The going public process and the IPO decision
Do companies need to issue public shares in order
to survive in the current competitive, global and
innovative economic environment?
Tilburg, December 1, 2014
Youri Jacobi, ANR 944894
Tilburg School of Economics and Management
The going public process and the IPO decision
Do companies need to issue public shares in order to survive in the current competitive,
global and innovative economic environment?
Tilburg University
Master Thesis Finance
Tilburg School of Economics and Management
Department of Finance
Author
Youri Willem Johannes Hubertus Jacobi
ANR
944894
Supervisor
Drs. J.H.G. Gieskens AC CCM QT
Tilburg, December 1, 2014
1
Preface
Almost every day, companies from all over the world decide to have an initial public offering.
Inspired by this phenomenon, I decided to analyze the decision and the need of the going
public process. This master thesis has been written with regards to the Master Finance at
Tilburg University and has been conducted with full dedication.
The analysis in this thesis would not have been as comprehensively without the support of
several people. First of all, I would like to thank my supervisor Mr. Gieskens for his helpful
feedback to this master thesis. His extensive knowledge and compassion have assisted in
realizing the completion of this thesis. Besides, I would like to thank the following people for
taking the time to getting interviewed. Gaining insight in their companies provided useful
information for the analysis of the IPO decision.
Willem van der Vorm, chief executive officer of Novisource
Dwight van de Walle, senior manager of EKK Eagle
Jonas Wintermans, chief operating officer of Additive Industries
Wishing you a pleasant and informative reading,
Youri Jacobi
Tilburg, December 2014
2
Abstract
Globally, there are many companies operating in a competitive and innovative economic
environment. These companies try to survive by offering competitive advantages over their
competitors. Companies can differentiate by offering low-cost, high-quality or innovative
products. However, R&D and company expansion will incur additional costs. One way to
raise equity is by having an IPO. When analyzing the Global 500, it seems that 81% of the top
hundred companies decided to go public. Only companies that are owned by the state and
several oil and gas companies did not have an IPO.
This qualitative research investigates the going public process and the IPO decision. The
advantages, disadvantages and timing of an IPO will be analyzed. To investigate whether a
company has to issue public shares in order to survive in the current competitive, global and
innovative economic environment, the performance of several companies that went public
will be contrasted to comparable companies, industrial averages, or to their historical levels
before they had an IPO. To get a full analysis of the advantages of an IPO, not only will
several companies that recently had an IPO be analyzed for a short-term overview, but also
companies that had an IPO a few decades ago will be analyzed for a long-term overview.
Besides, the process of a public company that decided to go private will be analyzed, to
investigate whether having an IPO can be disadvantageous. Also, the view of a young
innovate company on IPOs will be described to analyze whether it is profitable for the firm to
issue shares in the near future.
The results show that for most companies it is beneficial to have an IPO. An IPO offers
several benefits such as raising equity and publicity. However, conflict of interests might arise
between the long-term view of directors and the short-term shareholders. Besides, innovate
companies will have to disclose information that might be profitable for competitors.
Nonetheless, the advantages of going public often outweigh the disadvantages, and, when
shares are being issued during the right time, an IPO might indeed increase company
performance, increase its growth level, and may help companies to survive in the current
competitive, global and innovative economic environment.
3
Contents
Page
Preface
2
Abstract
3
List of figures
6
List of tables
8
1. Introduction
10
1.1 Background
10
1.2 Setting
11
1.3 Research questions
12
1.4 Outline
12
2. Literature Review
14
2.1 Benefits of an IPO
14
2.2 Costs of going public
16
2.3 Timing of an IPO
18
2.4 The advantages of privatization
19
2.5 Conclusion
21
3. Methodology and academic relevance
22
3.1 Relevance
22
3.2 Procedure
22
4. Analysis information technology sector
24
4.1 Overview of the IT companies
24
4.2 Ratio Analysis
29
4.2.1 Liquidity ratios
30
4.2.2 Activity ratios
31
4.2.3 Financial-leverage ratios
33
4.2.4 Profitability ratios
34
4.2.5 Market-value ratios
36
4.2.6 Overall evaluation
38
4.3 The privatization of Dell
5. In-depth research of several companies
40
42
5.1 Going public to raise equity: Tesla motors
42
5.2 The decision of a recent IPO: Novisource
46
5.3 Long-term consequences of an IPO: Eagle Industry Co., Ltd
49
4
5.4 A possible IPO in the near future: Additive industries
6. Conclusion and recommendations future research
52
54
6.1 Conclusion
54
6.2 Theoretical implications
56
6.3 Managerial implications
57
6.4 Limitations
58
6.5 Future research
58
References
59
Glossary
64
Definitions & formulas
65
Appendix
68
I: Ratio analysis of the IT companies
68
II: Tesla Motors’ financial data
73
III: Graphical visualization of Tesla Motors’ performance
75
IV: General information about the conducted interviews
77
V: Novisource’s financial data
78
VI: Graphical visualization of Novisource’s performance
80
VII: Eagle Industry financial data
82
VIII: Graphical visualization of Eagle Industry’s performance
85
5
List of figures
Nr.
Name
Page
3.1
The conceptual model
23
4.1
Stock prices of Apple
25
4.2
Stock prices of Samsung
25
4.3
Stock prices of Hewlett-Packard
26
4.4
Stock prices of Dell
26
4.5
Stock prices of Acer
27
4.6
Market value of the IT companies
28
4.7
Net income of the IT companies
28
5.1
Stock prices of Tesla Motors
42
5.2
Stock prices of Novisource
46
5.3
Stock prices of Eagle Industry
49
I.1
Current ratio of the IT companies
68
I.2
Quick ratio of the IT companies
68
I.3
Total asset turnover of the IT companies
69
I.4
Inventory turnover of the IT companies
69
I.5
Debt to equity ratio of the IT companies
70
I.6
Interest coverage ratio of the IT companies
70
I.7
Net margin of the IT companies
71
I.8
Return on equity of the IT companies
71
I.9
Return on assets of the IT companies
71
I.10
P/E ratio of the IT companies
72
I.11
P/B ratio of the IT companies
72
I.12
Dividend yield of the IT companies
72
III.1
Liquidity ratios of Tesla Motors
75
III.2
Activity ratios of Tesla Motors
75
III.3
Financial leverage ratios of Tesla Motors
75
III.4
Profitability ratios of Tesla Motors
76
III.5
Market-value ratios of Tesla Motors
76
III.6
Yearly results of Tesla Motors
76
VI.1
Liquidity ratios of Novisource
80
6
VI.2
Activity ratios of Novisource
80
VI.3
Financial leverage ratios of Novisource
80
VI.4
Profitability ratios of Novisource
81
VI.5
Yearly results of Novisource
81
VIII.1
Liquidity ratios of Eagle Industry
85
VIII.2
Activity ratios of Eagle Industry
85
VIII.3
Financial leverage ratios of Eagle Industry
85
VIII.4
Profitability ratios of Eagle Industry
86
VIII.5
Market-value ratios of Eagle Industry
86
VIII.6
Yearly results of Eagle Industry
86
7
List of tables
Nr.
Name
Page
2.1
Benefits of an IPO
14
2.2
Costs of an IPO
16
2.3
The advantages of going private
19
4.1
Short overview of the IT companies
24
4.2
Current ratio of the IT companies
30
4.3
Quick ratio of the IT companies
31
4.4
Total asset turnover of the IT companies
32
4.5
Inventory turnover of the IT companies
32
4.6
Debt to equity of the IT companies
33
4.7
Interest coverage ratio of the IT companies
34
4.8
Net margin of the IT companies
35
4.9
Return on equity of the IT companies
35
4.10
Return on assets of the IT companies
36
4.11
P/E ratio of the IT companies
37
4.12
Price-to-book ratio per share of the IT companies
37
4.13
Dividend yield of the IT companies
37
5.1
Tesla Motors’ performance
43
5.2
Tesla Motors’ financial ratios
44
5.3
Novisource’s performance
47
5.4
Novisource’s financial ratios
48
5.5
Eagle Industry’s performance
50
5.6
Eagle Industry’s financial ratios
50
6.1
Main reasons of an IPO in the current competitive, global and
innovative economic environment.
6.2
54
Main disadvantages for a company to take into consideration when
having an IPO in the current competitive, global and innovative
economic environment.
55
II.1
Tesla Motors’ consolidated statement of operations
73
II.2
Tesla Motors’ consolidated balance sheet
74
V.1
Novisource’s statement of income statement
78
8
V.2
Novisource’s balance sheet
79
VII.1
Eagle Industry’s balance sheet
82
VII.2
Eagle Industry’s income statement
84
9
1. Introduction
This section provides further details about the background and the setting of this research.
Besides, the main research question and four sub-questions have been denoted. Finally, the
outline of this study has provided.
1.1 Background
The economic environment is changing rapidly. New firms arise, where firms that have been
in existence for many decennia go bankrupt. In order to survive, companies need to be
flexible. They need to innovate continuously and stay ahead of their competitors. Companies
need to grow to gain market share. However, since most companies are not able to finance
new investments by solely using their yearly profits, they need to gain capital from external
investors in order to be able to make investments. Bill Gates, co-founder of Microsoft,
recently explained that the current economic environment offers the best opportunities in
history for companies to innovate, since there are many ways to raise external capital and to
finance innovative projects (Gates 2014). One way to gain capital is by issuing public shares
by an initial public offering (IPO).
An IPO is the first time that the stocks of a company are being sold to the general public. The
shares will be traded on a stock market where they can be bought by public investors. An IPO
has a large influence to the legal and economic structure of a company. Since the shareholders
are the owners of the public firm, the management will have the responsibility to manage the
firm in the best interest of the shareholders (Draho 2004). However, this can cause agency
problems, since the managers might tend to maximize their own benefits. Another
consequence of trading on the stock market is the obligation to make all the information of the
firm, regarding its financial health and operations, public. Competitors might take advantage
of this information.
IPOs are an important phenomenon in the economic environment. During the first nine
months of 2014, global IPO activity counted up to 851 IPOs which raised $186,6 billion. This
has been a 49% increase in volume and a 94% increase in proceeds compared to the same
period in 2013. The United States lead in terms of capital raised by IPOs. NASDAQ is the
world’s busiest exchange by number of new listings and accounts for 16% of the global total
(EY 2014).
10
On 19 September 2014, the Chinese company Alibaba had its IPO on the NYSE. The
company raised $25 billion which made its IPO the largest in history (Picker and Chen 2014).
The Fortune Global 500 shows a list of the five hundred largest companies ranked by its total
revenues for their respective fiscal years. A remarkable fact is that 81% of the top hundred
companies are listed on a stock exchange. The 19 companies that are not listed are either oil
and gas companies, or are owned for more than 50% by the country’s government (Fortune,
2014). It seems that having an IPO is very beneficial when companies grow in size, where the
benefits of an IPO outweigh the disadvantages.
1.2. Setting
Going public offers many benefits for firms, like the raise of equity and brand awareness.
However, an IPO also comes with direct and indirect costs, which mainly affect small
companies. Therefore, it may also be beneficial for some companies to stay private. In order
to survive in the competitive environment, companies need to keep growing and keep
innovating. This study is related to the finance literature that provides theoretical information
about the advantages and costs of an IPO.
Geddes (2003) and Draho (2004) describe the IPO process and give various reasons for going
public. Ritter (1987) has described the costs of going public. Besides, there have been several
studies to examine the performance of initial public offerings. Ritter and Welch (2002)
analyzed the returns and performance of companies that had an IPO between 1980 and 2001
in the United States. Zamanian, Khodaparati, and Mirbagherijam (2013) investigated the
short-run and long-run returns of both private and public companies that had an IPO on the
Tehran Stock Exchange market. Trivedi (2013) investigated the short and long term return of
IPOs listed on the National Stock Exchange between 2007 and 2011.
During the last decades, most large companies decided to go public and are now listed on a
stock exchange. Therefore, it seems that the going public process offers more benefits than
disadvantages in the current competitive, global and innovative environment. However, the
question arises whether it could be beneficial for some companies to stay private.
11
1.3 Research Questions
This study examines the IPO decision in an international context. In this thesis, there will be
an analysis whether it is necessary for companies to have an IPO in order to survive the fierce
competition. To investigate the going public decision and the IPO process, the main question
of this thesis has been described as the following sentence:
Should companies issue public shares in order to survive in the current competitive,
global and innovative economic environment?
Since the main question is too broad to be answered straight away, several sub-questions will
be answered in this thesis:
(i)
Which advantages are the main reasons for a global and innovative company, which is
operating in a competitive economic environment, to decide whether it should have an
IPO?
(ii) What are the main disadvantages for a company to take into consideration when
having an IPO in the current competitive, global and innovative economic
environment and why would a company decide to go private again?
(iii) Is there a best timing to have an IPO?
(iv) Do companies that are publicly listed outperform the industry averages and does the
performance of a company increase after an IPO?
1.4 Outline
The structure of the thesis is as follows:
First, a summary of the benefits and costs of having an IPO, which have been described in the
academic literature, will be provided. Besides, the timing of an IPO and reasons for going
private again will be described.
Second, the methodology and academic relevance of this thesis will be expressed.
Third, the financial performance of five companies in the IT industry will be analyzed by
using ratio analysis. These companies are very innovative and have to compete in a fierce
competitive environment. One of these companies, Dell, decided to go private after being
listed for twenty-five years. The performance of the companies will be compared to each
12
other and to the average industry ratios and there will be an in-depth research to the
motivation of Dell to go private.
