Shifting landscape — Are you ready?

Global IPO trends report 2009

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Foreword
The severe economic downturn in 2008 sent worldwide IPO markets
plummeting by over 60% in both deal numbers and funds raised
since 2007. With assets being revalued globally, no IPO market was
insulated from the nancial crisis. The spreading nancial contagion
effectively shut down public markets worldwide bringing to an abrupt
end the record-setting IPO boom years of 2006–07. Even so, some
larger quality companies with strong business plans still managed
to access the public markets with positive results. Despite faltering
economies and sinking stock markets in 2008, the US and China led
in IPO fundraising and deal numbers, respectively, while Saudi Arabia
emerged as the third largest IPO market.
Trends in IPO activity can be difcult to predict, especially in
times of market volatility. Global markets will require a period of
macroeconomic stability and condence rebuilding for the window
of IPO opportunity to reopen. Nevertheless, the 2009 IPO pipeline
contains many quality companies from both developed and emerging
markets, which continue to ready themselves to go public while
waiting for market conditions to improve.
After extensive interviews with some of the world’s top investment
bank leaders and stock exchange leaders, Ernst & Young’s Global IPO
trends report 2009 reviews the major developments in the worldwide
IPO markets of 2008 and the rst quarter of 2009. As the sixth
global IPO report produced by Ernst & Young, this review offers an
in-depth examination of the key trends for companies planning an IPO
today, as well as perspectives on IPO readiness.
As Jim Turley, Chairman and CEO, Ernst & Young emphasizes in
the report’s opening interview, “A crisis is a terrible thing to waste.”
Indeed, many market-leading companies were formed during
challenging economic times. Companies that undergo an effective
IPO readiness transformation during these tough times will be the
rst to go public when markets reopen. Early signs suggest a shift
toward a new economic landscape favoring companies that offer
innovative and productive solutions for the changing environment.
We look forward to working with these pioneering companies in their
transformation from a private entity to a public enterprise.
Global IPO Trends Report 2009

Contents
An interview with Jim Turley, Chairman and CEO, Ernst & Young

From nancial crisis to opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Perspectives on global IPO markets

Global
Global IPO activity has more than halved since 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Interviews:
Edward Law, Deutsche Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Scott Cutler, NYSE Euronext . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Graphics:
Top 20 IPOs by capital raised, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Global IPO activity by region in 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

The US
US raises the most IPO funds despite faltering economy . . . . . . . . . . . . . . . . . . . . . . . . . 18
Interview:
Lisa Carnoy, Bank of America Merrill Lynch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

China
China launches the most IPOs despite stock market plunge. . . . . . . . . . . . . . . . . . . . . . . 24
Interviews:
Rowena Chu, John Lydon, Heidi Yang, Deutsche Bank . . . . . . . . . . . . . . . . . . . . . . . 27

Europe
Emerging market companies still dominate London listings . . . . . . . . . . . . . . . . . . . . . . 29
Interview:
George Magnus, UBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

The Middle East

Saudi IPO markets ourished until late 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Interview:
Jeff Singer, NASDAQ-Dubai. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Perspectives on IPO readiness

Top 10 IPO readiness challenges, a Measures that matter global study. . . . . . . . . . . . . . 40

A panel discussion: post-IPO value creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
The impact of MiFID on the European securities market . . . . . . . . . . . . . . . . . . . . . . . . . 45
Managing for success in turbulent times. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Denition of an IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

1
From financial crisis
to opportunity

What do you think caused the current
global nancial crisis?
The current situation is really complex, and
you’re never going to be able to point to just
one cause. A lot of different circumstances
overlapped and it’s that combination that has
created the “perfect storm” that we see today.
It is clear that at the heart of everything was
too many lenders making some really bad
loans. On top of that was many investors,
nancial institutions and consumers using
too much leverage and investing in nancial
instruments that they didn’t understand well
enough — often with little underwriting diligence
and an unrealistic expectation that property
prices would continue to rise indenitely.
If those were the causes, what do you think
the implications are?
Well, I think everyone can see that during
2008 the crisis had moved from just nance
into the so-called “real” economy, and
that’s hurting people around the world.
Unemployment is high and going higher — not
only in countries like the US and Britain, but
everywhere. Around the globe, trade levels
have plunged, consumer condence is way
down and stock markets have tumbled. And
lending is still tight, with even rock-solid
companies nding it difcult to borrow.
In terms of IPOs, the market has slumped,
too, with new listings dropping by more than
half from 2007 to 2008, and capital raised
dropping by something like two-thirds.
So, 2009 looks to be the most difcult year
for the global economy in decades. But
set against all this doom and gloom I think
we can take some comfort in the fact that
business and governments around the globe
have grasped the scale of the challenge
An interview with Jim Turley,
Chairman and CEO, Ernst & Young
For entrepreneurs, the industry shake-ups
unleashed by the nancial crisis are an
opportunity to pursue bold new ideas about
how to thrive in the new environment
and are working together to get the global
economy moving again.
What can we do to get out the current
situation?
Of course that’s what everyone’s discussing
these days. I think the best way for me to
answer that is actually to say some things
that we shouldn’t be doing. First, we can’t
retrench into protectionism — in the US or
anywhere. It might be human nature for
leaders in some parts of the world to think,
“Let’s protect our people by putting high
walls around our country.” But it’s a bad idea.
Globalization has done more to lift economies
and lift people throughout the world than
anything else. Protectionism would surely
slow the recovery.
Second, as we create new regulatory
frameworks, we mustn’t stie innovation and
entrepreneurship — the engines of economic
growth. Getting the balance right will be
key — providing protection for investors, but
also encouraging prudent risk-taking.
Third, governments should not see state
ownership as a long-term solution. While
it has been important for governments to
intervene to help stabilize several nancial
institutions, over the long term, governments
simply don’t allocate capital as efciently or
effectively as free markets.
I believe that any time of crisis is also a
time of opportunity for anyone with a
real entrepreneurial attitude — people or
companies who can move quickly and focus
on what they can gain instead of only what
they could lose.
Lastly, as you travel around and speak
with policy-makers, corporate boards,
entrepreneurs and others, what are the key
messages you try to leave them with?
It’s been said that “a crisis is a terrible thing
to waste,” and I tend to agree with that. A
time of upheaval presents an opportunity
for leaders, in government and the private
sector, to do things that would be more
difcult to do in more stable times.
Reform and modernization of nancial
regulation should be a top priority, with the
goal of plugging the holes that have been
exposed by the current nancial crisis.
There should also be efforts to identify
future vulnerabilities and to address them
before problems erupt. And to do all this in a
globally coordinated way.
Governments should also reduce red tape
and provide incentives for the formation of
capital that will be invested in innovation and
entrepreneurial initiatives to spur growth
momentum around the globe.
For entrepreneurs, the industry shake-ups
unleashed by the nancial crisis are an
opportunity to pursue bold new ideas about
how to thrive in the new environment.
Innovators in the public and private sectors
can focus on overcoming looming challenges,
such as climate change, with dynamic clean
technologies and sensible policies.
The nancial crisis has taken a heavy
toll on billions of people throughout the
world. As we all work to try to mitigate the
damage from the current crisis, we should
also be taking this opportunity to prevent
the next crisis — ensuring that nancial
markets around the world serve as engines
of economic growth and opportunity and
help to build a brighter tomorrow for future
generations.
3
Perspectives on global IPO markets
Global IPO activity
has more than halved since 2007
Key trends
• Due to market turmoil, 2008 global IPO activity fell by 61% in
deal numbers and 67% in funds raised
• Emerging market companies sourced 15 of the 20 largest
IPOs (including 4 each from China and Saudi Arabia)
• The largest IPO was the US$19.7 billion Visa deal on the
NYSE representing 21% of total capital raised globally
• A widening gap in valuations expected by investors and
companies makes pricing and executing deals challenging
• The US raises the most IPO capital, China launches the most
IPOs, Saudi Arabia hosts 4 of the world’s top 20
• The nancial, energy and power and materials sectors
raise the most IPO capital while real estate, healthcare and
technology IPOs decline 90% on average
• 80% of equity issuances are follow-on offerings; over half are
recapitalizations of nancial rms
• Large, quality companies in energy, infrastructure, cleantech
and healthcare are expected to be the rst to go public
• Private placements bridge short-term funding gaps, while
offering attractive entry points for investors into companies
In 2008, the global nancial crisis led worldwide IPO activity to
plummet by more than half. Investor appetite and companies’
willingness to list were severely undermined by tumbles in market
indices averaging 40%, constrained credit and the abrupt collapse of
the globalized banking system. Around the world, the major obstacles
to an IPO include shaky economic fundamentals, negative investor
sentiment and volatility in equity markets. Seeking to stabilize
markets and revive their economies, the world’s governments are
cutting interest rates and crafting stimulus packages and industry
bailout plans. In the process, the rules governing global capital
markets, including IPOs, continue to be rewritten in 2009.
4 Global IPO trends report 2009
During 2008, a total of 762 IPOs worldwide raised US$95.2 billion,
representing a 61% drop in deal numbers and a 67% decline in capital
raised from 2007 (see gure 1, page 6).1 2008 saw the lowest
number of IPOs since at least 19952 and since 2003 for capital raised.
Faced with the lowest market valuations since the 1980s, a record
number of prospective IPOs were withdrawn or postponed. By stark
contrast, in 2007, global IPO activity had soared to an all-time high
with 1,979 deals and US$287.1 billion in capital raised (see gure 1,
page 6).
In the rst quarter of 2009, IPO markets continued to stagnate as
volatile markets made it difcult to price and execute deals. Globally,
a total of 51 IPOs in a wide range of sectors raised a mere US$1.4
billion (see gure 4, page 8). The largest offering for the quarter was
the US$828 million carve-out IPO of Mead Johnson Nutrition Co. on
the New York Stock Exchange (NYSE).
Large, emerging market companies sustain 2008 global IPOs
A few market-leading companies were well received by the world’s
public markets in 2008, almost all in the rst half. The largest IPO of
the year, and the biggest ever in US history, was the US$19.7 billion
Visa IPO on the NYSE, which represented 21% of total capital raised
globally (see page 16).
In 2008, the emerging markets were the source of 15 of the 20
largest IPOs worldwide (including 4 from China and 4 from Saudi
Arabia) (see page 16). The second largest IPO was the US$5.7
billion offering of China Railway Construction Corp. Ltd, a dual listing
on the Shanghai and Hong Kong stock exchanges. The third largest
offering was Brazil’s biggest ever, the US$4.1 billion IPO of oil and gas
company OGX on the Sao Paolo Stock Exchange. In 2008, the deal
threshold required to make the top 20 of global IPOs fell to US$0.85
billion, a 56% decline from 2007.
Market volatility diminishes valuations
High volatility and depressed valuations put the brakes on global
IPO markets. Pricing businesses has become extremely difcult as
market prices of comparable public companies uctuated so widely
(up to 5-10%) each day. “Probably one of the biggest challenges to
the IPO market now is that public market valuations have come down
so signicantly — in some cases, 70% off where they were less than
a year ago,” says Scott Cutler, Executive Vice President, America’s
Listing, NYSE Euronext.
1 Unless otherwise specied, all IPO data in the report is based on annual and quarterly
data provided by Dealogic, Thomson Financial and Ernst & Young
2 Ernst & Young rst began tracking global IPO activity in 1995
Around the world, the major
obstacles to an IPO include shaky
economic fundamentals, negative
investor sentiment and volatility
in equity markets

