian H. Giddy Financing Growth Companies 20 Why Venture Capitalists Prefer Preferred l Senior status in bankruptcy l Does not put a value on the shares l Is convertible into common stock before the IPO l Conversion price is set such that if there is a liquidation all the money goes to the preferred shareholders (equity is worth zero)

21. Copyright ©2000 Ian H. Giddy Financing Growth Companies 21 Case Study: Photronics

22. Copyright ©2000 Ian H. Giddy Financing Growth Companies 22 Case Study: Photronics Photronics is the world's leading and fastest growing manufacturer of photomasks. Photomasks are high precision quartz plates that contain microscopic images of electronic circuits. A key element and enabling technology in the manufacture of semiconductors, photomasks are used to transfer circuit patterns onto semiconductor wafers during the fabrication of integrated circuits. They are produced in accordance with circuit designs provided by customers at strategically located manufacturing facilities in North America, Europe and Asia.

23. Copyright ©2000 Ian H. Giddy Financing Growth Companies 23 Case Study: Photronics Sales, 1994-99

24. Copyright ©2000 Ian H. Giddy Financing Growth Companies 24 The Company’s Debt

25. Copyright ©2000 Ian H. Giddy Financing Growth Companies 25 Should Photronics Have More Debt? l Benefits of Debt  Tax Benefits  Adds discipline to management l Costs of Debt  Bankruptcy Costs  Agency Costs  Loss of Future Flexibility

26. Copyright ©2000 Ian H. Giddy Financing Growth Companies 26 How Much Debt? Relative Analysis The “safest” place for any firm to be is close to the industry average l Subjective adjustments can be made to these averages to arrive at the right debt ratio.  Higher tax rates -> Higher debt ratios (Tax benefits)  Lower insider ownership -> Higher debt ratios (Greater discipline)  More stable income -> Higher debt ratios (Lower bankruptcy costs)  More intangible assets -> Lower debt ratios (More agency problems)

27. Copyright ©2000 Ian H. Giddy Financing Growth Companies 27 The CFO Questions l How fast can we grow? What criteria for spending money? Acquisitions? Divestitures? l How should we finance our growth? What kind of equity? What’s our exit plan? Private or public? l How much (cheap) debt should we have? l What kind of debt should we have? Maturity? Fixed/floating? Currency? Asset-backed? Hybrids, such as convertibles? l How should we manage our financial risks?

29. www.giddy.org

31. Copyright ©2000 Ian H. Giddy Financing Growth Companies 31 giddy.org Ian Giddy NYU Stern School of Business Tel 212-998-0332 Fax 917-463-7629 ian.giddy@nyu.edu http://giddy.org