Fourth, four particular companies will be thoroughly examined. Several managers have been
interviewed about their view in having an IPO. It will be illustrated whether the firms had
distinct reasons to go public and whether their performance has increased since they have had
their IPO.
Finally, the study ends with conclusions about the studies and recommendations for further
research.
13
2. Literature Review
In this section, the reasoning and timing of an initial public offering will be described. An
overview of the benefits, costs and the timing of initial public offerings that have been
discussed by existing literature will be provided.
An initial public offering (IPO) is a process by which companies go from private to public. It
is the first sale of a company’s shares to the public and the listing of the shares on a stock
exchange. In the UK, IPOs are often referred to as flotations.
2.1 Benefits of an IPO
Traditional IPO theories show several financial benefits for companies that decide to go
public. There are two main reasons for the going public decision, the primary and secondary
offering, which have been described by Geddes (2003). Besides, an IPO may offer several
other financial and non-financial advantages.
Advantages of an IPO
1)
Raise equity for company’s use (primary offering):
a) raise cash to expand the business of the company
b) reduce debt levels of the firm
2)
Raise funds for existing shareholders (secondary offering):
a) provide an exit route
b) listing gain
3)
Other financial advantages:
a) taxation and valuation purposes
b) borrowing becomes cheaper
c) minimize agency costs and maximize firm value
d) providing incentives to management and employees
4)
Non-financial advantages:
a) increase in publicity
b) competitive benefits
c) personal satisfaction
Table 2.1: Benefits of an IPO
14
The primary offering is the opportunity to raise equity capital for the firm, which can be used
to expand the business of the company or to reduce its debt levels. A company can only
survive in a competitive environment when it satisfies its customers. Innovation is therefore
very important. However, a company needs money for its manufacturing and for R&D
spending which it might not have. This capital can be raised by having an IPO. The company
also creates a valuable currency by issuing shares. A company’s stock can be used to
compensate employees or to make acquisitions (Draho 2004).
The secondary offering is the ability to raise funds for the existing shareholders. When having
an IPO, founders and initial shareholders are able to diversify their holdings, since they can
convert some of their wealth into cash at a future date (Ritter and Welch 2002). By issuing
shares, it will be easier to cash out. Therefore, taking a company public might offer managers
an exit route (Reuvid 2003). A recent study, that analyses firms that decided to go public
between 2007 and 2011, shows that most firms are underpriced during an IPO relative to what
the market is willing to pay as soon as they start trading. On average, investors are therefore
able to get a listing gain on short term (Trivedi 2013).
An IPO may offer several other financial advantages. An IPO may be useful to value the
company for taxation and for estate valuation purposes (Reuvid, 2003). Besides, having an
IPO enables companies to borrow more cheaply. Around the IPO date, the interest rate on a
company’s short-term credit falls. Therefore, the number of banks that are willing to lend
money to the company increases (Pagano, Panetta, and Zingales 1998).
The outside investors, who are more diversified, are willing to pay a higher price for the risky
cash flows of the company than the entrepreneur’s own valuation of these cash flows
(Benninga, Helmantel, and Sarig 2005). Firms that decide to go public establish efficient
governance structures which minimize their agency costs and thereby maximize their firm
value (Daines and Klausner, 2001). By going public, companies subject themselves to get
monitored by outsiders, which might enhance the value of the company. Public trading of a
firm’s stocks influences managerial incentives in two ways. First, a poorly performing public
firm may become a target for a takeover; this threat will prevent managerial misbehavior.
Second, public trading provides managerial incentives according to the continuous
performance of the company’s share price (Holmström and Tirole 1993). Also, an IPO might
help to attract and incentivize staff, since their share options are more valuable if the shares
are quoted (Reuvid 2003).
15
A non-financial benefit is the increase in publicity. However, this reason only plays a minor
role for most companies (Ritter and Welch 2002).
Other theories illustrate competitive benefits for having an IPO. When going public, firms are
able to grab market share from its private competitors. Even firms that have enough internal
capital available may decide to go public, driven by the possibility that their competitors go
public (Chemmanur and He 2011). Public trading itself can add value to a firm, since it may
give customers, investors, creditors and suppliers more faith in the firm. Some managers
might have a passion for their company and business success can be related to their personal
goal. It is a vital part of their life and tied up to their self-esteem and sense of worth. Taking a
company public might therefore also express gratitude and personal satisfaction (Reuvid
2003).
2.2 Costs of going public
There are also costs of having an IPO. It is possible to make a distinction between direct costs
and indirect costs, which have been described by Ritter (1987). Besides, the going public
process might cause some other disadvantages.
Disadvantages of an IPO
1)
Direct costs, such as registration fees, investment banking costs and legal expense.
2)
Indirect costs, which are associated with the underpricing of the company’s shares
3)
Other disadvantages:
a) Underperformance of the stocks of the company up to five years after the IPO.
b) conflict of interests
c) disclosure of financial and business information
Table 2.2: Costs of an IPO
Direct costs of the issue consist mainly of registration fees, investment banking costs, legal
expenses, the cost of conducting a marketing road show, accountancy and audit fees. When
having an IPO, fees have to be paid to lawyers and auditors. Besides, there are also less
quantifiable costs in terms of management time. Many of these direct costs are relatively
fixed, so there are considerable economies of scale. Having an IPO is therefore relatively
more costly for small firms. In order to have an IPO and go public, companies may decide to
conduct a marketing road show, which also inflicts opportunity costs of management time
(Ritter 1987).
16
Indirect costs are associated with the underpricing of a company’s shares. Investors are less
informed than managers about the true value of a company, so there is information
asymmetry. If IPOs would be priced, on average, with zero discount, risk-averse investors
would prefer to buy shares in the after-market. To make sure investors gain enough money,
stock prices will be underpriced at an IPO. So the initial discount on IPOs might be
interpreted as a return to the investors for taking risk, but the initial owners essentially ‘leave
money on the table’, since they could have sold their shares at a higher price if they had kept
them and would have sold them in the after-market (Jenkinson and Ljungqvist 2001).
When analyzing the long-run performance of companies that recently went public, it appears
that their shares underperform relative to other quoted companies up to five years after the
initial flotation. These underperformances might be explained by over-optimism about the
future prospects of the companies. Besides, there might be a conflict of interest between the
intermediaries. If the investment bank, which acts as a sponsor for the company, also leads as
the underwriter, there might be an incentive to put a low price on the shares to reduce the
underwriting risk (Jenkinson and Ljungqvist 2001).
The IPO process requires companies to disclose financial and business information. The
disclosure rules might be more disadvantageous for innovative and research-oriented
businesses. These firms relatively invest a lot of capital in research and development and may
possess innovative business information which might have not yet been available to their
competitors. Pioneer firms may be advantageous in the economic environment. By being
innovative and by establishing brand awareness, they might have competitive advantage over
their rivals. However, they may face new-entry risk: the risk to encourage new entry by
revealing valuable information about investment and financing decisions (Maksimovic and
Pichler 2001). When an innovative company decides to have an IPO and has to disclose
important business information, it might lose some of its competitive advantage.
17
2.3 Timing of an IPO
All the suggested reasons for having an IPO exhibit a tradeoff between the benefits of going
public and the associated costs. When companies want to exploit existing ideas, it is optimal
to have an IPO. The prices of publicly traded stocks immediately react to good news, which
provides insiders with incentives to choose conventional projects. Private firms take more risk
than public firms by investing more capital in new products and technologies. When
companies want to explore new ideas, it is optimal to stay private, since private firms are less
transparent to outside investors than public firms. Therefore, private ownership creates an
incentive for companies to innovate, while public ownership discourages innovation.
However, it might be beneficial for a firm to stay private early in its life cycle, but when it
grows in size, it becomes optimal to go public (Ferreira, Manso, and Silva 2014).
The decision to remain private today does not eliminate the possibility to have an IPO at some
future date. Besides, companies still have an opportunity to go private again once they are
listed. Therefore, the IPO decision entails more than just a straightforward comparison
between immediate benefits and costs (Benninga et al. 2005).
It seems that initial public offerings of equity occur in waves. These waves are called ‘hot
issue markets’ and are often disproportionally populated by companies within the same
industry. One possible reason for these waves is the likelihood that firms face better
investment opportunities during some periods, so the companies decide to go public to raise
capital for these investments. However, it seems that IPOs appear in clusters during periods in
which investors place relatively high values on the companies (Loughran et al, 1994).
Some theories rely on the imperfectness of markets, in which firms decide to go public when
their shares are overvalued. Other theories try to explain these IPO waves by changes over
time in market conditions. The IPO process is complex and involves significant uncertainty.
However, there is a pattern visible: IPOs seem to happen in waves of capital needs and
technological shocks (Boeh and Dunbar 2014).
Companies that decide to go public during an IPO wave will have a larger cash holding than
companies that decide to go public off the wave (Chemmanur and He 2011). Entrepreneurs
issue shares and go public when the cash flows of their companies are relatively high. During
these periods stock prices are also high, since these are cross-sectionally correlated,
particularly within industries (Benninga et al. 2005).
18
On a macro-economic level, it is possible to see patterns of hot IPO markets during the 1980s
and late 1990s, in which there was strong economic growth and increasingly stock market
valuations. Cold IPO markets were visible during the 1970s, early 1990s and early 21st
century, in which there were periods of recession and weak economic growth. These patterns
may be explained by the fact that investors are more willing to fund risky and yet unproven
companies when the economic prospects are good. Therefore, the cost of equity will be lower
and dilution is minimized, so companies decide to go public during these periods (Draho
2004).
To conclude, there are many explanations for the occurrence of IPO waves. Rydqvist and
Högholm (1995) provide evidence that the European IPO boom during the 19080s was
created by a rise of share price and by deregulation. Habib and Ljungqvist (2001) describe
that IPOs are changing over time and are in line with stock market conditions, the business
cycle, and a gradual increase in competitiveness of the underwriter market.
2.4 The advantages of privatization
Listed firms have to opportunity to go private again. One example is Dell, which went private
after a period of 25 years. An in-depth research to the motivation of Dell to go private and
whether this has been a wise decision will be provided in section 4. The going private process
can happen directly, in a management buyout or leveraged buyout; or indirectly, by being
purchased by another company. Clearly, when the conditions under which the corporation
operates changes, the incentives to stay private or to go public can also change (Benninga et
al. 2005).
Benefits of going private
1)
Reduce stock-holders related agency costs
2)
Tax benefits
3)
Reduction of direct and indirect costs of being listed
4)
Productive gains
Table 2.3: The advantages of going private
19
There are several reasons why a company would decide to go private again. The company can
reduce its stock-holders related agency costs. According the incentive realignment hypothesis,
managers will have increased incentives due to an increased ownership stake. Following the
free cash flow hypothesis, the high leverage stops the managers from empire building, in
which the firm grows beyond its optimal size and at the expense of value creation. A
leveraged buyout also offers tax benefits and a reduction of the direct and indirect costs of
maintaining a listing. Besides, going private may purpose to gain from undervaluation and as
a defense mechanism for hostile takeovers (Renneboog and Simons 2005).
The literature examining the LBO deals during the 1980s focused on the importance of
reorganization benefits. These studies described the buyout deals as a mechanism for reducing
agency problems associated with free cash flow. When analyzing a dataset of two thousand
firms that decided to go private between 1990 and 2007, it is remarkable that mainly young
firms go private, often having the same management that made the crucial restructuring
decision to have an IPO. There is a trade-off between the benefits of public ownership
together with the costs of maintaining their listing, including listing fees and disclosure costs.
The main reason to go private is the failure to reap the full benefits of public ownership; the
companies failed to attract a critical mass of financial visibility and investor interest. This
financial visibility is particularly coveted by young, less well-known companies when they
decided to have an IPO. Besides, companies tend to go private when they have low stock
turnover, analyst coverage growth is declining and when institutional ownership is falling.
Public firms tend to have a cost-benefit trade-off whether to go private again (Mehran and
Peristiani 2010).
Going private can generate productive gains through public ownership expenses, such as
savings of registration and through increased incentives for corporate decision makers under
private ownership. Commonly, going-private transactions are labeled minority freezeouts,
since the management already owns a majority of the outstanding stock. Minority
shareholders might face unfairness, since the management is both purchaser of the public
shares but also agent for the sellers. However, considering test results in which seventy-two
Amex and NYSE-listed firms were examined between 1973-80, minority shareholders might
also gain from a privatization, since the U.S. legal system provides minority shareholders with
certain rights to capture productive gains from going private. On average, the wealth of public
20
stockholders increased by 22.27 percent during the two days surrounding the initial proposal
to go private (DeAngelo, DeAngelo, and Rice 1984).
2.5 Conclusion
Having an IPO offers several benefits, like the infusion of equity, increase in publicity and
gains for founders and shareholders. However, being listed comes with direct and indirect
costs which might be relative larger for young companies and SMEs. The optimal timing of
an IPO depends on the several market conditions. Therefore, advantages and the need for
having an IPO can vary between various companies and various industries.
Mainly for small, young and innovative companies it might be disadvantageous to go public,
since it will have to disclose information, which will be visible by its competitors. Besides,
the costs of having an IPO are relatively more expensive for them. However, various
innovative companies made the decision to go public and have proved to be successful. Firms
tend to raise money in both bull and bear markets. However, investor interest will be greater
when share prices are increasing and when confidence is high. To gain better knowledge in
the advantages, disadvantages and the best timing of an IPO in the real world, useful
information can be acquired by analyzing practical examples of IPO decision, which will be
described in section 4 and 5.