The expectation gap for valuations continues to widen between
investors and companies looking to go public. “Prelisted companies
are in a state of denial about the depressed valuations as reected
in their stock price and what they consider fair market value for their
company,” says Philip Leung, Ernst & Young Strategic Growth Markets
Leader in China. “We still need a valuation reset in the IPO market,
says Cutler. “Quite frankly, investors won’t tolerate anything else.”
Despite IPO declines, emerging markets still drive global growth
With assets being revalued globally, no IPO market was insulated
from the nancial crisis. Almost all countries saw a substantial drop in
numbers and fundraising, even those that had been IPO powerhouses
in recent years, such as BRIC countries (Brazil, Russia, India and
China). In 2008, the BRIC countries together hosted 163 deals worth
US$28 billion, a 62% drop in deal numbers and a 76% decline in funds
raised from 2007 (see page 17).
In early 2008, emerging markets appeared to be relatively immune
to developed market economic meltdown. However, by the end of
2008, decoupling theories were thoroughly debunked as emerging
markets suffered a severe loss in asset values, liquidity and investor
condence, just as in the developed markets.
Nevertheless, in 2009, emerging markets continue to grow, albeit
more slowly at 3.3% on average.3 On the other hand, developed
markets are forecast to sustain a GDP contraction of approximately
-1.6 to 2%4 and go through an ofcial recession.
IPO markets in Americas, Europe and Russia were hardest-hit
In the face of weakening economic fundamentals and the subprime
crisis, the US saw 31 IPOs worth US$25.9 billion, an 82% fall in deal
numbers and 24% decrease in funds raised from the previous year.
Even so, in 2008, the US was the fundraising leader with 27% of the
total global capital raised — this was due primarily to the massive Visa
deal, which by itself, made up 21% of global fundraising.
Latin American markets also ground to a halt in response to the
global credit crunch, falling commodity prices and rising interest rates.
In 2008, the region saw just 10 IPOs together worth US$7.3 billion, a
89% plunge in deal numbers and a 81% decline in funds raised from
2007 (see page 17). Regionally, Latin America made up 8% of global
IPO funds raised in 2008, compared 13% in 2007.
European companies grappled with bleak earnings outlooks, sinking
stock markets and looming recession. Europe generated just 168
3 Gross domestic product (GDP) growth rates, IMF World Economic Outlook,
October 2008
4 Ibid.
deals worth US$13.6 billion, representing a 67% decrease in deal
numbers and an 85% drop in funds raised from 2007. As a region,
Europe accounted for 14% of global IPO fundraising, compared with a
32% share in 2007.
Threatened by the global banking crisis, oil price uctuations,
exchange rate devaluations and accelerating ination, Russia saw
only two deals worth US$1 billion — a collapse of 90% in deal numbers
and 95% in funds raised from 2007.
China remains an IPO leader, Saudi Arabia becomes a player
Despite the bursting of the equity bubble, Chinese IPOs were
sustained by a still fast growing economy and infrastructural
privatizations. In 2008, Greater China retained its lead globally in
IPO deal numbers and came in second only to the US in fundraising,
with 127 deals worth a total of US$17.9 billion, a 51% drop in deal
numbers and a 73% decline in funds raised from 2007.
The widening nancial crisis helped trigger high volatility in India’s
stock markets in 2008. India’s 40 IPOs raised US$4.8 billion,
representing a 62% drop in number of deals and 45% decline in funds
raised, compared with 2007. India’s energy company Reliance Power
was the fourth largest IPO, raising US$3.0 billion on the Bombay
Stock Exchange, but now trades far below its offer price.
In the rst half of 2008, the Middle East, particularly Saudi Arabia,
emerged as a major player in the global IPO market. Shored up by
vast liquidity, soaring oil prices, infrastructural development and
privatizations, the Middle East yielded 51 IPOs worth US$13.2 billion,
representing 17% of global capital raised (compared with 7% in
2007). Indeed, 4 of the world’s top 20 deals were from Saudi Arabia.
However, by the end of 2008, deated oil prices and global nancial
crisis halted Saudi IPO momentum.
Financial, energy and natural resources IPOs prevail
Although all industries contributed to 2008 global IPO activity, the
top three sectors accounted for 63% of total fundraising: nancial
services (US$26.0 billion), energy and power (US$18.3 billion) and
materials (US$16.0 billion). By number of deals, the leading sectors
for IPOs were materials (185 offerings), industrials (108) and
technology (84) (see gure 3, page 7).
With all sectors down, risk-averse investors heavily discounted
high-growth companies in particular. In funds raised, real estate,
healthcare and technology industries declined the most, generating
just US$1.8 billion (down 94% from 2007), US$1.1 billion (down
89%) and US$1.9 billion (down 88%).

