How to Write the Equity Sales Team Memo

Source: Mergers and Inquisitions
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  How to Write the Equity Sales Team Memo: The Best Part of Working in ECM?   by    M&I - Luis   10 Comments  | Investment Banking - The Work Itself     If you're new here, please click here to get my FREE 58-page investment banking recruiting guide - plus, get weekly updates so that you can break into investment banking. Thanks for visiting! If you work in an equity capital markets team,  one thing’s for certain: you will know how to raise capital like nobody else  can. Writing memos, one might say, will be the ace up your sleeve . The good news is that these “equity sales team memos” are   shorter  than many of the documents you write for M&A deals, like CIMs (confidential information memorandums) and OMs (offering memorandums). The bad news is that while there are some interesting parts, it’s still not exactly rocket science…   But hey, you need to do them if you’re a junior banker in capital markets.    We’ll walk through   why and when  you would write these, how  to set them up and structure them, and the differences for different types of equity offerings in this tutorial: Equity: When to Issue, and How to Issue It  Equity issuances can be divided into  initial public offerings (IPO), secondary offerings , and follow-on offerings  (the company is already public and needs to raise more funding)  –   and they’re all motivated by different factors:      IPOs:  Investors are looking for an exit, and they think an IPO will produce a higher ROI or IRR than an outright sale.    IPOs: Employees or the management team are looking to “cash in their chips” (see: all tech IPOs).    Both IPOs and Follow-On Offerings: Companies need the funds for expansion,working capital, acquisitions, debt repayment, and so on.    Secondary Offerings:   One group sells its shares to another group… so  the first group simply wants an exit. But one factor motivates equity issuances above all else: the direction of equity markets . There are definite “windows,” and no company wants to raise capital when the w indow is closed or when the markets are facing serious headwinds. Issuing equity is almost always viewed as a sign that the company is confident about its future prospects  –  unlike an outright sale via an M&A deal, which could sometimes be interpreted as “giving up” or “yielding to competitive pressure.”   And that highlights the most important difference  between marketing a buy-side or sell-side M&A deal vs. an equity deal: the equity deal is more about the story   behind the company and its future potential, whereas an M&A deal is more focused on the operations    –  or what the company is doing now. Raising Equity: Deciding on an Offering Type    While anyone outside of equity capital markets will tell you that an equity raise is just an equity raise, there are definitely differences   depending on how it’s marketed to the investment community:    Fully Marketed:  This one is publicly marketed over a period of 2-4 days, and it allows the issuing company to reach the broadest investor audience. With a discount to the last sale price, this process offers the upper ceiling of issue size and provides a platform for the company to tell its story and its approach to doing business. This one’s more like a company announcing a   new product (think: lots of fanfare) instead of just opening a new store (think: a new banner).    Accelerated Bookbuild:  This offering is marketed (in limited quantities) over a period that ranges from 24 hours to up to 3 days. With a discount to the pre-announcement trading price, this approach offers flexible access to capital and limits market risk. It’s also much   faster   than the fully marketed method, and is often used when a company needs financing ASAP for an M&A deal that came together at the last minute.    Registered Direct or Confidentially Marketed:  The marketing for this process is quite varied, but the time frame itself can be as short as overnight. It offers the sale of securities to a select group of investors. With a negotiated discount to the current stock price, this approach offers quick access to capital and no market risk.    Rights Offering:   This is a sale of equity securities to the company’s existing investors, allocated according to their subscription rights. Subscription rights give the existing shareholders a chance to buy more shares at a discount to the current market price; the point is to help these investors maintain their share of a company relative to other investors. A rights offering process may be backstopped by “anchor investors,” which are typically some of the most loyal institutional investors (ex: Fidelity, BlackRock, etc.) that participate in almost every capital raise for the company in question.    At-the-Money or At-the-Market Offering:  In this process, the securities are sold for a succession of days or even weeks . On each day the securities are sold, the issuer’s  treasury department or finance team has a call with the hired investment banks to provide a quick due diligence update. The main question asked is: “Is there anything materia l that we should know about?” Other questions include: “Do you want to issue securities today?” and “At what price?” Usually the issue is done at the prevailing market price. The issue size depends on how frequently the stock trades  hands in the market (the faster it trades hands, the more liquid the stock and the bigger the issue size). With this method, the company can raise financing very selectively and avoid all the work required for an intense road show  –   but it’s a bad choice for a company in dire need of immediate financing.    Block Trade or Bought Deal:  The investment bank buys all the shares issued by the client, eliminating any risk related to the financing (since the demand for the security issue is provided entirely by the investment bank). The bank is then responsible for reselling the securities almost immediately, if not at a later date. Compared to the other methods, a block trade or bought deal involves a lower issue price  –   so it’s easier to sell, but it also results in lower proceeds. If the deal is sizable, other investment banks may join the transaction to spread out the financing risk. Which marketing process is the right one to run with? The decision depends on equity performance  and liquidity .  A company with fewer shareholders may benefit from a more focused marketing campaign   in order to ensure that all the shares it’s selling are actually purchased.  On the other hand, a hyped company that appears  to be in great financial shapemay opt for a fully marketed offering to get the maximum price and raise as much capital as possible.  As a banker, you’re not responsible for making the call: you just present the alternatives to your client, show the trade-offs of each one, and let them make the final decision. Once the offering type is set, you need to understand the differences outlined above, plus the company’s story and supporting information so you can write the   sales team memo  successfully. Why Write an Equity Sales Team Memorandum?  To understand each part of the sales team memo and to see the entire process in more detail, take a look at this case study on the Citi-led IPO of SITC, a Chinese shipping and logistics firm. This was an IPO with a complete road show included, so it’s an example of a “fully marketed process.”  
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