21
3. Methodology and academic relevance
3.1. Relevance
During the last five years, many innovative companies like Tesla Motors and Novisource
decided to have an IPO. Although many literature has been written about the benefits and
costs of going public and about the hot and cold IPO markets during the 1970’s-2000’s, not
much has been written about IPOs that have taken place after the financial crisis of 2008.
Analyzing several innovative companies that recently decided to go public or that might have
an IPO in the near future will give a short-term overview of the decision to have an IPO in the
recent competitive, innovative economic environment.
The empirical results will be compared to the theoretical implications. Companies that still
doubt whether they should go public in this current competitive, global and innovative
environment can use these results to evaluate whether it is more profitable for them to stay
private or to have an IPO. Other researches might use these data as a framework to research
the IPO process in a current competitive, global, but a traditional environment.
3.2 Procedure
The subject of this thesis is being investigated by reviewing existing literature and by
analyzing several practical examples. The advantages, disadvantages and timing of having an
IPO have been described in lecture books and academic journals. In this thesis, the pros and
cons of having an IPO , that have been illustrated by the theoretical knowledge of the existing
literature in section 2, will be contrasted to several practical examples of companies that had
an IPO, which will be described in section 5.
There have also been several companies that decided to go private again during the last five
years. Dell is a good example of a company that is operating in a very innovative and
competitive environment. Dell went private one year ago after being listed for 25 years. By
analyzing Dell and four of its main competitors in section 4, it is possible to get insight in the
decision of Dell and the advantages for other companies to go private.
Ratio analysis will also be used to evaluate the financial performance of the companies in this
thesis. A comprehensive explanation about ratio analysis will be provided in section 4 and
will be further used to evaluate the financial performance of the companies in section 5.
22
To incorporate novel empirical components in order to gain a deeper insight in the going
public process of companies, several managers of the companies that will be evaluated in
section 5 have been interviewed. See appendix IV for general information about the
conducted interviews. These managers can provide specific information and knowledge about
their decision to have an IPO. They have been interviewed about the company’s financial
performance, the competitive advantages, short- and long term goals and the possibility of the
company to go private.
Pre-IPO decision
Trade-off between
the advantages and
disadvantages of an
IPO.
Timing of an IPO
The actual IPO
Initial
Public
Offering
IPO evaluation
Analysis of:
- financial performance
by using ratio analysis
- Competitive
advantages
- Short- and longterm goals
- Trade-off between the
advantages and
disadvantages of
delisting
Post-IPO decision
Stay listed on
public exchange
Go private again
Figure 3.1: The conceptual model
23
4. Analysis information technology sector
The information technology sector is very useful to analyze in this thesis, since the companies
are very innovative and are operating in a global economic environment. Besides, the
computer technology sector suffers fierce competition.
According to the Boston Consulting Group, Apple has been the most innovative company in
the world for nine years in a row. Samsung is currently ranked third, HP eleventh and Dell
twentieth in the list of most innovative companies in the world. Acer did not reach the top
fifty (Wagner et al, 2014). All five companies have been economical successful and have
grown to become multinational corporations (MNCs). Besides, they all have been publicly
listed for over twenty years. Therefore, a lot of long-term financial information has been
available about these companies.
4.1 Overview of the IT companies
Founded
IPO
Stock Exchange
Apple
1976
1980
NASDAQ
Samsung
1969
1975
Korea Stock Exchange
HP
1939
1967
NYSE
Dell
1984
1988
Private (previously on NASDAQ)
Acer
1976
1988
Taiwan Stock Exchange
Table 4.1: Short overview of the IT companies
Since the beginning of the digital revolution and the start of the information age in the late
1970s, information technology companies have developed and expanded enormously.
Technology companies need to innovate continuously in order to keep their market share.
Brand loyalty might not always be very high to these companies, since its consumers can
easily switch to competitors when a company lacks innovative products or when a product is
overpriced. The stock prices will give a short overview of the performance of these
companies. The price represents the official closing price of the stocks.
24
Apple Inc. is a main example of a company that keeps innovating its products to stay ahead of
its competitors. Apple develops and produces consumer electronics and computer software.
The company was founded on April 1, 1976 and went public on December 12, 1980.
Stock price of Apple
140
120
100
80
60
40
20
0
Figure 4.1: Stock prices of Apple (in USD)
Samsung Electronics Co., Ltd develops and produces consumer electronic products. It
operates in three business divisions: the consumer electronics division, the device solutions
division, and the information technology & mobile communications division.
Stock price of Samsung
2000000
1500000
1000000
500000
0
Figure 4.2: Stock prices of Samsung (in KRW)
25
Hewlett-Packard Company (HP) provides products, technologies, software and services to
individual consumers, small- and medium sized businesses and large enterprises. The
company offers personal computing and other access devices.
Stock price of Hewlett-Packard
60
50
40
30
20
10
0
Figure 4.3: Stock prices of Hewlett-Packard (in USD)
Dell Inc. is an American computer technology company. It develops, manufactures and sells
computers and related services. Dell Inc. is a large multinational, employing more than
100.000 people worldwide. Dell had its initial public offering on June 22, 1988, but decided
to go private again on October 28, 2013.
Stock price of Dell
50
40
30
20
10
0
Figure 4.4: Stock prices of Dell (in USD)
26
Acer Incorporated is a Taiwan-based company, which mainly focuses on the research,
development, and production of personal computers and notebook computers. It also provides
e-business services to consumers, companies and governments.
Stock price of Acer
120
100
80
60
40
20
0
Figure 4.5: Stock prices of Acer (in TWD)
The going private decision and the recent performance of Dell will be analyzed to gain an
overview whether it was a good decision for Dell to go private. Where Apple might be the
most famous example of a very innovative company, it has to compete continuously against
the other large technology companies. Therefore, the performance of Apple and Dell will be
benchmarked to the performances of Samsung, Acer and HP.
Where the stockprices of Apple and Samsung have been moving in an upward trend over the
past 10 years, the stockprices of Dell have been slightly decreasing until its privatisation. The
stockprice of HP and Acer have been very volatile. Where the stockprice of HP has been
increasing during the last two years, the stockprice of Acer has been decreasing since 2010.
Next figure present the market value of the companies. The market value is the share price
multiplied by the number of ordinary shares in issue. This figure gives a good overview of
their value relative to their competitors. Apple shows the largest market value. Acer’s market
value is very low compared to the rest and is therefore barely visisble in the figure.
27
Market Value
700000
600000
500000
Apple
400000
HP
300000
Dell
200000
Samsung
100000
Acer
0
Figure 4.6: Market value of the IT companies (in USD)
Analyzing the increase or decline of a company’s net income during the last ten years also
gives a good overview of the company’s performance.
Net Income
50
40
30
20
10
0
-102004
-20
Apple
HP
Dell
Samsung
2005
2006
2007
2008
2009
2010
2011
2012
2013
Acer
Figure 4.7: Net income of the IT companies (in billion USD)
The evoluation of the net income corresponds to the graphics of the stockprices and of the
market values. The same patern is visible. The performance of Apple and Samsung is in an
upward slope. Dell’s net income decreased during the last year, while Acer even reported a
negative net income during the last three years and HP in 2012.
HP had a fiscal 2012 net loss of $12.65 billion. HP grossly overpaid for an acquisition. The
company paid $11 billion to purchase the Britisch software firm Autonomy, which was more
than 11 times Autonomy’s $931 million of revenue for the year ended June 30, 2011 (Weil
2012).
28
4.2 Ratio Analysis
In the current competitive world, with the fast growth of commercial activities, it is necessary
to evaluate companies based on their financial performance. These financial evaluations
encourage companies to obtain a higher level of performance and to create a competitive
environment by showing their current financial position in relation to other companies. These
evaluations are also useful in analysing and improving weaknesses of a company. Evaluating
the performance of companies is an important guideline for future decision, while concerning
investment, development, control and supervision (Tehrani, Mehragan, and Golkani 2012).
The Financial Analysis Model of Small and Medium Enterprises (FAMOS) model can
forecast the balance structure of a company for the coming years. Estimates can be produced
between various sectors and at the level of micro-sized, small, medium-sized and large
companies. Besides, the model can be used to generate financial indicators, from which it is
possible to derive the financial position of companies instantly. The financial analysis covers
the past, but can also be used to estimate future benefits. The financial indicators serve as an
initial step of the financial analysis and entail an alalysis of financial ratios. These indicators
can be calculated by using the FAMOS model in combination with other Pantheia/EIM
models, such as the PRISMA and KTO (Span, Verhoeven, and Ruis 2013).
By evaluating the financial ratios it is possible to evaluate the financial performance of the
companies. Ratios are simply relationships between two financial calculations. The ratios are
essentially not very meaningful as standalone numbers, but they are meaningful when
compared to a benchmark, such as historical data or firms in the same industry (Bodie, Kane,
and Marcus 2011).
There are five categories of financial ratios, according to the the aspect of the business which
the ratio measures: liquidity ratios, activity ratios, financial-leverage ratios, profitability ratios
and market-value ratios (Span et al. 2013). These ratios will be further analyzed in paragraph
4.2.1 till 4.2.5. To differentiate current performance with data from before the financial crisis,
financial information about the recent ten years has been provided. Corresponding graphics to
the tables in this chapters are presented in appendix I. The financial indicatiors of Apple,
Hewlett-Packard, Dell, Samsung and Acer have been downloaded from Datastream. Industrial
averages have been derived from Reuters (2014).
29
4.2.1 Liquidity ratios
Liquidity ratios explain whether a company can meet its obligations in the short-run. Higher
liquidity levels indicate that it’s easy for companies to service its current obligations. Broadly,
two ratios are adopted to assess liquidity: the current ratio and the quick ratio (Bouma 1980).
Investors often look for companies whose liquidity ratios meet or exceed industrial
advantages. An initial public offering provides greater liquidity for the company’s publicly
traded stock (Colo 2014).
a) Current ratio
The current ratio consists of current assets divided by current liabilities. A low current ratio
would imply possible insolvency problems. According to the general benchmark, the current
ratio of a company should exceed 1.3 (Gieskens 2011).
However, a very high current ratio might imply that management is not investing idle assets
productively (RMA 2011). The current ratio can be calculated by dividing the total current
assets by the short-term liabilities. The industrial average within the IT industry amounts 1.5.
Current ratio
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Apple
2.63
2.96
2.24
2.36
2.46
2.74
2.01
1.61
1.50
1.68
HP
1.50
1.38
1.35
1.21
0.98
1.22
1.10
1.01
1.09
1.11
Dell
1.20
1.11
1.12
1.07
1.36
1.28
1.49
1.34
1.19
-
Samsung
1.23
1.34
1.37
1.41
1.52
1.65
1.54
1.61
1.86
2.16
Acer
1.42
1.36
1.47
1.34
1.25
1.29
1.39
1.34
1.19
1.29
Table 4.2: Current ratio of the IT companies
b) Quick ratio
Since certain current assets, such as inventories, might be difficult to convert into cash, we
may want to modify the current ratio. The quick ratio subtracts the inventories from the
current assets before dividing it by the current liabilities. The quick ratio is also being called
the acid test ratio. According to the general benchmark, the current ratio of a company should
exceed 1 (Gieskens 2011). The industrial average within the IT industry amounts 1.22.
30
Quick ratio
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Apple
2.43
2.75
2.00
2.09
2.07
2.48
1.72
1.37
1.24
1.41
HP
1.08
0.99
0.98
0.84
0.67
0.91
0.78
0.69
0.80
0.80
Dell
1.04
0.94
0.95
0.86
1.06
1.04
1.26
1.13
0.97
-
Samsung
0.93
0.99
0.97
1.00
1.03
1.24
1.10
1.15
1.37
1.61
Acer
1.17
1.05
1.21
1.06
0.95
0.98
1.10
1.02
0.87
0.95
Table 4.3: Quick ratio of the IT companies
When analyzing the liquidity ratios, it seems that Apple and Samsung currently outperform
the industrial averages. However, the liquidity ratios of Apple have been declining, where the
liquidity ratios of Samsung have been increasing over the past ten years.
HP, Dell and Acer report liquidity ratios that are often below the industrial average and often
even below the overall benchmark. Dells decreasing ratios might be a reason for the company
to delist from the stock exchange. However, since HP and Acer decided to stay public while
their liquidity ratios recently underperformed to Dell, these ratios don’t provide enough
information to explain delisting.
4.2.2 Activity ratios
Activity ratios provide knowledge about the effectiveness and the efficiency of the use of
assets within a company to generate revenues or earnings. These ratios relate assets to
turnover, such as the total asset turnover and inventory turnover.
c) Total asset turnover
The total asset turnover shows how many sales are being generated from each dollar of the
company’s assets. A high total asset turnover is desirable. However, this ratio varies widely
from one industry to another, and comparisons can therefore only be made between
companies in the same sector. The IT industry has an average asset turnover of 1.13.