5
Perspectives on global IPO markets
Figure 1: Global IPO activity by year
Capital raised (US$b)
1,837 1,883
1,748
1,372
1,042
$132 $145 $116 $177 $210
1996 1997 1998 1999 2000
Source: Dealogic, Thomson Financial, Ernst & Young
Follow-on offerings make up about 80% of equity issuance in 2008
With the market instability and harsh debt constraints, wary investors
focused on follow-on offerings (share offerings from already-public
companies). Typically perceived by investors as less risky and volatile
than IPOs, follow-on offerings made up about 80% of equity issuance
in 2008, with 2,664 deals worth US$554.4 billion. “Follow-ons are
happening now because of renancing challenges,” says Michael
Lynch-Bell, Ernst & Young UK IPO Services Leader. “Lower protability
has led to concerns about breaching debt covenants. Raising additional
equity through follow-on offerings is the best solution.”
Capital raising in 2008 was heavily biased towards recapitalization. In
the wake of huge write-downs, nancial services rms made up 55%
of global follow-on fundraising. Large global banking institutions used
capital gained through follow-on offerings to repair balance sheets
and nance acquisitions. Other leading sectors for follow-on offerings
were metals and mining with 10% of total funds raised and energy
and power with 7%.
Major exchanges lose market share, but trend may be reversing
The top three exchanges in 2008 by capital raised were the NYSE, the
LSE and the Hong Kong Stock Exchange (HKEx) (see gure 2, page 7).
Buoyed by the Visa listing, the NYSE accounted for US$24.8 billion (26%
of global capital raised), the LSE made up US$5.5 billion and the HKEx
hosted US$4.8 billion. By number of deals, the top three exchanges were
the Australian Stock Exchange (65 IPOs), AIM London (27) and HKEx
(24) (see gure 2, page 7).
In 2008, the developed market exchanges continued to lose market
share to emerging market bourses in the Middle East and Asia. In the
competition between stock exchanges, IPOs have become the eagerly
sought-after trophies. As capital markets globalize, local exchanges
outside the main markets have proven themselves highly capable of
hosting large public offerings. In 2008, 72% of all IPOs (in number
of deals) did not list on the top 10 stock exchanges. Historically,5
including the year 2008, around 90% of IPOs take place on their
home exchanges.
5 In every year since Ernst & Young started tracking global IPO activity in 1995
6 Global IPO trends report 2009
Number of deals
1,979
1,729
1,517 1,537
832 864
839 762
$94 $66 $50 $125 $167 $246 $287 $95
2001 2002 2003 2004 2005 2006 2007 2008
However, newly risk-averse investors may be driving issuers back
toward the more established major exchanges such as the NYSE or LSE.
Nowadays, these main exchanges may be deemed “safer” because
of the perceived instability of smaller exchanges, especially in the
emerging markets. “The recent volatility shows that stocks listed on
a big exchange generally are more stable,” says Mark Jarvis, Ernst &
Young UK Inbound IPO Leader. “Going forward, probably more emerging
markets companies will consider listing on the larger exchanges.”
Private placements may bridge short-term funding gaps
Due to the challenges in raising capital through equity and debt
markets, companies might decide to do a private placement (i.e.,
place shares privately with institutional shareholders). Through
private placements, a company can access long-term capital without
risking its reputation in a possibly unsuccessful IPO. “Such private
placements can bridge short- or medium-term funding gaps for
corporations while offering reasonably attractive entry points for
investors into companies,” says Edward Law, Co-Head of Western
Europe Equity Capital Markets, Deutsche Bank.
While private placement funding can tide a prelisted company over
until it is ready to borrow again or do a proper IPO, it does have its
drawbacks. For example with today’s reduced valuations, private
placements set a lower benchmark for the valuation of the company.
A private placement could provide enough capital to avoid the public
markets for the short term, but eventually investors will need more
substantial capital, which is typically best achieved through an IPO.
Beyond 2009, PE may pursue IPOs to monetize or deleverage
Although unattractive valuations and pricing of IPOs made new
issuances difcult in 2008, private equity (PE) could be a key source
of IPOs beyond 2009. Under increasing pressure to release capital
to investors, PE rms may be encouraged to exit investments earlier
than they would normally choose, and determine the IPO market to
be the best available capital source. “Sponsors may want to pursue
an IPO to start the monetization process or to deleverage the balance
sheet ahead of near-term debt maturities,” says Lisa Carnoy, Global
Head of Equity Capital Markets, Bank of America Merrill Lynch.
Figure 2: Global IPO activity by stock exchange*

Number of deals Total capital raised

NASDAQ: 2% (16) NYSE: 2% (16) NASDAQ: 1.6% (US$1.5b)

LSE: 1% (6)
NYSE: 26% (US$24.8b)
AIM: 3.5% (27)
LSE: 6% (US$5.5b)
Euronext: 1% (10)
AIM: 1% (US$1.0b)
Alternext: 0.8% (6)
Euronext: 3% (US$2.5b)
Other: 72% Deutsche Borse: 0.4% (3) Other: 53%
(547) (US$50.7b) Alternext: 0.1% (US$0.057b)
HKEx: 3% (24)
Deutsche Borse: 0.6% (US$0.6b)
Tokyo: 1% (8)
HKEx: 5% (US$4.8b)
Toronto: 2% (13)
Tokyo: 0.4% (US$0.4b)
ASX: 8.5% (65)
Toronto: 0.8% (US$0.8b)
SGX: 3% (21)
ASX: 1.7% (US$1.6b)
SGX: 1% (US$0.9b)

*Data based on the stock exchange, regardless of the listed company domicile
Source: Dealogic, Thomson Financial, Ernst & Young

Figure 3: Global IPO activity by industry, 2008

Number of deals Total capital raised

Telecommunications: 3% Telecommunications: 7%
Retail: 4% Retail: 2%
Consumer products and services: 8% Consumer products and services: 2%
Real estate: 4%
Consumer staples: 6% Real estate: 2% Consumer staples: 4%
Media and
entertainment: 4% Energy and power: 8% Media and Energy and power: 19%
entertainment: 1%

