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How to Write the Equity

Sales Team Memo: The Best


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by M&I - Luis
10 Comments | Investment Banking - The Work Itself
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If you work in an equity capital markets team,
one things 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 shorterthan 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, its still not exactly rocket
science
But hey, you need to do them if youre a junior banker in capital markets.
Well 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 theyre 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 window
is closed or when the markets are facing serious headwinds.
Issuing equity is almost always viewed as a sign that the company is confidentabout 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
theoperations 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 its 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
ones 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. Its 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 companys 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
issuers 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 material 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 its 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 its
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 its 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, youre 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 companys 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 its an example of a fully
marketed process.
The purpose of the sales team memo is to educate the sales team on the company and
the marketing process the company is using, and to get the sales force to sell more
shares.
A sales team that consistently generates higher-than-expected orders will get more
deals and better deals in the future higher commissions beget higher future
commissions.
Sales teams also use these memos to assess potential demand for an equity capital
raise once they know about the company, they can look at comparable firms and see
which institutional investors might be interested.
To do this, they might look at the AUM for an institutional investor, multiply by a small
percentage (5-10% or less) based on the # of comparable firms the institutional investor
has a position in, and then aggregate the results over a region to figure out the best
spots for a road show.
For example, lets say the team determines theres a higher concentration of investors
with holdings in transportation and logistics companies in San Francisco and New York.
If thats the case, they might spend more time in those locations and then pick other
locations based on other investors that might be interested in increasing their sector
exposure in the future even if they arent familiar with the issuing company.
What Goes Into the Sales Team Memo?
The sales team memo can run from 2 to 16 pages in length, and it discusses not only
the company and its story, but also the context surrounding the capital raise including
a capitalization table and how the company will be using the proceeds.
Besides the information on the marketing process, the memo also has to specify the
offering type:
Initial Public Offering (IPO): The first time a company sells capital in the public
markets.
Secondary Offering: Any time a group of shareholders sells its ownership in a
company to another group.
Follow-On Offering: Any time after the IPO, when a company sells capital in the
public markets once again. You can see an example of this kind of equity offering
with this Alliance Oil case study.
Within the memo, the main sections are the Offering Summary, Company
Overview, Investment Highlights, Summary Financials, Summary
Valuation,Sources & Uses, and Risk Factors.
Offering Summary
For a good example of this, take a look at page 1 of the SITI case study above (not an
actual memo, but it has similar information).
Its a short description of the transaction, which includes:
Issuer Name
Ticker / Stock Exchange
Type of Offering: Initial Public Offering, Secondary Offering, or Follow-On Offering
Shares Offered
Deal Size
Over-Allotment Provision: Typically around 15% of the capital raise, the underwriter
effectively sells the stock in advance without owning the stock. If the shares perform
well, the underwriter buys shares from the issuer. If the shares do poorly, the
underwriter buys shares from the market.
Fully Diluted Shares Outstanding: Pre-offering and post-offering figures
Underwriters: What other banks are working on this deal?
Bookrunners: Oversee investor education, the roadshow process, pricing, and
sizing
Co-Managers: Add visibility via research or additional equity sales channels
Use of Proceeds: General corporate purposes? Working capital requirements?
Acquisitions? Debt repayment?
Company Overview
Unlike the company overview prepared in other contexts, a company overview prepared
for a sales team memo is short and to the point:
What the company sells to its customer base
What applications exist for the companys products
Sales composition by business unit, and a sentence about what each business unit
sells to the customer
Recent acquisitions, their transaction values, and what the acquired companies sell
to customers
Financial metrics of the issuer: Sales, EBITDA, Net Income, etc.
Investment Highlights
This ones in pages 3 8 of the case study above: the parts that explain how Citi
positioned SITC to receive a premium valuation (P/E rather than P/BV, highly
integrated platform, network-driven model, intra-Asia market growth, management
team, and cost advantages).
This section answers the big question: Why would an equity investor be interested in
buying shares in the issuer?
It also links the companys appealing characteristics to cash flow generation, and
therefore to an increased valuation:
Any unique characteristic relative to the issuers competitors, such as a product or
geographical strength
Product presence or diversity of customer base
Macroeconomic details that support sales growth
Management teams track record for improving the companys value (e.g., through
sales of business units, or margin improvements)
You see examples of all these points in pages 3 8 of that case study.
Summary Financials
This part gives a quick snapshot of the line items that drive the valuation:
Net Revenue
Gross Profit
EBITDA
Operating Income
Net Income
EPS
Summary Valuation
This part provides a quick overview of the public comps and the key metrics and
multiples:
Stock Price
Equity Value
Enterprise Value
Enterprise Value / Sales
Enterprise Value / EBITDA
Price / Earnings
You can see some of these metrics on page 12 of the case study.
In the context of an equity offering, a forward Price / Earnings (P / E) multiple is typically
used.
However, the bank and the sales force can use any other multiple(s) they want as long
as they can justify the asking price per share.
This is one major difference between an equity sales memo and a CIM for an M&A
deal: youll never see a section on valuation in the CIM.
Thats mostly because the CIM is distributed directly to potential buyers, whereas the
sales force memo is for internal use.
You dont want to negotiate against yourself by proposing a specific valuation upfront
when approaching buyers but you do want the sales team to have a sense of the
valuation youre trying to help the company achieve.
Sources and Uses
This summarizes how the transaction is financed and how the funds will be spent.
For capital raises, these are much simpler than the Sources & Uses schedules seen in
M&A deals and LBO deals, so they exist more for process and less for substance:
Sources = The amount of equity capital raised
Uses = Use of Proceeds (General Corporate, Working Capital, Debt Repayment,
Acquisitions, etc.) + Fees
Risk Factors
You focus on items that may reduce demand for a companys products/services (and
which therefore may reduce its valuation):
Customer preferences and disposable income (consumer retail)
Government contracts and geopolitical conflict (aerospace and defense
manufacturers)
Season and economy (ground transportation, maritime shipping, and airlines)
Housing starts (engineering and construction, home builders & aggregates)
These summaries also include an overview of the issuers equity investor base, or a
shareholder analysis. Here is an example of an equity shareholder analysis.
These are typically tables of institutional equity investors, their current share of the
companys equity prior to the capital raise, and sometimes also these investors shares
in comparable companies.
As you might imagine, the sales team uses this ownership data to help pitch the case
for additional investment in the company.
A current majority investor today might lose a portion of its position relative to other
institutional investors unless they commit additional funds to the companys new round
of funding.
In follow-on offerings, some investment banks also add a price-volume chart to
everything above, covering the past 3 months, past year, or other time frames.
Whither Sales Team Memos?
An equity sales team memo orients the reader, and gives the sales team the major
points it needs to work with institutional investors and generate more demand for the
equity raise.
The process teaches you a lot about how something is sold, and it incorporates
thepositioning that is also used to pitch acquisition ideas to potential buyers.
And these memos are short, to the point, and give you a solid idea of what buy-side
investors look for when making investment decisions.
Plus, anything beats those 150-page pitch books that get revised 87 times before the
final presentation, right?