31
Total asset
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Apple
1.04
1.23
1.12
0.95
0.82
0.90
0.87
0.93
0.89
0.83
HP
1.08
1.16
1.14
1.19
1.05
1.01
1.03
0.99
1.12
1.09
Dell
2.12
2.45
2.29
2.26
2.36
1.59
1.60
1.40
1.20
-
Samsung
1.20
1.09
1.06
1.06
1.16
1.18
1.16
1.07
1.13
1.09
Acer
1.81
1.85
1.96
1.90
2.25
1.97
2.24
1.92
1.90
1.91
turnover
Table 4.4: Total asset turnover of the IT companies
d) Inventory turnover
The inventory turnover measures how many times a company turned its inventory over during
a year. A high turnover is desirable, since it implies that management does not hold onto
excess inventories and its inventories are highly marketable. The IT industry has an average
inventory turnover of 19.26.
Inventory
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Apple
74.78
73.00
62.03
50.44
48.80
51.90
51.09
68.16
107.94
78.16
HP
8.91
9.26
9.25
9.75
11.00
12.06
14.74
13.49
12.90
13.46
Dell
101.41
87.40
76.01
53.17
48.10
44.35
41.69
35.01
31.31
-
Samsung
9.08
8.49
8.47
8.52
9.17
8.70
7.37
6.82
6.68
6.63
Acer
17.38
13.32
12.01
13.84
13.20
11.25
12.17
10.69
9.27
8.49
turnover
Table 4.5: Inventory turnover of the IT companies
It seems that analyzing the activity ratios do not give much information about the competitive
advantages of listing or about the decision of Dell to go private either. Where Apple’s
inventory turnover outperforms the industry’s benchmark, it underperforms with its total asset
turnover. HP and Samsung currently underperform, while Dell and Acer outperforms on both
ratios.
32
4.2.3 Financial-leverage ratios
Leverage ratios measure the degree to which a company is being financed by outside capital.
Debtors are curious about these ratios to indicate whether the company is able to redeem its
debt. High leveraged companies have a heavy debt in relation to their net worth and are more
vulnerable to business downturns (RMA 2011). The debt to equity ratio and the interest
coverage ratio will be analyzed.
When an IPO takes place, financial-leverage ratios drop immediately because of the equity
infusion (Draho 2004). Besides, these ratios are important in the delisting decision. Previous
research indicates that delisted firms have significantly higher leverage, compared to matched
firms that remained publicly. Besides, the delisted firms are unable to raise additional capital.
These results are strong after controlling for liquidity, asymmetric information, and agency
conflicts (Pour and Lasfer 2011).
e) debt to equity ratio
The debt to equity ratio compares the company’s total liabilities to its total shareholders’
equity. It identifies companies that are highly leveraged and which are therefore a higher risk
for investors. A high ratio implies that a company is highly leveraged and might face
financial risk. However, debt to equity ratios vary widely between industries. Capitalintensive companies usually have more leverage compared to other sectors. The industry
average ratio amounts 34.91.
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
0
0
0
0
0
0
0
0
13.73
HP
18.99
14.05
13.62
21.24
45.84
38.16
53.49
77.91
124.96
82.83
Dell
7.82
12.23
17.49
15.72
47.08
72.33
77.22
103.78
100.21
-
Samsung
51.43
41.51
32.07
28.15
30.1
21.6
12.61
15.03
12.73
7.7
Acer
18.96
5.46
10.57
28.88
16.37
13.98
28.88
31.4
24.45
32.65
Debt to
equity
Apple
Table 4.6: Debt to equity of the IT companies
f) interest coverage ratio
The interest coverage ratio determines the ability for a company to pay interest on outstanding
debt. It is being calculated by dividing the company’s earnings before interest and taxes by
the interest expenses in the same period. Average industry ratio amounts 14.50.
33
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Apple
128.67
-
-
-
-
-
-
-
-
369.79
HP
17.99
11.61
22.4
18.28
23.43
16.77
27.32
17.3
-12.8
7.93
Dell
267
278.81
165.29
75.84
86.69
18.32
15.63
21.09
14.43
7.33
Samsung
30.9
73.8
38.27
34.43
33.75
10.81
23.99
23.61
40.65
72.58
Acer
14.8
15.5
35.93
28.46
20.88
23.9
20.25
-0.66
2.41
-21.38
Interest
coverage
Table 4.7: Interest coverage ratio of the IT companies
Apple had no debt until 2013. In 2013, the company decided to issue $17 billion in debt to
pay out dividends to its shareholders and to pay back some of its shares, while it was sitting
on a $145 billion stockpile. This might seem strange, but it saves Apple money, since most of
this cash ($102 billion) are in overseas accounts. When Apple would bring home the money
to the U.S.A. to pay dividends or to buy back its shares, it has to pay corporate taxes. In
comparison, when Apple would borrow money, the interest payments would be tax-deductible
(Dwyer 2013).
HP and Dell both face increasing debt levels between 2004 and 2012, while Samsung’s debt
has been decreasing. Since HP’s recent debt levels are comparable to Dell, the high debt of
Dell does not offer enough evidence for the decision of Dell to go private and the decision of
HP to remain public.
4.2.4 Profitability Ratios
Profitability ratios measure the level of earnings in comparison to a base, such as equity,
assets, or sales. These ratios are a general indicator of enterprise-management efficiency
(Span et al. 2013). Three ratios will be analyzed: net margin, return on equity and return on
assets.
g) net margin
Net margin measures the percent of profits a company generates for each dollar of sales. Net
margin reflects the firm’s ability to control costs and make a return on its sales. Net margin is
calculated by dividing net income by sales. The average within the IT industry is 7.42.
34
Net margin
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Apple
3.33
9.58
10.30
14.56
14.88
19.33
21.54
23.87
26.67
21.67
HP
4.38
2.77
6.76
6.97
7.04
6.72
6.97
5.56
-10.51
4.55
Dell
6.18
6.39
4.50
4.82
4.06
2.70
4.28
5.61
4.17
-
Samsung
13.16
9.48
9.23
7.53
4.56
6.94
10.22
8.10
11.53
13.04
Acer
3.12
2.67
2.77
2.80
2.15
1.98
2.40
-1.39
-0.68
-5.7
Table 4.8: Net margin of the IT companies (%)
h) return on equity
The return on equity is a measure of how well management has used the capital invested by
shareholders. For publicly traded companies, the relation of earnings to equity is of prime
importance, because the management must provide a return for the money invested by
shareholders (Oren, 2014). Return on equity can be calculated by dividing net income by
average shareholders’ equity. The industry average amounts 15.96.
ROE
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Apple
5.94
21.29
22.85
28.52
27.19
30.54
35.28
41.67
42.84
30.64
HP
9.29
6.42
16.46
18.95
21.50
19.28
21.64
17.89
-41.43
20.57
Dell
47.68
67.31
61.68
73.10
61.90
28.91
39.31
41.86
24.21
-
Samsung
33.55
17.85
18.44
15.04
8.72
13.40
18.01
12.67
18.82
19.77
Acer
11.34
13.41
14.62
17.18
14.76
13.00
16.24
-7.79
-3.86
-31.26
Table 4.9: Return on equity of the IT companies (%)
i) return on assets
The return on assets measures the net income returned on each dollar of assets. This ratio
measures overall profitability from investments in assets. Higher rates of return are desirable.
Return on assets is calculated by dividing net income by average total assets. Within the IT
industry, the average amounts 7.33.
35
ROA
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Apple
3.78
13.81
13.92
16.47
14.94
19.75
22.87
27.06
28.54
19.38
HP
5.01
3.51
8.25
9.05
8.62
7.14
7.67
5.93
-10.27
5.47
Dell
14.41
15.60
10.88
11.41
9.58
5.18
7.69
8.85
5.53
-
Samsung
16.10
11.00
10.55
8.80
6.19
9.06
12.97
9.65
14.23
15.58
Acer
6.22
5.94
5.91
6.29
5.25
4.43
5.58
-2.12
-0.88
-9.47
Table 4.10: Return on assets of the IT companies (%)
Apple and Samsung are healthy operating companies, where Apple reports continuous
increasing profitability ratios until 2012. Dell’s performance ratios decreased during its last
public year, but still outperform HP and Acer.
Acer had negative net income during the last three years which causes negative performance
ratios. HP shows stable ratios over the years, but faces a sudden decline in 2012, where it got
a fiscal loss after it overpaid for an acquisition (Weil 2012).
4.2.5 Market-value ratios
Market-value ratios entail stock-market price analysis. Therefore, these ratios can’t be
calculated by using the FAMOS model, but are still available in Datastream by analyzing the
company stocks. Three market price ratios will be analyzed: the price to earnings ratio, the
price to book ratio and the dividend yield.
J) Price to earnings ratio
Investors often refer to the P/E ratio as a rough indicator of the value for a company. A high
P/E ratio is desirable, since a high P/E ratio suggests that investors are expecting higher
earnings growth in the future compared to companies with a lower P/E. However, the P/E
ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios
of one company to other companies in the same industry, to the market in general or against
the company's own historical P/E (RMA, 2011). The average P/E ratio within the IT industry
is 16.55.
36
P/E
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Apple
69.8
42.3
34.3
47.1
18.9
33.2
22.1
15.4
15.1
12.2
HP
17.5
25.4
22.2
21.2
11.5
16
11.5
6
-
-
Dell
31.6
24.0
19.1
22.4
9.9
16.6
17.3
8.6
5.6
-
Samsung
7.7
12.0
12.4
11.1
8.7
27.3
8.6
9.8
15.5
12.4
Acer
13.6
17.9
11.4
13.7
10.4
21.3
14.8
34.4
-
-
Table 4.11: P/E ratio of the IT companies
K) Price to book ratio
The price-to-book ratio is used to compare a company’s stock market value to its book value.
Within the IT industry, the average ratio amounts 2.91.
P/B
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Apple
3.58
5.75
5.5
7.25
2.64
3.92
3.82
2.92
4.16
3.91
HP
1.54
2.1
2.65
3.05
2.08
2.73
2.25
2.26
0.87
1.77
Dell
15.62
17.1
14.06
14.41
4.62
4.97
3.43
2.82
1.55
-
Samsung
1.71
2.01
1.86
1.33
1.12
1.43
1.29
1.26
1.61
1.31
Acer
1.68
2.58
2.21
1.96
1.3
2.34
2.56
1.06
0.88
0.79
Table 4.12: Price-to-book ratio per share of the IT companies (in USD)
L) Dividend yield
The dividend yield expresses the percentage of dividends paid to shareholders in relation to
the price of the stock. The average industry ratio amounts 2.42.
Dividend
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
0
0
0
0
0
0
0
1.65
2.49
HP
1.72
1.20
0.84
0.61
0.86
0.68
0.78
1.86
3.72
2.60
Dell
0
0
0
0
0
0
0
0
3.39
-
Samsung
2.1
0.93
0.86
1.00
1.54
0.73
1.65
0.63
0.42
0.56
Acer
4.81
2.97
5.29
6.17
7.38
2.41
3.99
10.83
0
0
Yield
Apple
Table 4.13: Dividend yield of the IT companies
37
In 2012 and 2013 Apple decided to pay out dividends to its shareholders, for which the
company decided to take the debt in 2013, as described in section 4.2.3.
Dell shows
decreasing market-value ratios, but Samsung even underperforms on all the industrial average
market-value ratios. Besides, Apple shows a decreasing P/E ratio, which is remarkable since
the company shows increased performance ratios. The reason for this phenomenon will be
described in section 4.2.6.
4.2.6 Overall evaluation
When analyzing the ratios of Apple, HP, Dell, Samsung and Acer, we can further interpret the
companies’ performances and their current financial position compared to its competitors.
Apple is a very innovative and successful company. Apple introduced several inventive and
high-quality products like the iPod, iPad and the iPhone. The company has faced increasing
stock prices, net income, and profitability ratios between 2004 and 2012. Besides, it has a
high inventory turnover rate. During the first quarter of 2013, Apple faced its first drop in
stock prices in a decade, but it increased its dividends paid out to shareholders. Reasons for
this drop in share price are concerns from its investors and shareholders. Investors have been
worried that the company’s market share will be lowered by increasing popular offerings from
competitors such as Samsung. Besides, the investors require continuous innovation and have
been concerned with the lack of new product launches (Cellan-Jones 2013). This shows how
important innovation is in the current global and competitive environment, even for market
leaders. However, after a dip in 2013, Apple faced increasing market price and market value
gain until at least October 2014.
Samsung may be comparable with Apple; since 2008, the company faced increasing share
prices, market value, net income and profitability ratios, and improving leverage ratios. The
company has been very successful in competing with Apple in the tablet and smartphone
market.
HP has been a been steady company, but with volatile stock prices. It mainly faced decreased
performance in 2012, where it even reported a net income of -12.65 billion and negative
profitability ratios. This decrease in 2012 is due to some serious accounting improprieties and
misrepresentations, which caused the overpaid acquisition of Autonomy (Worthen, 2012).
Dell has also been a very successful company in the information technology industry. Dell has
38
been very successful with its innovative PCs during the 90s, but during the last decade it faced
decreasing performances due to a lack of innovation in the tablet, computer and smartphone
market. This decrease in profits might be the reason for its privatization, which will be further
described in paragraph 4.3.
Acer might be comparable with Dell, since it is also facing declining profits since 2010. The
company even reported negative net income and profitability ratios during the last three years.
The company has also been hit hard by declining PC sales when its users switched to tables.
However, where Dell decided to go private in 2013, Acer is still being publicly traded. Acer’s
biggest mistake was that the company invested too early in ultrabooks and touch-screen
technology at a time when the market for such devises did not yet exist. To increase its
performance, Acer will focus more on new computer hardware and cloud services (Culpan
2014). The outcome may be positive, since the company faced increasing net income again
during the first three quarters of 2014 (Morningstar, 2014).