Materials: 24% Financials: 9% Materials: 17%

Healthcare: 5%
Industrials: 15% Financials: 28%

Industrials: 14% High technology: 11% High technology: 2% Healthcare: 1%

Source: Dealogic, Thomson Financial, Ernst & Young

M&A volumes deteriorate, although buying opportunities abound
Bringing to a close ve consecutive years of M&A growth, global M&A
volume reached US$2.9 trillion in announced deals, a decline of 29%
from 2007 totals.6 The difculty in deal-making was reected in the
1,194 withdrawn M&A transactions during the year, the highest level
since 2000. Potential buyers have exercised caution in the midst of
market uncertainty.
Nevertheless, it is expected that in 2009 and beyond, companies with
relatively stable stock prices and strong balance sheets will be driving
the M&A markets. Cash-rich businesses are viewing the economic
crisis as an opportunity to “buy or bury” the competition. Such
companies will likely begin to acquire undervalued and distressed
assets of “strategic ts” within a year or so.
6 M&A Review full year 2008, Dealogic, January 2009
Long-term fundamental investors will be primary IPO investor base
The recent capital market turbulence will probably shift the primary
target investor base for IPOs to the more traditional “long-only”
fundamentals-based investors. These are investors, such as mutual
funds and pension funds, with committed long-term capital and
fundamental views. Since 2004, hedge funds typically bought around
a quarter of all IPOs. However, in 2008-09, hedge funds lost capital
due to the withdrawal of funds by institutional investors under pressure
from the nancial crisis.
Thus, hedge funds will likely be less active in the IPO space. “Although
long-only investors always made up the majority of demand in IPOs,
they will be even more important than the hedge fund community
in the future,” says Law, “reecting more of a change in the relative
sizes of the two asset classes rather than any fundamental difference
in investing strategy.”

7
Perspectives on global IPO markets

Figure 4: Global IPO activity by quarter

Capital raised (US$b) Number of deals

585 567 591

455 454 458 440

381
386 403 342
337 333 347 344
337 339
226 251 269

171 130 164

78
51
$4 $7 $13 $26 $27 $33 $27 $37 $29 $37 $33 $68 $34 $62 $45 $105 $36 $90 $59 $102 $41 $38 $13 $3 $1.4

Q103 Q203 Q303 Q403 Q104 Q204 Q304 Q404 Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109
Source: Dealogic, Thomson Financial, Ernst & Young

An IPO revival requires stable markets were investing in and how risky they were.” From an investment
Historically, markets have taken at least four to six quarters to banking perspective, risk will play a more important element to
recover from an economic downturn, as was the case after the investment decisions, and companies will not be as highly leveraged
dot-com bubble burst in 2001. In order for the IPO window of as in the past. “In the investment banking landscape, the whole
opportunity to reopen, global markets need to see a period of paradigm has changed in terms of leverage and risk,” says Cutler.
relative macroeconomic stability. “By stability, I don’t necessarily
Energy, infrastructure and follow–ons look promising
mean a return to growth, it’s as much about a reduction in volatility,
Although most IPO markets remain dormant, the IPO pipeline of
or a perception that the economy has bottomed out or at least is
companies preparing to make the transition from private entity to
stabilizing,” says Law. Furthermore, a time lag always exists between
public enterprise remains robust, both in the developed and emerging
broader market stabilization and companies coming to the public
markets. Many quality companies, from a variety of geographic
markets, primarily due to the lengthy preparation time for an IPO.
regions, have delayed or deferred their public listings.
Market analysts commonly cite the following indicators of an IPO
Companies in sectors such as energy, infrastructure, clean technology,
market revival: positive fund ows into the equity market, investor
hard assets, healthcare and telecommunications are expected to be
appetite, brighter corporate earnings outlook, recovery in market
the rst to take advantage of a market recovery. “Markets will see
valuations, evidence of liquidity to spur business and consumer
that companies will be rewarded for making things and being at the
spending, completion of successful follow-on issues for established
cutting edge of internet technology, green technologies or alternative
public companies, successful public-equity transactions involving
energies, social programs and infrastructure development, rather
carve-outs/spin-outs from existing large public companies and new
than for providing services or nancing,” says George Magnus, Senior
VC/PE-backed IPOs. For now, analysts are focusing on the likely
Economic Advisor of UBS in London.
impact of central bank and government measures.
Furthermore, in 2009, the lion’s share of equity issuance is likely
First to go public will be larger, high-quality companies
to be follow-on offerings from already listed companies seeking to
Bankers consistently agree upon a discernible ight to quality. “Investors
recapitalize balance sheets or nance acquisitions. These attractively
want certainty, visibility and results,” says Carnoy. “The era of IPO-ing
priced sources of nancing are still in demand by global companies.
a story rather than a track record is at an end,” says Jarvis. Risk-averse
And until there is a broader market recovery, investors are expected
investors will seek scalable, larger companies (with a market cap
to continue migrating to already public companies with positive price/
above US$1 billion), and will closely scrutinize nancial statements,
earnings ratios and a track record.
business plans, growth plans and use of proceeds. Thus, companies
looking to go public will need to have strong fundamentals, good Some analysts such as Law believe that investment decisions will be
corporate governance, stable cash ows, favorable earnings outlook, very company-specic, rather than sector- or geography-specic. The
proven management teams and a solid asset base. They will need to nature of the business, rather than the country or exchange of listing
demonstrate robust operational performance on a quarterly basis and a will dene investment decision. “The companies that come to market
business model that has proven resilient throughout the downturn. will be very much determined by investor appetite for those specic
companies, rather than just by a broader regional stabilization
Risk will play a more important role in investment decisions. “Many
in markets,” says Law, who believes that it is very difcult and
of the problems with distressed companies worldwide, particularly
inappropriate to try to identify which markets will open rst.
nancial institutions, have to do with losses caused by poor risk
management processes,” says Phil Gandier, Ernst & Young Middle
East IPO Leader. “People just didn’t understand the products they

8 Global IPO trends report 2009

Market outperformers start acting like public companies at
least 12 months prior to the IPO by implementing critical changes
to their strategic and corporate tax planning, management team,
nancial accounting, reporting and internal control systems

Top performers act like public companies early on Many successful companies emerge from the tough times
Even when the nancial climate is not ideal for raising funds, it could Early signs suggest a shift toward a new economic landscape — toward
be a good time to plan for an IPO. Executives of outperforming those companies that offer bold new solutions for the modern world.
companies start preparing to list a full 12 to 24 months before “Innovation and productivity have to replace leverage as the global
going public so that they are well positioned to take advantage of growth engine,” says Magnus. As the market recovers, some of the
the re-opening of the IPO window.7 “Market outperformers start most promising IPOs will be those companies that can sell themselves
acting like public companies at least 12 months prior to the IPO by on their ability to innovate and to convert these innovations into
implementing critical changes to their strategic and corporate tax revenue.
planning, management team, nancial accounting, reporting and
In 2009, where many companies are failing, others are emerging
internal control systems,” says Gil Forer, Ernst & Young Global Director
to take their place. Many global market leaders were formed during
IPO Initiatives.
economic downturns/recessions. Historically, post-recession periods
Because of the market uncertainty, “dual tracking” discussions are see numerous highly successful IPOs. Typically, the company seeking
common, in which companies pursue the preparation process for to go public after a market downturn has evolved into a leaner, more
an IPO event as well as for a disposal or merger event. “95% of the efcient organization and has demonstrated a robust business model,
preparation process for an IPO will put a business in a good position strong performance and long-term sustainability.
to sell itself or attract new investors,” says Jackie Kelley, Ernst &
With new deal structures, new players and new areas of opportunity
Young Americas IPO Leader. “Companies should be prepared for
emerging, 2009 is turning out to be a year of adjustment. The
both eventualities. Obviously, it’s unknown which part of the market’s
repercussions of worldwide governmental efforts to overhaul, expand
going to open rst.” A multi-track approach reduces risk without
and globalize the regulatory environment will be felt for many years.
adding much cost or time because many of the same preparations are
The turmoil gripping the nancial system could lead to a “changing of
necessary, whichever route is chosen.
the guard” in the world’s top companies. Many established names could
Many newly public companies seriously underestimate the level of lose their market-leading positions and be replaced by a whole new
market scrutiny that accompanies an IPO. Newly listed companies breed of dynamic, fast-growth entrepreneurial companies. As always,
must meet market and analyst expectations immediately. Although the best companies will nd a way to turn adversity into opportunity.
this is a market truism, it is even more critical after downturns.
Management must strive for accuracy in projections and forecasts so Gil Forer, Global Director, IPO Initiatives, Strategic Growth Markets,
that targets are consistently hit — quarter after quarter. For a public Ernst & Young
company, a single news item that is not well-managed by the investor
Jennifer Lee-Sims, Global Associate Director, IPO Initiatives, Strategic
relations function can have a signicant impact on stock price.
Growth Markets, Ernst & Young
After the IPO, the executive challenge is to deliver the shareholder
value promised to stakeholders. For a majority of executives,
operational excellence is the most highly valued characteristic for
creating post-IPO shareholder value. “This recession is likely to be
the ultimate stress test of business models,” says Law. “Investors will
look for business plans that have been very resilient throughout the
downturn. The biggest driver of valuations and investor appetite for
companies will be their performance in the 12-24 months prior to
IPO.” Especially in today’s crisis environment, companies should focus
on the day-to-day operational performance of the business.

7 Top 10 IPO readiness challenges – A Measures that matter global study, Ernst & Young;
2008

9
Perspectives on global IPO markets
“The current downturn will be the
ultimate stress test of many companies’
business models”
Ernst & Young: What’s your perspective on
global IPO activity for 2008-09?
Edward Law: At the start of 2008, we
saw continued activity in the global IPO
market, especially from emerging markets.
In particular, the Middle East continued to
be active, driven by the region’s attractive
growth prospects and the perception, at that
stage, that emerging markets would be less
impacted by the nancial crisis. Then towards
the end of 2008, the effect of the credit
crunch spread on a geographic basis to IPO
activity across all regions.
In terms of the equity capital market
(ECM) landscape in 2009, the bulk of
equity issuance will be follow-ons/rights
offerings from existing listed companies
looking to raise signicant amounts of
money to recapitalize their balance sheets
or, potentially, to nance acquisitions. This
has certainly been the case in the rst few
months of 2009.
In the current downturn, the market is
looking to differentiate between the winners
and losers, and investors are being selective
about how they deploy their cash. Investors
are willing to back the companies they see
as the winners, but on the other hand, they
may consider walking away from companies
they perceive as weak and likely to struggle
through the downturn.
At the moment, investors are very much
focusing on the companies they already
have in their existing portfolios. Volatility
remains much higher than historic norms,
and until this subsides investor condence
will remain weaker, particularly in relation
to IPOs. Uncertainty in equity markets has
a particularly strong impact on investors’
willingness to invest in new businesses or
untested management teams, which is
10 Global IPO trends report 2009
ultimately what an IPO is. In addition, IPOs
are supply driven as opposed to just demand
led, and with current low valuations, owners
of businesses are less willing to sell. As we
progress through the rst quarter of 2009,
it certainly feels like we’re yet to return to a
supportive environment for IPOs.
Ernst & Young: What’s behind the
signicant decline in global IPO market
activity?
Edward Law: Clearly, we saw a signicant
decline in IPO activity in 2008 compared
with the years immediately beforehand.
Overall, investors’ risk appetite decreased
in 2008 in reaction to the credit crunch
and the uncertainty it created. Investors
are now focusing much more on their
existing portfolios and are less willing to
back companies they don’t know well with
unfamiliar management teams.
If you look at the split of total ECM issuance,
IPOs usually account for around 30% of
equity issuance volumes. But in 2008, we
saw a decline in IPOs relative to overall
issuance. That was largely a function of
the nature of capital-raising in 2008, which
was obviously heavily biased towards
recapitalizations, particularly in the nancial
services sector. Banks accounted for
approximately 50% of overall issuance in
Europe in 2008.
It’s also a function of broader market
conditions. It is very difcult to execute IPOs
in extreme volatility. The marketing process
for IPOs is generally to set a price range and
then go out on the road to potential investors
for a fortnight. This means you have two
weeks’ exposure to market movements
while you’re executing a transaction. When
markets are volatile, two weeks can be a long
time — the comparables that you’re pricing
the IPO against can move several percentage
points a day, in either direction. Of course,
this makes it very difcult to price a company
new to the market.
Ernst & Young: Currently, what are the
chief concerns of prelisted companies that
you speak with?
Edward Law: Companies recognize that
right now is not an easy time to IPO. At
the moment, they are looking for broader
guidance on the direction of the economy —
on when we are going to see some stability
in the macro environment and, also, in
underlying equity markets.
From a valuation perspective, in an IPO
there’s sometimes an expectation gap
between the seller and the underlying
company looking to list. Valuations across
all asset classes have declined signicantly
in the last 12 to 18 months, and the ability
to achieve an attractive valuation is an
important driver to encourage owners of
potential IPO candidates to sell these assets
through the public markets.
Nevertheless, there are situations where
companies need access to capital for other
reasons, whether it’s investment for growth,
to make acquisitions, to strengthen their
balance sheets, etc. And if the need is in the
short term, that will obviously drive timing.
So ultimately there’s always a balance to
be struck between valuations and whether
the company needs to come to market for
specic corporate reasons.
Ernst & Young: What are the broader
market conditions necessary to support a
recovery in the global IPO markets?
Edward Law: In the United States, Europe
and Asia, we need to see a period of relative