Since HP and Acer currently show significantly lower liquidity and profitability ratios than
Dell; and Apple and Samsung show significantly lower activity ratios than Dell, ratio analysis
provides an indication about the performance of the companies, but is not enough to explain
the delisting decision or the decision to stay public. Increases in financial performance of a
company are often company-specific. A research to the thoughts and actions of the managers
is required to gain a better insight in the decision to stay public or to go private.
39
4.3 The privatization of Dell
Dell Inc. rose to the top of the industry during the 90’s with its innovative concept. Instead of
selling standardized PCs at computer shops, customers could order the PCs online and select
specifications which they desired. Just before the burst of the internet bubble, Dell Inc. stocks
were worth $125 billion (NRC Handelsblad 2013).
On Oct. 29, 2013, Dell Inc. completed his acquisition by Dell’s founder and CEO Michael
Dell and became a private company after being listed for twenty-five years. This section
analyses why Dell decided to delist from the stock exchange.
Previous research indicates that firms that decided to de-list voluntary are more likely to have
come to the market in order to re-balance their leverage rather than to finance their growth
opportunities. During their quotation period, their insider ownership and their leverage
remained high and they did not raise equity capital. Besides, their growth opportunities,
profitability and trading volume declined substantially. These findings suggest that firms
decide to de-list voluntarily when they have failed to benefit from listing. These firms should
not have come to the market, since they often destroyed shareholder value (Lasfer and Pour
2013).
Dell shows indeed high leverage ratios, mainly in the last five years before it decided to delist
itself. However, HP also shows high leverage which is remarkable. However, the financial
ratios of HP have been increasing during 2013, where the financial ratios of Dell show a
decline during its last public year.
Since the arrival of the smartphones and tablets, the market for PCs is declining significantly.
Weak sales of PCs and a weak demand in Europe hampered overall results. Total revenues
were less than expected. PC revenue decreased 6% as a result of high competition in
emerging markets and lower demand, since tablets became a more popular substitute. Future
expectations model a gradual decay in Dell’s operating margin. To increase its profits, Dell is
undergoing a transition from client technologies to enterprise hardware and services, but this
transition will take time and money (Holt 2012).
By going private, Dell could change its business model to fully serve the interest of its
customers. The company can focus on a long-term strategy, where its competitors need to
satisfy the short-term demands of its shareholders. Dell has more freedom to invest and to
innovate. It doesn’t have pressure from its shareholders anymore to increase earnings every
40
single quarter. According to Michael Dell, the capital structure is better as a private company
than while being a private company. While being public, Dell was spending between $1,7
billion and $2 billion each year on dividends, share repurchases and interest. As a private
company, Dell still has a huge debt on the balance sheet. The company is aggressively paying
down its debt so the capital structure is preferred. Besides, the interest environment is very
favorable at the moment, therefore the company has less costs than while being public
(Mahanta 2014).
Dell Inc. currently only releases its quarterly financial results to its current holders of debt
securities and to prospective institutional debt investors. The firm reports these results
confidentially (Dell 2014). Therefore, it’s not possible to evaluate the current performance of
the company in this thesis.
By going private, Dell is focusing on a long-term goal. Its current financial performances are
driven by strategic moves to optimize its operations and to invest in its end-to-end solutions
and service capabilities. The company intends to spend $1 billion in cloud data and solution
centers. Besides, the company made several acquisitions and established a new software
solutions group. Dell is very confident about the future. Information technology is a $3 trillion
industry, where Dell currently has about a two-percent share. Dell’s ultimate goal is to grow
and to help its customers achieve their goals (Dell 2013). Therefore, this long-term vision
suits the decision to go private, since the company does not have to comply with its
shareholders every quarter anymore to obtain to their goal in having a continuously increased
shareholder’s value.
41
5. In-depth research of several companies
To gain a deeper insight in the public going decision of innovative companies operating in a
competitive and global economic environment, several companies have be investigated
thoroughly. Several managers have been interviewed about their IPO decision.
In this chapter, four companies have been analyzed with various reasons to have an IPO.
The advantages and disadvantages of the IPOs will be compared to the theoretical
implications which are described in section 2. As derived from the FAMOS model, several
financial indicators can be used to evaluate a company. The financial indicators are mainly
important for the suppliers of the financial capital of a firm, because the indicators can
provide an impression of the financial performance of the company (Span et al. 2013).
5.1 Going public to raise equity: Tesla Motors, Inc.
Oil and petroleum prices have been increasing significantly during the last decade and
consumers have started to prefer more environmentally-friendly cars (Hagman and Selvig
2007). Therefore, the large pioneer companies are getting competition from recent firms that
design and manufacture electric cars, such as Tesla, which recently has had its IPO on June
29, 2010 on the NASDAQ.
Stock price of Tesla Motors
350
300
250
200
150
100
50
0
29-6-2010
29-6-2011
29-6-2012
29-6-2013
29-6-2014
Figure 5.1: Stock prices of Tesla Motors (in USD)
Tesla Motors, Inc. designs, develops, manufactures and sells electric cars. Besides, it provides
services for the development of electric powertrain components. Tesla Motors raised over
$225 million by the IPO that valued the corporation at $2 billion. It was the first time in more
than fifty years that a U.S. automobile company went public since Ford Motor in 1956. The
company had several reasons to have an IPO. Almost all operations of Tesla are capital
42
intensive, from concept design and development tot mass production. Therefore, the company
had to seek external investors. Between 2004 and 2009, Tesla raised approximately $200
million by having six funding events (Larcker and Tayan 2011).
The company was founded in 2003. Before the IPO, Tesla had never made any profits. The
IPO raised enough money to introduce its second vehicle, the Model S. Besides, Tesla got a
lot of publicity because of the IPO, which is important for a company in its R&D and startup
phase. The IPO has been a success. Tesla has increased its revenues and started to make its
first profits in the first quarter of 2013. When analyzing its annual report for the fiscal year
ended December 31, 2013, this increase in performance is clearly visible (Tesla Motors
2014).
Pre-IPO
IPO
2009
2010
2011
2012
Revenues
111,943
116,744
204,242
413,256
2,013,496
Gross profit
9,535
30,731
61,595
30,067
456,262
Net income
-55,740
-154,328
-254,411
-396,213
-74,014
Yearly results
Post-IPO
2013
Table 5.1: Tesla Motors’ performance, for the fiscal years ended December 31 (in thousands USD). See
appendix II for Tesla Motor’s consolidated statements of operations and consolidated balance sheet.
The company increased its revenues in 2014 by 387% from $413 million to more than $2
billion. The companies’ net income is still negative. However, Tesla is facing increasing
performance. The company keeps innovating and introducing new car models and is capturing
more market share in the automobile industry. So the future is looking bright for Tesla, which
is also due to the decision to go public.
Some of Tesla’s main competitors in the auto manufacturer sector are Toyota Motor
Corporation, Daimler AG, and Volkswagen AG. Tesla’s financial ratios can be compared to
its industrial average, to gain an overview of Tesla’s performance (table 5.2).
43
Yearly financial
Pre-IPO
IPO
2009
2010
Post-IPO
2011
2012
2013
Industrial
Average
ratios
Current ratio
6.21
2.76
1.95
0.97
1.88
1.28
Quick ratio
5.73
2.1
1.64
0.46
1.33
1.05
Asset turnover
0.29
0.3
0.29
0.37
0.83
0.87
Inv. turnover
4.79
2.2
2.64
2.22
4.77
9.44
Debt to equity
16.7
35.07
125.04
374.23
90.97
77.36
Interest coverage
-21.07
-123.65
-
-1428.42
-3.63
0.68
Net margin (%)
-49.79
-132.19
-124.56
-95.88
-3.68
10.92
ROE (%)
-61.94
-63.57
-118.03
-227.22
-18.69
21.70
ROA (%)
-24.67
-39.76
-46.29
-43.34
-2.98
9.64
Price/earnings
-
-
-
-
-
13.98
Price/book
-
16.19
15.19
30.44
23.42
2.72
Dividend Yield
-
0
0
0
0
2.68
Table 5.2: Tesla Motors’ financial ratios; 2009-2013 company data derived from Datastream and industrial
averages from Reuters. See appendix III for graphical overview.
As visible in table 5.2, Tesla is facing a very high leverage. Tesla had an IPO to raise equity.
Therefore, the financial-leverage ratios should decline during the IPO. However, Tesla’s debt
increased as well, which resulted in an increase of the debt to equity ratio.
The liquidity ratios are performing close to the industrial average, and currently exceed the
standardized norms of minimum 1.3 for current ratio and 1 for quick ratio. Its profitability
ratios are very low to the industrial average, since the company’s net income is negative, but
they significantly increase every year. Tesla did not pay any dividends to its shareholders yet.
Since Tesla is still young compared to its competitors, and since all financial ratios increased
significantly last year, Tesla’s future is looking bright. Therefore, shareholders are willing to
invest in the company, despite the fact that many ratios are still underperforming to the
industrial average. The increase in performance is also visible by analyzing Tesla’s annual
statements.
44
In short, the primary offering to raise equity in order to expand the business was the main
reason for Tesla Motors to have an IPO. Since Tesla Motors is very capital expensive, it needs
to raise equity from external investors. It also gained a lot of publicity, which subsequently
increased its competitive benefits. It might also profit from other advantages, but also faced
direct and indirect costs. When analyzing the increase in performance of Tesla Motors, the
trade-off between these pros and cons seems to have been very advantageous for the
company.
45
5.2 The decision of a recent IPO: Novisource NV
Novisource is a Dutch company that offers business consultancy and project management to
organizations about the changing and innovative environment of business and IT. It also
develops business solutions and offers interim managers to increase the efficiency of a
company’s business operations and to improve its business processes. The company was
founded in 2001 under the name B-street and has currently about 80 own and 220 external
employees (Novisource 2014).
Stock price of Novisource
5
4
3
2
1
0
Figure 5.2: Stock prices of Novisource (in Euro)
Novisource NV has had its IPO on January 28, 2014, by having a reverse takeover with the
company 1NOMij. The company has got its stock traded on the NYSE Euronext Amsterdam.
Novisource decided to have a reverse takeover instead of a regular IPO to avoid the complex
process and to speed up the process of going public.
The company operates in various markets: banking & investments, pensions, health,
insurance, technology, telecom, and utilities. Therefore, Novisoure has to deal with the
changing world continuously. Van der Vorm agrees that it is indeed necessary to keep
innovating in order to survive in the current competitive environment. The competition in the
market is fierce and the technology improves every day. Innovation is very important for
Novisource to stay ahead of its competitors and to keep knowledge in the markets in which it
is operating, which is also visible in their slogan ‘change is constant’.
46
Novisource had been growing enormously from 2003 till 2008 and increased its revenues
from € 3 million to € 44 million during these years. During the following years Novisource
faced decreased profits because of the financial crisis. However, where several of its
competitors went bankrupt, Novisource had been able to stay in the business and even kept
investing money during the financial crisis. Nowadays, Novisource is a financial healthy
company with good economic prospects, which is also the reason why Novisouce had its IPO
in 2014 and not earlier during the financial crisis. Van der Vorm expects the company to
increase its revenues within 3 year to € 50 million and to improve the EBITDA margin to a
minimum of 5 percent. Novisource intends to keep growing by taking over several companies
and possible by expanding abroad (van der Vorm 2014).
The first semiannual results look promising. Note that the large difference in net income is
being caused by the difference between the purchase price and net equity value of Novisource
N.V. on the date of acquisition, which accounted a total of € 6.294.288.
Pre-IPO
Post-IPO
Dec 31, 2013
June 6, 2014
Change
Revenues
11,683,791
18,133,987
55%
Gross profit
3,905,526
4,369,254
12%
Net income
126,491
6,115,319*
4734%
Semiannual results
Table 5.3: Novisource’s performance, for the last six months of 2014 and the first six months of 2014 (in Euros).
See appendix V for Novisource’s statement of income and balance sheet.
Since Novisource is a consultancy company, inventories are redundant on the (semi)annual
reports. Therefore, the quick ratio and inventory turnover could not be calculated. The firm
did not specify any interest expenses and therefore interest expense could not be calculated.
Besides, Novisource does not have any long-term debt.
47
Semiannual financial
Pre-IPO
Post-IPO
Dec 31, 2013
June 6, 2014
Change
ratios
Industrial
Average
Current ratio
1.47
1.32
-10%
2.20
Asset turnover
1.27
1.60
26%
0.76
Debt to equity
2.03
2.88
42%
29.24
Net margin (%)
1.08
33.72
3022%
8.74
ROE (%)
4.16
209.67
4940%
-1.77
ROA (%)
1.37
53.98
3840%
6.27
Table 5.4: Novisource’s financial ratios (in Euro’s). Company data calculated from the semi-annual statements.
Industrial averages are derived from Reuters. See appendix VI for graphical overview.
Both current assets and current liabilities have been increased since the IPO. However since
current liabilities increased more than the current assets, the current ratio has been decreased.
The company is facing low debt, which is a good sign for publicly listed companies. The
profitability ratios increased enormously, because of the increase of net income caused by the
difference between the purchase price and net equity value of Novisource N.V. on the date of
acquisition.
During an IPO, the debt to equity ratio is expected to decrease as the result of the equity
infusion of an IPO (Draho 2004). However, the equity of Novisource even decreased from
3,037,760 during the first half year of 2013 to 2,916,729 during the first half year of 2014
(appendix V). Besides, the debt increased, which caused the debt to equity ratio to increase.