macroeconomic stability. By stability, I don’t
necessarily mean a return to growth; it’s as
much about a reduction in volatility, or a
perception that the economy has bottomed
out or at least is stabilizing.
We need to see a recovery in broader equity
investor sentiment and the current wave of
recapitalizations will need to have largely
passed, in order to provide the appropriate
backdrop for investors to be prepared to put
money to work in newly listed companies.
In addition, investors are going to want to
see better visibility on broader corporate
earnings across the listed companies, and
really understand the recession’s impact by
sector, by company. Sellers of assets will
want to see some form of recovery in market
valuations. All of this will be helped by more
funds owing back into the equity market.
Ernst & Young: What is your timeframe for
the reopening of the global IPO markets?
Edward Law: Assuming that we do see
stabilization in the secondary market
during mid-2009, the thing to remember
about IPOs is that there’s always a time lag
between stabilization in the equity markets
and companies coming to IPO. This is largely
simply a factor of the preparation and time
required to launch an IPO.
Once a company decides to IPO, it will
typically take three to four months from
when they start preparation to when they
actually list. It generally takes that much
time to produce nancial statements, a
prospectus, marketing materials, brief
research analysts and so on.
Obviously, you need to see a stabilization of
markets before summer in order for people
to feel comfortable enough to commit to
an IPO during the summer. It’s conceivable
Ernst & Young interview
we could see the IPO markets starting to
reopen at the end of 2009. However, then
the decisions to go ahead would, realistically,
need to be made just after the summer
holidays, so around September 2009.
Ernst & Young: What will investors look for
in companies that reopen the IPO markets?
Edward Law: It will very much be the high-
quality issuers with defensive characteristics,
strong earnings visibility and strong cash
ow. We saw that last time in some of the
companies that came back into the IPO
market in 2003 - 2004, some of the bigger
companies like Eircom, a telecommunications
company with very visible, clear cash ows
Volatility remains much higher than historic norms, and
until this subsides, investor condence will remain weaker,
particularly in relation to IPOs
and Northumbrian Water, a utility company in
the United Kingdom, in May 2003.
It will be critical for newly issued companies
to meet analyst and market expectations in
the early months and years after the IPO. This
always applies to companies coming to the
market, but even more so after a period of
market stress. A company that has a less-
established track record, a new company
coming to the market — investors will be very
unforgiving of any company that misses its
target after it does come to market. Investors
will initially watch new companies very closely.
Ernst & Young: Which geographies will be
most active when the IPO window reopens?
Edward Law: The country or stock exchange
is not going to drive investment decisions.
Edward Law
Co-Head of Western
Europe Equity Capital
Markets, Deutsche Bank
It is very difcult, and not really relevant, to
try to identify countries that could open up
quicker. What matters is the characteristics of
the specic company. For instance, investors
in Europe are typically investing on a pan-
European basis nowadays.
Having said that, there is an interesting
debate to be had about developed economies
versus emerging market economies.
Emerging market IPOs will typically be
much more growth-oriented investment
propositions than those in developed market
economies. It’s extremely difcult to call
which would open up rst. It will depend upon
investor risk appetite for growth stories and
for the emerging markets themselves. But
I think it’s pretty reasonable to assume that
the emerging markets IPO market would
open up roughly around the same time as the
Western European one.
Ernst & Young: Which types of companies
or sectors will be the rst to go public?
Edward Law: It’s going to be very company-
specic rather than sector- or geography-
specic. The companies that come to market
will be very much determined by investor
appetite for those specic companies, rather
than just by a broader regional stabilization
in markets. Investors will be much more
discerning as to the sorts of management
teams, the sorts of companies, the types of
businesses they want to back.
11
Perspectives on global IPO markets
The biggest driver of valuations and investor appetite
for companies when they do come to market will be their
performance in the 12–24 months prior to IPO
To some extent, the current downturn is
going to be the ultimate stress test of many
companies’ business models. Investors will
look for business plans that have been very
resilient throughout the downturn. These are
probably going to be reasonably defensive
businesses with pretty clear visibility on
earnings going forward, supported by stable
cash ows. Proven management teams with
proven execution capabilities will be critical
to attracting investor support. These types of
businesses are probably more common in the
developed markets.
Investors will also be looking for companies
they nd predictable and stable enough to
be able to work out and identify the value-
creation opportunity going forward. It’s really
a case of resilient, stable businesses. There’s
no doubt that cash ow generation is going
to be very important to investors as we move
out of this downturn.
Ernst & Young: How do prelisted companies
make the decision whether to pursue an
IPO or look to alternative capital sources?
Edward Law: Value maximization is typically
an important factor when companies think
about accessing the public market, as well
as future access to capital to fund future
growth. Given the depressed valuations
currently in the market, that’s obviously
going to be a deterrent to listing in the near
term, but with general availability of capital
becoming more scarce, having access to
equity market funding will be a positive.
In recent years, some of the biggest
competition for the IPO market has actually
been from private equity (PE) rms doing
secondary buyouts. A lot of that has been
driven by cheap debt and access to credit.
Often you’d have a situation where a seller
or even a PE company was looking to IPO or
12 Global IPO trends report 2009
monetize an asset. They’d run a dual-track
IPO and M&A process or they’d start with an
IPO. Then another sponsor would come along
and make an offer for that asset. During
the credit bull market, the valuation that
was achievable using leverage in a private
capacity was much greater than the public
markets were willing to pay.
Looking ahead to the IPO market beyond
2009, the public market will be signicantly
more attractive and competitive than other
exit routes, for PE but also for all sellers of
assets on a relative basis. Having said that,
there’s no doubt that trade sales will also
remain a feature for potential sellers of assets.
Ernst & Young: What are the key
alternative sources of capital available to
companies now?
Edward Law: It’s the usual things. If you’re
a private company, clearly you don’t have
access to public equity, so you would be
looking at debt nancing. There’s no doubt
securing credit is more difcult right now
than it has been for some time.
You could be looking at getting an additional
partner through a private placement. They
certainly can bridge short- to medium-
term funding gaps for companies while
often offering reasonably attractive entry
points for investors. They would potentially
provide enough capital to avoid the company
needing to come to the IPO market in the
short term. These private placements can
take the form of a sale of straight equity or
issuance of debt-like instruments with xed
coupons convertible into straight equity at
IPO, and potentially can build around some
guaranteed minimum returns for investors.
Having said that, the issue with private
placements from an investor’s perspective is
that they’re obviously not liquid. The liquidity
event is an IPO, so that in itself can impact
the overall attractiveness for investors.
People are focusing back on liquidity in their
investments.
The other area that’s worth mentioning is
the willingness of big strategic investors to
commit long-term capital. Those would be
the likes of sovereign wealth funds (SWFs)
or high net worth individuals, both of which
remain open for business. When you think
across a broad range of funding options
on the debt side, funding is difcult, and
although the right companies can still access
those markets, the cost has increased
signicantly. So alternative forms of equity
are going to need to come from some form
of private placement or strategic-type
investors like SWFs. However, it’s difcult to
see SWFs being major participants in pre-IPO
investment. They tend to focus very much
more on the big brand-name companies or
those opportunities that are interesting from
a strategic perspective.
Ernst & Young: What’s your outlook for PE-
backed IPOs?
Edward Law: It’s a bit early to tell how that’s
going to play out. PE investors will always
be very focused on valuation, because
ultimately they will be seeking to maximize
their portfolios’ returns.
There’s a general expectation in the market
that PE rms will come under pressure to
release capital to their investors. This could
encourage some of them to look to exit
investments earlier than they would normally
choose to, in order to provide liquidity to
their own end investors. Having said that,
they will be very cognizant of and sensitive to
valuation. The two push and pull factors will
need to marry to see a signicant increase in
PE IPOs.

What are their alternatives for exiting their

investments? Given the change in the credit
markets and the increased cost of credit on
a relative basis, we certainly think that IPOs
will be a more attractive exit route than they
have been in recent years.

When a PE rm thinks about exiting an

of the two asset classes as opposed to any So given the severity of the current crisis
investment, the options are an IPO, a sale to
fundamental difference in investing strategy. and limited visibility, our recommendation
another PE rm, or a trade sale. A trade sale
to companies right now is to focus on the
will be very situation-specic. Is there another
Ernst & Young: What recommendations are day-to-day operational performance of the
company that could buy it despite antitrust
you making to prelisted companies now? business. As I mentioned, this recession
concerns? Or it could depend on availability,
is likely to be the ultimate stress test of
or the willingness of a public listed company
Edward Law: Companies that were looking business models. When investors look to
to undertake M&A activity. Sale to another PE
to raise money to fund growth (which is invest in new companies, they’re going to
rm won’t compete with the IPO market as
often the rationale behind an IPO) have put look at the recent historical performance
easily as it has in recent years, because of the
their plans on hold because of the negative to extrapolate that out into the future in
increasing cost of credit.
broader macroeconomic outlook for 2009. combination with a broader recovery.

Ernst & Young: How will IPO markets

Companies looking to IPO in order to delever The biggest driver of valuations and investor
be changing as a result of the nancial
or because of more imminent capital needs appetite for companies when they do come
turmoil?
are probably considering alternative sources to market will be their performance in the
of capital, such as private placements. 12, 18 months or two years prior to IPO,
Edward Law: In recent equity transactions
which is going to be a very difcult period
that Deutsche Bank has executed, we’ve
Situations where you have an IPO because a for companies. So the fundamental focus
seen increased participation from “long-
majority or a controlling shareholder would needs to be on the underlying operational
only”, fundamental investors — such as the
like to monetize its investment — those performance of the business.
mutual funds, the pension funds — those
situations often have been put on hold
investors that are ultimately, as we call it,
because depressed valuations make it less Disclaimer:
the fundamentals-based investors. Going
attractive for the minority shareholders. The views contained in this interview are
forward, the primary target investor base
those of the individual, and not those of
for IPOs will be these long-only fundamental
PE rms are focused on the operational Deutsche Bank.
investors who’ve got committed long-term
performance within their portfolios of
capital, long-term fundamental views on the
companies. In many instances, they’re
business.
just managing the debt proles of those
companies, because the companies tend to
Long-only investors have always accounted
be much more highly leveraged than they
for the majority of demand in IPOs. But
would be if they were in the public market. As
on a relative basis, they will be even more
mentioned, most of these are not considering
important than the hedge fund community in
any imminent exits via IPOs.
the future. That reects just the relative sizes

13
Perspectives on global IPO markets
“We need to have a
valuation reset in the IPO market”
Ernst & Young: What is your outlook for
global IPO activity in 2009?
Scott Cutler: 2009 will be a challenging
year in the global IPO market. As the
stimulus and countercyclical policy
measures take effect, we will start to see
the overall economic improvement. The
IPO market is challenged because business
execution is difcult, credit is tight, volatility
Investment banks will offer less capital and more restrictive
terms which will impact the types, valuations and structures of
deals consummated
in valuations continue and investor appetite
for new risk is low. As these conditions
improve, so will the market for IPOs.
Bankers are suggesting that the rst ones
out of the gate will be larger, more liquid
deals. Given the overall market volatility and
economic outlook, we see few emerging
any time soon. Volatility continues to be
problematic. Ever since the Lehman Brothers
debacle, volatility has largely exceeded 1%.
If you look across most sectors —
transportation, energy, nancials — they’re
all down. There’s no real safe haven right
now; even the largest, most established
companies that are leaders in their spaces
are experiencing business challenges.
Ernst & Young: What’s been the impact of
current public market valuations on IPOs?
Scott Cutler: Probably one of the biggest
challenges to the IPO market right now is
that public market valuations have come
down so signicantly — in some cases
70% off where they were less than a year
14 Global IPO trends report 2009
ago. So until the mindset changes of the
private company, including the board and
the investors, it is going to be very difcult
for these stakeholders to accept the price
buyers are willing to pay. Many will wait for
valuations to improve.
We will still need to have a valuation reset
in the IPO market. Quite frankly, investors
won’t tolerate anything else. In the 1990s,
the average discount to pricing relative to the
public comparables was around 30% for an
IPO. As banks became a lot more competitive
in valuation, the average discount moved to
around 15%, sometimes even on par in the
last couple of years.
We are going to see an environment in which
the discount to the public comparables is
higher than it was in the last few years. That’s
mostly because investors would rather invest
in the secondary market than in the IPO
market, due to the risk.
Ernst & Young: What kind of strategic
transactions are prelisted companies
looking to as alternatives to IPOs?
Scott Cutler: Prelisted companies are
resorting to private transactions. With the
public markets being closed, the impact is
far more chilling when you consider that the
overall level of M&A activity, which is typically
an alternative, is also reduced signicantly
over prior years. Capital intensive areas,
such as biotechnology, will see hundreds of
private as well as young public companies
fail, without additional nancing. So
companies are left to nd lots of different
creative structures and terms to nance
their businesses to raise capital. The private
market is just one of those ways.
Ernst & Young: How do you compare this
nancial crisis to the previous downturns?
Scott Cutler: The last major market
downturn was really concentrated in one
sector, the technology sector (including the
internet). This time you are talking about a
contagion that relates to the credit market,
the nancial markets, consumers — and it’s
global. We can’t return to market condence
without additional consumers having visibility
into their own nancial situations. It’s much
broader certainly than the last downturn.
Ernst & Young: When the market begins to
recover, what will investors be looking for?
Scott Cutler: Investors are looking for
companies that are very liquid, as they need
to know they can get in and out as needed.
We’ll mostly see companies that are large and
global, that have proven, sustainable business
models, and companies in some instances
that address an overall concern in the
marketplace — for example, companies related
to healthcare, energy, alternative energy, as
well as companies that address risk.
Ernst & Young: What have been the
synergies involved in the NYSE and
Euronext merger?
Scott Cutler: It continues to evolve. The
transactions created the rst global exchange
and allowed us to expand into other products
that have high growth potential. You don’t
see many organizations transform their
businesses as we have, in such a short period
of time. Being a more diversied business

really helps in times like this. Purely from a
listings perspective, the synergy has been
in the opportunity to list companies in other
venues outside of the United States. It’s been
the expansion of the market opportunity for
the NYSE in attracting global listings.
Ernst & Young: Are international listings
still a big part of your IPO pipeline?
Scott Cutler: The landscape has shifted,
given a conuence of factors. We merged
with Euronext, the afliation of the
Amsterdam-Paris-Brussels-Lisbon exchanges,
providing a local European market for listings.
Over the last several years, some foreign
companies have had concerns about entering
the US market, because of regulatory issues.
We now have an alternative base for them on
which to list, acting to counter-balance the
US regulatory issue.
We will continue to have a pipeline of
companies coming from China, and
eventually, some re-emergence of companies
from Brazil. International listings will
continue from emerging markets in which
the indigenous markets have not proven
to be sufciently liquid and/or when the
commercial footprint and US investor base
are sought. Clearly, from established Western
markets, we do not believe we will see a great
deal of activity coming to the US market. But,
our platforms in Europe can accommodate
those companies.
Ernst & Young: Local exchanges in
emerging markets have grown quickly –
will this trend continue?
Scott Cutler: Local exchanges in emerging
markets have selectively matured, as have
the European markets. Markets such as
Hong Kong have successfully reached world
scale, for example, in IPO proceeds, though
Ernst & Young interview
they depended on mega transactions that
resulted from nationalizations/privatizations.
Local Asian entrepreneurs have tapped not
only this market, but local Chinese markets
and the US as well. As to the Latin American
market, local exchanges in Brazil, Mexico,
Chile, and Columbia have promoted retail
investing to facilitate liquidity. We too have
facilitated overall liquidity of the exchanges,
by offering cross listing opportunities for
local companies, thereby increasing the size
of the liquidity pie. In summary, emerging
markets will continue to selectively mature,
though they will be highly dependent on both
global and local trends.
Ernst & Young: What’s your take on the
recent proliferation of alternate trading
venues?
Scott Cutler: Over the last couple of years, we
have seen a continued rise of alternate trading
venues. Some consortiums have been put
together with investment banks, some have
been just a creation of other exchanges or
ECNs. This has resulted in the establishment
of 40 different liquidity pools today, where an
investor can have the opportunity to nd the
contra trade site outside of the exchanges.
That impacts both the NYSE and NASDAQ.
I am not sure companies or investors have
really understood the impact of liquidity
fragmentation. Companies have much less
visibility into their trading as a result of
fragmentation.
Ernst & Young: What does the movement
toward greater regulation of nancial
markets mean for some of the Sarbanes-
Oxley reforms that were underway?
Scott Cutler: There is strong pressure in
this environment for the Securities and
Exchange Commission (SEC) in particular
to make changes that reduce the burdens
Scott Cutler
Executive Vice
President, Americas
Listings, NYSE
Euronext
for companies in the US. The general
consensus is that the SEC, or perhaps the
new administration, will be more open to
easing some of those requirements rather
than adding more — although certainly in
industries that are accepting government aid,
such as nancial services, you are going to
see a lot more regulation.
Ernst & Young: Broadly speaking, what
will be the key changes in the US nancial
system for a prelisted company as a result
of the recent upheaval?
Scott Cutler: Obviously there has been
consolidation on the banking side, so there
will be fewer banks, and there are no large
pure investment banks left. So the whole
banking model has changed. From an
investment banking point of view, risk will
be a more important element to investment
decisions. Companies will probably not be
as highly leveraged as they have been, so
the whole paradigm has changed in terms of
leverage and risk in the investment banking
landscape. It’s changed forever.
As for the IPO market, we are still going to
have investment banks that are willing to
underwrite transactions. But in terms of
where they are putting their own capital —
lending to nance leveraged buyouts, M&A
nancing, direct investments for private
equity portfolios — there is going to be less
capital and more restrictive terms than we
have seen in recent memory. This will have
an impact on the types of deals that are
consummated, the valuations of those deals
and the structures of the transactions.
15
Perspectives on global IPO markets