The company’s profitability ratios have significantly increased after the IPO and significantly
outperform the industrial average.
The IPO of Novisource has been an important step for the company in order to keep growing
and to increase its brand awareness. Its clients have undergone a good connection with
Novisource. However, it is expected that the current clients and clients in the future
experience Novisource as being even more trustworthy and professional for being publicly
listed. The main disadvantage of the IPO are the costs of the going public process, but
according Van der Vorm the benefits of the going public process have been way larger than
the costs. Besides, it might have been even necessary for the company to have an IPO in order
to keep growing.
48
5.3 Long-term consequences of an IPO: Eagle Industry Co., Ltd
When a company is small and young, its main goals are surviving and perhaps even growing
its businesses. As described in previous chapters, having an IPO can give a company shortterm advantageous, such as raising external equity and gaining publicity. If a company is
successful, it can beat its competitors and keep gaining market share. After a few decades or
even already after few years, a company can become multinational. At the point when the
company has grown world-wide, when it has enough capital for its needs, and when every
customer is aware of the brand, the company needs to focus on different goals. In this
paragraph, these goals and the question whether the company should stay public or should
become private will be analyzed. In order to research the future long-term competitive
advantages of staying listed, it might be wise to analyze an example of a company that has
had its IPO at least ten years ago, such as Eagle Industry.
Stock price of Eagle industry
2500
2000
1500
1000
500
0
Figure 5.3: Stock prices of Eagle industry (in JPY)
Eagle Industry Co., develops, researches and manufactures mechanical products in the areas
of automotive and construction machinery industries; general industry; marine industry; and
aerospace and opt electronics industries. The company was founded in 1964 in Japan and was
listed on the Tokyo Stock exchange in 1982. Reason for this IPO was to attract external
capital in order to keep expanding its businesses.
Nowadays, the company is located worldwide. The EKK group consists of Eagle Industry
Co., 50 subsidiaries, and 53 affiliated companies. Eagle Industry Co., Ltd has already been
listed for more than 30 years and it has grown multinational. Therefore, expanding the
business is not very important anymore. Main purpose of their policy is to keep the
shareholders satisfied and to increase the shareholders’ value (van de Walle 2014).
49
Yearly results
2009
2010
2011
2012
2013
Revenues
78,168
76,063
91,920
96,237
102,817
Gross profit
16,025
16,396
22,252
22,751
24,259
Net income
1,337
2,567
4,871
3,013
4,501
Table 5.5: Eagle Industry’s performance, for the fiscal years ended March 31 (in million Japanese Yen). See
appendix VII for Eagle Industry’s balance sheet and income statement.
Yearly financial
2009
2010
2011
2012
2013
ratios
Industrial
Average
Current ratio
1.71
1.61
1.55
1.53
1.52
5.21
Quick ratio
1.16
1.19
1.17
1.1
1.07
4.49
Asset turnover
0.85
0.78
0.92
0.92
0.86
0.64
Inv. turnover
4.76
4.86
6.09
5.7
5.14
3.66
Debt to equity
131.56
101.12
99.15
99.66
75.47
18.06
Interest coverage
1.88
10.87
10.28
9.27
20.41
14.85
Net margin (%)
1.71
3.37
5.3
3.13
4.38
16.26
ROE (%)
3.83
7.75
13.76
8.28
10.88
11.73
ROA (%)
1.93
3.36
5.49
3.4
4.43
8.38
Price/earnings
-
8
6.6
9.3
11.9
22.97
Price/book
0.57
0.95
0.75
0.6
1.46
2.75
Dividend Yield
1.45
1.08
1.92
2.36
0.83
1.21
Table 5.6 Eagle Industry’s financial ratios; company data derived from Datastream and industrial averages from
Reuters. see appendix VIII for graphical overview.
The yearly results show a stable increase of the performance (table 5.2). Table 5.3 shows that
the company’s liquidity ratios significantly underperform the industrial averages. The
company’s debt is very high compared to the industrial average. This might indicate an
incentive to delist from the stock exchange (Pour and Lasfer. 2011). However, according to
Van de Walle, going private is unnecessary. The stocks are a good way to compare the value
of the company with other companies. Besides, the company wants to make up its
consolidated annual reports anyway to keep insight in the company. Also, being listed on the
Tokyo Stock Exchange creates brand awareness, mainly in Japan and Asia. In The
Netherlands the company is not that well-known because it is not listed here. This is not a
50
problem for attracting customers, but mainly for attracting employees. The customer base of
Eagle Industry Co. consists of original equipment manufacturers (OEMs) and tier one
companies. These customer commitments have long-term periods and are worldwide.
It is not important for the company to cross list its shares to Europe, in order to attract more
European investors, since the company has enough internal capital nowadays.
By using Porters five forces analysis, we gain a further insight in the level of competition of
Eagle Industry Co. (Porter 1979). Eagle Industry Co. has not to deal with a lot of competition.
There are only a few comparable companies in the worldwide market. Besides, the costs of
setting up the production processes and its development are very expensive. Therefore, no
new entrants on the market show up.
However, innovation is very important. Its customers expect continuously innovated products.
The company spends most of his money on research and innovation. This might be a
bargaining power of the customers: if the company doesn’t fulfill to the needs and wishes of
its customers, it might lose its customers to its competitors who offer substitutes.
To conclude, Eagle Industry Co. is an example of a foreign company that went public a few
decades ago. Having an IPO was an important decision to attract external capital. After
having its IPO, the company has expanded worldwide and became a multinational.
Nowadays, being listed in a foreign country mainly benefits local brand awareness purposes
and advantages to benchmark its value. Even in a market that is not very competitive, it is
very important to keep innovating in the current economic environment.
51
5.4 A possible IPO in the near future: Additive Industries
A recent high-tech development is 3D printing. Most companies focus on printing with
synthetic material. However, Additive industries focuses on printing with metal, which is a
relative new process. The company is an original equipment manufacturer (OEM) and has
been founded in December 2012. To get enough capital, it received equity from a private
investor. At the moment, the company is looking for more strategic investors to finance the
company.
The company started with two people: CEO D. Kersten and COO J. Wintermans. Nowadays,
the company has 17 employees and is still growing fast. Additive Industries has the ambition
to be a major player in the industrial additive manufacturing and 3D printing of functional
parts of metal. The company is building a competence centre and knowledge hub for 3D
design & engineering. Also, the company is developing next generation additive
manufacturing equipment.
To experiment and to explore the opportunities of additive manufacturing and 3D printing,
Additive Industries has created a shared facility called Addlab. Additive industries works
together with several industrial partners in this facility. These companies pay a membership
fee to access AddLab for three years. When less money is spent during the Addlab program
than budgeted, the company will reimburse the excess amount to the partner. Therefore,
Additive Industries does not make any profits at the moment, but it does not have any risk
associated to running the Addlab program either.
Currently, the company is working on its first functional prototype, which will be a large 3D
metal printer that can be used by high-tech OEM’s, like ALSM, General Electric or Siemens.
To gain the required capital in order to develop this machine, Additive Industries has set up an
investment round.
J. Wintermans believes taking the company public is a viable option. However, the company
needs to focus on developing and completing a functional product first. Wintermans expects
that the company will be ready to expand its businesses in 2017, which is also expected to be
its first positive cash flow year. The company will then expand global, so if shareholders are
in for it, this might be a good timing to have an IPO.
52
Since Additive Industries is a capital intensive startup, the company needs to raise a lot of
equity before it can make a positive cash flow. Since the company is still in a phase of preproof of principle and does not have a working prototype yet, the company can only raise
equity by informal investors. In the future, when the company has completed its 3D metal
printer, the company has to choose whether it will finance its developments by private equity,
by looking for strategic investors or by having an IPO. This financing decision will depend on
the company’s objectives in 2017. Private equity might be useful to finance the growth of a
company. Strategic investment might be useful if the company wants to expand abroad and to
increase its sales (Wintermans 2014).
An IPO might be attractive for the company for various reasons. If the company is growing
fast and needs a lot of equity funding, an IPO might be useful. For example, when the
company will not only focus on building machinery, but also includes a different process of
the supply chain in its own development or production process, such as raw materials.
Wintermans also thinks that personal ambition can be reason for having an IPO. It would be
very rewarding for him to see the company that he has co-founded getting listed on a stock
exchange. Since the company is an OEM and focuses on industrial companies, gaining
publicity between consumers might not be as important.
However, Wintermans also points out disadvantages of having an IPO, such as large direct
and indirect costs and conflicts of interests with its short term shareholders. Besides, since
Additive Industries is working together with several industrial partners, the company
currently has a very open informative setting and shares a lot of information. If the company
decides to go public, the company is not allowed to disclose particular information before it is
announced publicly to avoid abuse of inside information. This will make it harder to
collaborate in a full open setting.
To conclude, having an IPO might be useful for Additive Industries. 3D printing is expected
to grow exponential, so raising enough equity will be crucial. Besides, having an IPO might
be more advantageous than using private equity or strategic investors. The best timing of the
IPO might be in a few years, when the company will have developed a functional product,
will be ready to expand abroad and needs equity to fund the growth of the company.
53
6. Conclusion and recommendations future research
6.1 Conclusion
This study investigates whether companies should issue public shares in order to survive in
the current competitive, global and innovative economic environment. To answer this main
question, several sub-questions have been provided.
(i) Which advantages are the main reasons for a global and innovative company, which is
operating in a competitive economic environment, to decide whether it should have an IPO?
In many sectors, companies are facing a fierce competition to gain a high market share and to
acquire customers for their products. Firms need to keep innovating in order to keep their
customers satisfied. However, innovation requires capital expenditure, and for many
companies it is impossible to finance these R&D projects by using merely the company’s own
assets. Therefore, companies are looking for ways to finance these projects by using outside
capital. The opportunity to raise equity has been the main reason for Tesla Motors and Eagle
Industry to have an IPO. Besides, staying public offers Eagle Industry insight in the
company’s performance compared to its competitors by making up consolidated annual
reports. Novisource went public in order to keep growing and to increase brand awareness.
Besides, an IPO offer several other advantages, such as raising funds for the existing
shareholders and personal satisfaction. Therefore, having an IPO is a viable option for
Additive Industries in the near future.
Main advantages of an IPO
1)
Raise equity for company’s use
2)
Raise funds for existing shareholders (listing gain)
3)
Valuation purposes
4)
Increase in publicity
6)
Personal satisfaction
Table 6.1 main reasons of having an IPO in the current competitive, global and innovative economic
environment.
54
(ii) What are the main disadvantages for a company to take into consideration when having
an IPO in the current competitive, global and innovative economic environment and why
would a company decide to go private again??
According to the theoretical implications and to the interviews, direct costs are the main
disadvantage of an IPO that should be taken into consideration. Besides, according to
Wintermans, the disclosure of financial information might be disadvantageous, since Additive
Industry likes to collaborate in a full open setting with its partners.
When analyzing the motivation for Dell to go private, it seems that the main reason for their
decision to go private was because of the conflict of interest between shareholders and the
management. Shareholders are mainly focused on gaining higher share value the short-term,
while managers also need to focus on increasing the company’s performance in the long-run.
The disadvantages of an IPO are related to the decision of going private again.
Main disadvantageous of an IPO
1)
Direct costs of the going public proces
2)
Disclosure of financial and business information
3)
Conflict of interest between shareholders and the management.
Table 6.2 Main disadvantages for a company to take into consideration when having an IPO in the current
competitive, global and innovative economic environment.
(iii) Is there a best timing to have an IPO?
Existing literature describes the occurrence of hot waves, in which companies of the same
sector have an IPO. Besides, companies are driven by the possibility that their competitors
might go public. However, according to the interviews, the companies mainly focus on their
own targets.
Tesla Motors went public to raise money for the production of its Model S.
Novisource went public on January 28, 2014; the company wanted to go public a few years
earlier, however, it faced decreasing profits because of the financial crisis. Since the company
is financial healthy nowadays, it decided to have its IPO this year. Additive Industries has
recently been founded and will wait to have an IPO until it has finished its functional product.
55
(iv) Do companies that are publicly listed outperform the industry averages and does the
performance of a company increase after an IPO?
During an IPO, companies are receiving an equity infusion. Therefore, it is expected that
financial-leverage ratios drop immediately. However, as is the case with Tesla and
Novisource, the debt to equity ratios might even increase, since companies that have an IPO
might also increase their leverage. According to theoretical implications, high leverage on the
long-term might implicate delisting. However, as is the case with Dell who decided to go
private, competitors might face an even higher debt while deciding to stay public.
Tesla’s financial ratios decreased the year of its IPO and started to increase towards the
industrial average three years after the IPO. Some of Novisource’s financial ratios increased
and some decreased after the IPO.
Ratio analysis might give an indication about the performances of a company, but a research
to the actions and expectations of the managers is required to gain a better financial analysis
of a company and to gain a better insight in the decision to have an IPO and the decision to
stay public or to go private again. Besides, when analyzing several companies’ performances
using ratio analysis, it seems that public companies do not necessarily outperform the industry
averages. Increases in financial performance of a company are often company-specific.
These sub-questions lead to the main question: Should companies issue public shares in order
to survive in the current competitive, global and innovative economic environment?
Findings suggest that IPOs can indeed by very rewarding for companies. When analyzing the
Fortune Global 500, it seems that most companies decided to have an IPO and to stay public.
According to Van der Vorm, the benefits of the going public process for Novisource have
been way larger than the costs. Having an IPO was important to keep growing.
Tesla Motors has been able to raise equity by having an IPO in order to introduce a new car,
which causes the company’s revenues and net income to increase significantly after the IPO.
Also, for Eagle Industry the trade-off between staying public or going private favors the
decision to stay public. Finally, Additive Industries is indeed considering having an IPO in the
near future and expects a positive trade-off. Therefore, it might indeed be profitable for
companies to issue public shares in order to survive in the current competitive, global and
innovative economic environment.
56
However, companies might face structural problems when being public, such as Dell.
Therefore, it must be noted that, although going public is often very advantageous, no
universal pronunciations about having an IPO can be created, since the magnitude of IPO
advantages and disadvantages vary between industries and can be completely companyspecific, and also depend on the wishes and views of the managers.
6.2 Theoretical implications
IPOs and innovation are both important aspects of the modern economy. To date, little
research has been done about the requisite for innovative companies to have an IPO.
Most research has been done before the financial crisis of 2008. Ritter and Welch (2002)
investigated the performances of companies that went public between 1980 and 2001 in the
United States. Bottazzi and Da Rin (2002) analyzed the financing of European innovative
companies in the 1990s. Therefore, this research provides great contribution to the existing
literature.
Furthermore, most studies focus on a large dataset of American or European companies. In
this thesis, several Dutch companies have been analyzed and their managers have been
interviewed to gain detailed information. Therefore, this study does not only contribute to the
theoretical aspect of the going public process and the IPO decision, but also provides practical
examples.
6.3 Managerial implications
Purpose of this research is to check whether it is advantageous for innovative companies to go
public in the recent competitive environment. By means of the results of this research,
managers that read this thesis might gain a better insight in the profitability and disadvantages
of going public. They might use this information to evaluate an IPO decision for their own
company. This may improve the going public process of private companies.
57
6.4 Limitations
This thesis focuses on the going public process and the IPO decision of innovative companies
in the current economic environment. Five companies operating in the information technology
sector have been analyzed and four companies operating in various sectors. Although the
practical results often correspond with the theoretical expectations, it might not be possible to
derive universal conclusions about the IPO decision, since this decision is company-specific
and depends on the view of the company’s managers.
6.5 Future research
Future research about the IPO process and the need to issue public shares could focus on
traditional sectors, in which there is low competition and innovation is not very important.
Besides, since this research focuses on the IPO decision in the current economic environment,
corresponding to period 2004-2014, it is possible that the view and requisite to have an IPO
might change in the future. Not only because the economic and competitive environment can
change due to economic recession or expansion, but also because there are new methods to
finance innovative projects arising, such as crowd funding. Therefore, the empirical results of
this thesis might change during the next ten years, wherefore a new research in the future is
being recommended.
58
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Glossary
Abbreviations
CEO
Chief executive officer
COO
Chief operating officer
EBITDA
Earnings before interest, taxes, depreciation and amortization
FAMOS
Financial Analysis Model of Small and Medium Enterprises
IPO
Initial public offering
IT
Information technology
JPY
Japanese yen
KRW
South Korean won
LBO
Leveraged buyout
MNC
Multinational corporation
NYSE
New York stock exchange
OEM
Original equipment manufacturers
P/B ratio
Price to book ratio
P/E ratio
Price to earnings ratio
R&D
Research and development
ROA
Return on assets
ROE
Return on equity
SMEs
Small and medium-sized enterprises
TWD
New Taiwan dollar
USD
United States dollar
64
Definitions & formulas
Activity ratio: ratios that provide knowledge about the efficiency of the use of assets within a
company.
Current ratio: a liquidity ratio that measures a company’s ability to pay current liabilities
with current assets.
Current ratio =
Datastream: an extensive database that provides a wide range of financial information for all
publicly listed companies worldwide.
Debt to equity ratio: a leverage ratio that compares the company’s total liabilities to its total
shareholders’ equity. It identifies companies that are highly leveraged and are therefore a
higher risk for investors.
Debt to equity ratio =
Dividend Yield: a financial ratio that gives an indication of how much dividends a company
pays out relative to its share price.
Dividend yield =
Financial-leverage ratio: ratios that denote the degree of which a company is being financed
by outside capital.
Initial public offering (IPO): a process by which companies go from private to public. It is
the first sale of a company’s shares to the public and the listing of the shares on a stock
exchange. In the UK, IPOs are often referred to as flotations.
Interest coverage ratio: a financial-leverage ratio that determines the ability for a company
to pay interest on outstanding debt.
Interest coverage ratio =
65
Inventory turnover: a ratio that measures the cost of goods sold to average inventory. It
indicates how rapidly inventory is being sold.
Inventory turnover =
Leverage ratio: a measurement to evaluate the debt levels of a company. It is being used to
get an insight in a company’s methods of financing and it measures the company’s ability to
meet its financial obligations.
Liquidity ratio: a ratio that is being used to determine a firm’s ability to pay off its shortterms liabilities.
Market value: the amount that investors believe a company is worth. It is the total market
value of all outstanding shares in dollars.
Market-value ratio: various ratios that relate the market price of a company’s common stock
to specific financial statement items. They give an indication to the management what the
company’s investors think of the firm’s performance and future prospects.
Net income: The excess of total revenues over total expenses. Net income is calculated by
adjusting the revenues for the cost of doing business, depreciation, interest and taxes. It can be
found on the bottom of a company’s income statement. Also called net earnings.
Net margin: A measure of how much of each dollar that is being earned by a company is
being translated into profits.
Net margin =
Price to book ratio: a market value ratio to compare a company’s stock market value to its
book value.
P/B ratio =
66
Price to earnings ratio: a valuation ratio of a firm’s current share price compared to its pershare earnings. It measures the value that the stock market places on $1 of a firm’s earnings.
P/E ratio =
Profitability ratio: ratios that measure a business’s ability to generate earnings relative to the
company’s sales, assets or equity. The ratio indicates how effectively the profitability of a
firm is getting managed.
Quick ratio: an indicator of a company’s short-term liquidity. The quick ratio measures the
company’s ability to meet its short-term obligations with its most liquid assets. It is also
called acid-test ratio.
Quick ratio =
Return on assets (ROA): a measure of the net income returned on each dollar of assets. This
ratio measures the firm’s success in using the firm’s assets to earn income for the people who
financed the business.
ROA =
Return on equity (ROE): a measure of how well management has used the capital invested
by shareholders. It measures the profitability of a company. Also called rate of return on
common stockholders’ equity.
ROE =
Total asset turnover: a financial ratio that measures the efficiency in which a company is
deploying its assets. It measures the amount of sales or revenues that is being generated per
dollar of assets.
Total asset turnover =
67
Appendix
I: Ratio Analysis of the IT companies
i) Liquidity ratios:
Current Ratio
3,5
3
2,5
2
1,5
1
0,5
0
2004
Apple
HP
Dell
Samsung
Acer
Industry average
2005
2006
2007
2008
2009
2010
2011
2012
2013
Figure I.1: Current ratio of the IT companies
Quick Ratio
3
Apple
2,5
HP
2
Dell
1,5
Samsung
1
Acer
0,5
0
2004
Industry average
2005
2006
2007
2008
2009
2010
2011
2012
2013
Figure I.2: Quick ratio of the IT companies
68
ii) Activity ratios:
Total Asset turnover
3
Apple
2,5
HP
2
Dell
1,5
Samsung
1
Acer
0,5
0
2004
Industrial average
2005
2006
2007
2008
2009
2010
2011
2012
2013
Figure I.3: Total asset turnover of the IT companies
Inventory turnover
120
Apple
100
80
HP
60
Dell
40
Samsung
20
Acer
0
2004
Industrial average
2005
2006
2007
2008
2009
2010
2011
2012
2013
Figure I.4: Inventory turnover of the IT companies
69
iii) Financial leverage ratios:
Debt to equity Ratio
140
120
100
80
60
40
20
0
2004
Apple
HP
Dell
Samsung
Acer
Industry average
2005
2006
2007
2008
2009
2010
2011
2012
2013
Figure I.5: Debt to equity ratio of the IT companies
Interest coverage ratio
400
Apple
300
HP
200
Dell
100
Samsung
0
2004
-100
Acer
2005
2006
2007
2008
2009
2010
2011
2012
2013
Industry average
Figure I.6: interest coverage ratio of the IT companies
70
iv) profitability ratios:
Net margin
30
Apple
20
HP
10
0
2004
-10
Dell
Samsung
2005
2006
2007
2008
2009
2010
2011
2012
2013
Acer
Industry average
-20
Figure I.7: Net margin of the IT companies
Return on equity
80
60
Apple
40
HP
20
Dell
0
-202004
Samsung
2005
2006
2007
2008
2009
2010
2011
2012
2013
-40
Acer
industry average
-60
Figure I.8: Return on equity of the IT companies
Return on assets
40
Apple
30
HP
20
Dell
10
0
2004
-10
Samsung
2005
2006
2007
2008
2009
2010
2011
2012
2013
Acer
Industry average
-20
Figure I.9: Return on assets of the IT companies
71
v) Market-value ratios:
Price to earnings ratio
80
Apple
60
HP
Dell
40
Samsung
20
0
2004
Acer
Industry average
2005
2006
2007
2008
2009
2010
2011
2012
2013
Figure I.10: P/E ratio of the IT companies
Price to book ratio
20
Apple
15
HP
Dell
10
Samsung
5
0
2004
Acer
Industry average
2005
2006
2007
2008
2009
2010
2011
2012
2013
Figure I.11: P/B ratio of the IT companies
Dividend Yield
12
Apple
10
8
HP
6
Dell
4
Samsung
2
Acer
0
2004
Industry average
2005
2006
2007
2008
2009
2010
2011
2012
2013
Figure I.12: Dividend Yield of the IT companies
72
II: Tesla Motors’ financial data
Tesla Motors, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Consolidated Statements of
Operations
Automotive sales
Development services
2009
$ 111,943
—
2010
$ 97,078
2011
2012
2013
19,666
148,568
55,674
385,699
27,557
1,997,786
15,710
Total revenues
111,943
116,744
204,242
413,256
2,013,496
Costs of automotive sales
Development services
102,408
—
79,982
6,031
115,482
27,165
371,658
11,531
1,543,878
13,356
Total costs of revenues
Gross profit
102,408
9,535
86,013
30,731
142,647
61,595
383,189
30,067
1,557,234
456,262
Research and development
Selling, general and administrative
19,282
42,150
92,996
84,573
208,981
104,102
273,978
150,372
231,976
285,569
Total operating expenses
61,432
177,569
313,083
424,350
517,545
Loss from operations
Interest income
Other expense
Other income (expense)
(51,897)
159
(2,531
(1,445
(146,838)
258
(992
(6,583
(251,488)
255
(43
(2,646
(394,283)
288
(254
(1,828
(61,283)
189
(32,934
22,602
Loss before income taxes
Provision for income taxes
(55,714)
26
(154,155)
173
(253,922)
489
(396,077)
136
(71,426)
2,588
$ (55,740)
$ (154,328)
$ (254,411)
$ (396,213)
$ (74,014)
$ (7.94)
$ (3.04)
$ (2.53)
$ (3.69)
$ (0.62)
Net loss
Net loss per share of common
stock, basic and diluted
Weighted average shares used in
computing net loss per share of
common stock, basic and diluted
7,021,963
50,718,302 100,388,815 107,349,188 119,421,414
Table II.1: Tesla Motors’ consolidated statements of operations, retrieved from Tesla Motor 10-K Annual
Report, filed on February 26, 2014.
73
Tesla Motors, Inc.
Consolidated Balance Sheet
(in thousands, except share and per share data)
Consolidated Balance Sheet
Cash and cash equivalents
Short-term marketable securities
Restricted cash
Property, plant and equipment,
net
Working capital (deficit)
Total assets
Convertible preferred stock
warrant liability
Common stock warrant liability
Capital lease obligations
Convertible debt
Long-term debt
Convertible preferred stock
Total stockholders’ equity (deficit)
2009
$ 69,627
—
—
23,535
43,070
130,424
2010
$ 99,558
2011
$ 255,266
2012
$ 201,890
2013
$ 845,889
—
73,597
25,061
23,476
—
19,094
—
3,012
114,636
150,321
386,082
298,414
181,499
713,448
552,229
(14,340
1,114,190
738,494
590,779
2,416,930
1,734
—
—
—
—
—
6,088
8,838
10,692
—
800
496
2,830
9,965
12,855
—
—
—
—
586,119
—
71,828
268,335
401,495
—
319,225
—
—
—
—
$ (253,523)
$ 207,048
$ 224,045
$ 124,700
$ 667,120
Table II.2: Tesla Motors’ consolidated balance sheet, retrieved from Tesla Motor 10-K Annual Report, filed on
February 26, 2014.
74
III: Graphical visualization of Tesla Motors’ performance
Liquidity ratios
7
6
5
4
3
2
1
0
2009
Current ratio
Industrial average
Quick ratio
Industrial average
2010
2011
2012
2013
Figure III.1: Liquidity ratios of Tesla Motors
Activity ratios
10
8
Asset turnover
6
Industrial average
4
Inv. turnover
2
Industrial average
0
2009
2010
2011
2012
2013
Figure III.2: Activity ratios of Tesla Motors
Financial leverage ratios
500
0
2009
Debt to equity
2010
2011
-500
-1000
2012
2013
Industrial average
Interest coverage
Industrial average
-1500
Figure III.3: Financial leverage ratios of Tesla Motors
75
Profitability ratios
50
0
2009
-50
Net margin (%)
2010
2011
2012
Industrial average
2013
ROE (%)
-100
Industrial average
-150
ROA (%)
-200
Industrial average
-250
Figure III.4: Profitability ratios of Tesla Motors
Market-value ratios
35
30
25
20
15
10
5
0
2009
Price/book
Industrial average
Dividend Yield
Industrial average
2010
2011
2012
2013
Figure III.5: Market-value ratios of Tesla Motors
Yearly results
2500000
2000000
1500000
Revenues
1000000
Gross profit
500000
0
-5000002009
Net income
2010
2011
2012
2013
-1000000
Figure III.6: Yearly results of Tesla Motors
76
IV: General information about the conducted interviews
To gain a closer insight to the investigated companies of section 5, several interviews have
been conducted.
During the interviews, general questions about the company’s business, performance,
competitors and innovation have been asked. Besides, the managers have been asked about
their opinion about the company-specific advantagess, disadvantages and best timing of
having an IPO. The managers of companies that already had an IPO have been asked whether
they are satisfied about the achieved performance and whether it is more advantageous for
their companies to stay listed or to go private.
Willem van der Vorm, Chief Executive Officer of Novisource N.V., has been interviewed on
July 10, 2014, at his office in Nieuwegein. Van der Vorm has been CEO of the company since
September 2011. His mission was explicitly to take Novisource public. During the interview,
van der Vorm talked about the activities of the company and about the reasons to take
Novisource public. Besides, the performance of the company has been discussed and its future
growth possibilities.
Dwight van de Walle, senior manager of EKK Eagle Holding Europe, has been interviewed
September 5, 2014, at his office in Kerkrade. During this interview, Dwight talked about the
reason for the company’s IPO and the current purpose to stay public. Also, he talked about the
fact that cross listing is not important for the company.
Jonas Wintermans, chief operating officer and co-founder of Additive industries, has been
interviewed on October 3, 2014, at his office in Eindhoven. Wintermans talked about the
activities of the company and the ways it collected capital to be able to make investments.
Besides, a possible future IPO has been discussed as alternatives for private equity funding
and by strategic investors.
The interviews have been semi-structured and contained open ended questions. The results of
the conducted interviews are described in section 5. Contact information is available on
request.
77
V: Novisource’s financial data
Novisource
Statements of income - Six months ended
(* €1, except per share amounts)
Statements of income
six months ended
Dec 31, 2013
June 6, 2014
Total net revenue
Cost of revenue
Gross profit
€ 11,683,791
7,778,265
3,905,526
€ 18,133,987
13,764,733
4,369,254
Operating expenses:
Depreciation intangible assets
Depreciation tangible assets
Salaries
General administrative expenses
Total operating expenses
Operating Income
21,147
3,417,345
297,693
3,736,185
169,341
1,000
19,889
3,689,972
416,318
4,127,179
242,075
Difference between purchase price and net equity value
Novisource N.V. on date of acquisition
Financial income and expenses
Income before income taxes
Income tax provision
Net income
687
168,654
42,163
€ 126,491
6,294.288
3.224
6,055,437
59,882
€ 6,115,319
Earnings per share: (11.613.923 shares outstanding):
Basic
Diluted
0.01
0.01
0.53
0.53
Table V.1: Novisource’s statement of income for the first six months of 2014 and last six months of 2013,
retrieved from Novisource semiannual report, filed on August 29, 2014. Novisource paid out €1,500,000
dividends in the first six months of 2014 and € 91,690 in the last six months of 2013. There were 11,613,923
shares outstanding.
78
Novisource
Balance sheet – Six months ended
(* €1, except per share amounts; unaudited)
Balance sheet
six months ended
Fixed assets:
Intangible assets
Tangible assets
Total fixed assets
Current assets
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Liabilities:
Equity attributable to the equity holders of the company
Total shareholder’s equity
Current liabilities:
Accounts payable and other payables
Total current liabilities
Total equity and liabilities
Dec 31, 2013
June 6, 2014
€134,738
134,738
€ 66,500
157.548
224,048
4,993,717
4,074,767
9,068,848
9,203,222
9,277,034
1,827,820
11,104,854
11,328,902
3,037,760
3,037,760
2,916,729
2,916,729
6,165,462
6,165,462
€ 9,203,222
8,412,173
8,412,173
€ 11,328,902
Table V.2: Novisource’s balance sheet for the first six months of 2014 and last six months of 2013, retrieved
from Novisource semiannual report, filed on August 29, 2014.
79
VI: Graphical visualization of Novisource’s performance
Liquidity ratios
2,5
2
1,5
Current ratio
1
Industrial average
0,5
0
Dec 31, 2013
June 6, 2014
Figure VI.1: Liquidity ratios of Novisource
Activity ratios
2
1,5
Asset turnover
1
Industrial average
0,5
0
Dec 31, 2013
June 6, 2014
Figure VI.2 Activity ratios of Novisource
Financial leverage ratios
35
30
25
20
15
10
5
0
Dec 31, 2013
Debt to equity
Industrial average
June 6, 2014
Figure VI.3: Financial leverage ratios of Novisource
80
Profitability ratios
250
Net margin (%)
200
Ind. avg
150
ROE (%)
100
Industrial average
50
ROA (%)
0
Dec 31, 2013
-50
June 6, 2014
Industrial average
Figure VI.4: Profitability ratios of Novisource
Yearly results
20.000.000
15.000.000
Revenues
10.000.000
Gross profit
Net income*
5.000.000
0
Dec 31, 2013
June 6, 2014
Figure VI.5: Yearly results of Novisource. *Difference of € 6,294,288 between purchase price and net equity
value Novisource N.V. on date of acquisition
81
VII: Eagle Industry financial data
Eagle Industry
Balance sheet
(in millions of Japanese Yens)
ASSETS
Current assets:
Cash and deposits
Notes and accounts receivabletrade
Allowances for doubtful
accounts
Inventories
Deferred tax assets
Other current assets
Total current assets
Property, plant and equipment:
Land
Buildings and structures
Machinery and equipment
Furniture and fixtures
Lease assets
Construction in progress
Total
Accumulated depreciation
Net property, plant and
equipment
Investments and other assets:
Investments in securities
Long-term loans
Goodwill
Deferred tax assets
Other assets
Allowances for doubtful accounts
Total investments and other
assets
Total
2009
2010
2011
2012
2013
¥ 13,279
18,586
¥ 15,160
21,932
¥ 17,469
23,300
¥ 12,456
25,791
¥ 13,944
27,966
(17)
(81)
(188)
(216)
(238)
12,132
755
2,345
47,080
10,225
1,090
1,827
50,153
10,898
1,296
1,657
54,432
12,617
890
3,271
54,809
15,558
1,129
3,639
62,031
3,718
19,959
33,626
4,445
417
1,163
63,328
(34,914)
3,805
20,877
36,522
4,238
379
645
65,566
(38,457)
3,954
21,270
37,034
4,702
415
566
67,941
(40,816)
4,469
22,149
39,634
5,615
788
2,062
74,717
(44,060)
28,414
28,109
27,125
30,657
4,577
12,763
13,249
1,594
288
3,184
35,658
(already
included)
35,658
6,267
1,962
7,501
3,361
1,384
(235)
20,240
10,641
1,825
4,959
3,337
1,445
(120)
22,087
9,460
1,816
6,080
3,204
1,421
(98)
21,883
9,314
1,717
6,231
3,080
1,867
(300)
21,909
12,393
1,776
5,525
3,059
2,467
(254)
24,966
¥ 95,734
¥ 100,349
¥ 103,440
¥ 107,375
¥ 122,658
Table VII.1a: Eagle Industry’s balance sheet part 1, retrieved from Eagle Industry’s annual statements on
http://www.ekkeagle.com/en/ir/docs/report.html
82
LIABILITIES AND SHAREHOLDERS’
EQUITY
Current liabilities:
Short-term bank loans
Current portion of long-term
debt
Trade accounts payable
Income taxes payable
Accrued expenses
Accrued bonuses for employees
Lease liabilities
Other current liabilities
Total current liabilities
Long-term liabilities:
Long-term debt
Lease liabilities
Allowance for retirement
benefits
Allowance for retirement
benefits for directors and
corporate auditors
Negative goodwill
Other liabilities
Long-term liabilities
Net Assets:
Shareholders’ equity:
Common stock
Capital surplus
Retained earnings
Treasury stock
Total shareholders’ equity
Valuation, translation adjustment
errors:
Unrealized gain on available-forsale securities
Foreign currency translation
adjustments
Total valuation, translation
adjustment and others
Minority interest
Total net assets
Total
2009
2010
2011
2012
2013
¥ 7,577
4,979
¥ 6,391
7,330
¥ 6,464
7,767
¥ 4,878
9,394
¥ 4,835
9,448
3,129
731
4,436
993
128
5,521
27,494
4,992
1,133
4,464
1,135
94
5,518
31,057
5,314
1,943
6,572
1,655
79
5,235
35,029
5,898
1,437
7,417
1,816
76
4,998
35,914
6,603
2,148
9,890
1,993
77
5,887
40,881
25,365
163
8,369
18,635
107
7,944
18,137
126
8,153
19,434
185
8,196
19,968
207
7,945
179
97
87
122
34,167
254
627
27,746
239
667
27,419
223
768
28,893
206
785
29,235
10,491
11,338
14,529
(493)
35,865
10,491
11,338
16,859
(495)
38,193
10,491
11,364
21,321
(457)
42,719
10,491
11,407
23,913
(1,080)
44,732
10,491
11,461
27,767
(986)
48,733
35
93
96
89
223
(4,678)
(3,282)
(7,029)
(7,819)
(3,197)
(4,643)
(3,189)
(6,933)
(7,730)
(2,973)
2,851
34,073
6,542
41,546
5,206
40,992
5,567
42,568
6,781
52,541
¥ 95,734
¥ 100,349
¥ 103,440
¥ 107,375
¥ 122,658
270
Table VII.1b: Eagle Industry’s balance sheet part 2, retrieved from Eagle Industry’s annual statements on
http://www.ekkeagle.com/en/ir/docs/report.html
83
Eagle Industry
Income statement
(in millions of Japanese Yens)
Net sales
Cost of sales
Gross Profit
Selling, general and administravie
expenses
Operating income
Other income (expenses):
Interest and dividends income
Interest expense
Loss on disposal of property,
plant and equipment
Loss on impairment of
property, plant and equpment
Amortization of transitional
obligations for employees’
retirement benefits
Equity in earnings of affiliated
companies
Foreign currency exchange loss
Gain on sales of investments in
securities
Loss on liquidation of business
Others-net
Other income (expenses)-net
Income before income taxes and
minority interest
Income taxes
Minority interest in net income
Net income
2009
¥ 78,168
62,143
16,025
12,779
2010
¥ 76,063
59,667
16,396
12,294
2011
¥ 91,920
69,669
22,251
13,534
2012
¥ 96,237
73,486
22,751
16,543
2013
¥ 102,817
78,558
24,259
16,680
3,246
4,102
8,717
6,207
7,579
185
(840)
(224)
881
(919)
(138)
214
(821)
(189)
385
(812)
(186)
122
(672)
(214)
(38)
-
-
-
(76)
(76)
-
-
-
877
700
1,102
1,376
756
(481)
(253)
789
(402)
(241)
3
578
(195)
3,051
315
40
1,301
5,403
89
(7)
8,710
139
661
6,869
264
473
8,052
1,315
399
1,774
1,062
2,935
904
2,931
925
2,598
952
¥ 1,337
¥ 2,567
¥ 4,871
¥ 3,013
¥ 4,501
Table VII.2: Eagle Industry’s Income statement, retrieved from Eagle Industry’s annual statements on
http://www.ekkeagle.com/en/ir/docs/report.html
84
VIII: Graphical visualization of Eagle Industry’s performance
Liquidity ratios
6
5
4
Current ratio
3
Industrial average
2
Quick ratio
1
Industrial average
0
2009
2010
2011
2012
2013
Figure VIII.1: Liquidity ratios of Eagle Industry
Activity ratios
7
6
5
4
3
2
1
0
2009
Asset turnover
Industrial average
Inv. turnover
Industrial average
2010
2011
2012
2013
Figure VIII.2: Activity ratios of Eagle Industry
Financial leverage ratios
140
120
100
80
60
40
20
0
2009
Debt to equity
Industrial average
Interest coverage
Industrial average
2010
2011
2012
2013
Figure VIII.3: Financial leverage ratios of Eagle Industry
85
Profitability ratios
20
Net margin (%)
15
Industrial average
ROE (%)
10
Industrial Average
5
ROA (%)
0
2009
Industrial Average
2010
2011
2012
2013
Figure VIII.4: Profitability ratios of Eagle Industry (Net margin very close to ROA, and therefore barely visible)
Market-value ratios
25
Price/earnings
20
Industrial average
15
Price/book
10
Industrial Average
5
Dividend Yield
0
2009
Industrial Average
2010
2011
2012
2013
Figure VIII.5: Market-value ratios of Eagle Industry
Yearly results
120
100
80
Revenues
60
Gross profit
40
Net income
20
0
2009
2010
2011
2012
2013
Figure VIII.6: Yearly results of Eagle Industry (in million of Japanese Yens)
86