Top 20 IPOs by capital raised in 2008

Industry Proceeds
Rank Issue date Issuer name Domicile nation description (US$m) Primary exchange
1 March 18 Visa Inc United States Financials 19,650 New York Stock Exchange (NYSE)

2 March 10 China Railway Construction China Industrials 5,709 Shanghai Stock Exchange (SSE),
Corp Ltd Hong Kong Exchanges & Clearing Ltd
(HKEx)
3 June 11 OGX Petroleo e Gas Brazil Energy & 4,112 Sao Paulo Stock Exchange
Participacoes SA power (BOVESPA)
4 January 21 Reliance Power Ltd India Energy & 2,964 Bombay Stock Exchange (BSE)
power
5 April 16 Al Inma Bank Saudi Arabia Financials 2,799 Saudi Stock Exchange (Tadawul)

6 May 6 New World Resources BV Czech Republic Materials 2,515 London Stock Exchange (LSE),
Prague Stock Exchange (PSE),
Warsaw Stock Exchange (WSE)
7 July 14 Saudi Arabian Mining Co – Saudi Arabia Materials 2,467 Saudi Stock Exchange (Tadawul)
Ma’aden
8 June 2 EDP Renovaveis SA Portugal Energy & 2,437 Euronext
power
9 May 9 Turk Telekomunikasyon AS Turkey Telecomm 1,918 Istanbul Stock Exchange (ISE)

10 February 22 Mobile Telecommunications Saudi Arabia Telecomm 1,867 Saudi Stock Exchange (Tadawul)
Company Saudi Arabia
11 May 9 Fresnillo Plc Mexico Materials 1,784 London Stock Exchange (LSE), Bolsa
Mexicana de Valores (BMX)
12 August 18 China South Locomotive & China Industrials 1,565 Shanghai Stock Exchange (SSE),
Rolling Stock Corp Ltd Hong Kong Exchange & Clearing Ltd
(HKEx)
13 April 21 American Water Works Co Inc United States Energy & 1,358 New York Stock Exchange (NYSE)
power
14 July 16 PT Adaro Energy Tbk Indonesia Materials 1,343 Indonesia Stock Exchange (IDX)

15 April 17 Jinduicheng Molybdenum Co China Materials 1,271 Shanghai Stock Exchange (SSE)
Ltd
16 January 12 Rabigh Rening & Petrochemical Saudi Arabia Materials 1,228 Saudi Stock Exchange (Tadawul)
Company (PETRORabigh)
17 July 30 BrisConnections Australia Industrials 1,119 Australian Securities Exchange (ASX)

18 April 20 Intrepid Potash Inc United States Materials 1,104 New York Stock Exchange (NYSE)

19 March 26 Want Want China Holdings Ltd China Consumer 1,046 Hong Kong Exchanges & Clearing Ltd
staples (HKEx)
20 May 7 Safaricom Ltd Kenya Telecomm 849 Nairobi Stock Exchange (NSE)

Source: Dealogic, Thomson Financial, Ernst & Young

16 Global IPO trends report 2009

Global IPO activity by region in 2008

Total number of BRIC IPOs Total funds raised by BRIC IPOs, US$b

$119

430 $86

279

176 163
146 $29 $28
109
$18
$13

2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008

North America EMEA

% of global deals, 2008 Number of deals % of global deals, 2008 Number of deals

12% 33% 2007 699

2007 270
2008 249
2008 90

% of funds globally, 2008 Funds raised % of funds globally, 2008 Funds raised

28% 31% 2007 $113b

2007 $38b
2008 $30b
2008 $27b

South America Asia Pacic

% of global deals, 2008 Number of deals % of global deals, 2008 Number of deals

1% 2007 91 54% 2007 919

2008 10 2008 413

% of funds globally, 2008 Funds raised % of funds globally, 2008 Funds raised

8% 2007 $39b 33% 2007 $91b

2008 $7b 2008 $32b

Source: Dealogic, Thomson Financial, Ernst & Young

17
The United States
US raises the most IPO capital
despite faltering economy
Key trends
• US was fundraising leader with 27% of global IPO capital
raised, due to US$19.7 billion Visa IPO, the largest ever in US
• Public market valuations are down as much as 70% from last
year, and current US IPO discount will probably be 20% +
below comparable public companies
• Eight out of ten largest US follow-on offerings took place in
2008, mostly by nancial companies
• Carve–out offerings and PE rms may be a key source of
IPOs beyond 2009
• Broader markets need to stabilize for 2-3 consecutive
quarters before IPO pipeline activity will return
• Large, brand names or growth companies in tech, cleantech
and biotech are likely to be rst to go public perhaps with
impetus from US stimulus plan
2008 was a subdued year for US IPO markets, slowed down by the
global economic crisis, year-old recession, tight credit and a 38%
decline in the Standard & Poors (S&P). US IPOs generated US$25.88
billion in 31 deals, an 82% decline in deal numbers and a 24% drop in
fundraising compared with 2007 (see Figure 5, page 20). “However,
some larger deals are still getting out with positive results,” says
Maria Pinelli, Ernst & Young Americas Strategic Growth Markets
Leader. “A good company with a strong business plan can still access
the public markets.”
Indeed, the largest US IPO ever was launched in 2008 — the US$19.7
billion offering of Visa, the world’s largest retail electronic payments
network. Largely due to the Visa issuance, the US raised the most
capital, accounting for 27% of total global IPO fundraising. The Visa
deal itself constituted 21% of total capital raised through IPOs world-
wide. The US$1.36 billion American Water Works Co. IPO was a
distant second in size among US IPOs. Even after excluding the hefty
Visa deal, the average 2008 US IPO deal size was quite substantial at
US$207.7 million, a modest increase from the average deal size of
US$198.8 million in 2007.
18 Global IPO trends report 2009
The top IPO sectors for funds raised in 2008 were nancial services
(insurance and banks) with US$20.0 billion raised (77% of total capital
raised), energy and power generating US$2.7 billion and materials
(metals & mining, paper) yielding US$1.3 billion. The leading US
IPO sectors in deal numbers were energy and power with eight deals,
healthcare with six offerings and the nancial sector with ve new
issuances, including Visa. Technology, nance and healthcare were the
three US sectors which had the most withdrawals from the IPO pipeline.
In the rst quarter of 2009, US IPO markets continued to languish with
just 1 IPO by the world’s biggest baby formula maker, Mead Johnson
Nutrition Co. Even so, the offering was quite successful, raising US$828
million, more than planned and was the largest IPO globally in the rst
quarter.
US investors demand deep discounts
Shell-shocked US investors are shying away from enterprises
without a solid track record. Market volatility has made pricing
unproven prelisted companies highly difcult. “Probably one of the
biggest challenges to the IPO market right now is that public market
valuations have come down so signicantly — in some cases 70% off
where they were less than a year ago, ”says Scott Cutler, Executive
Vice President, Americas Listing, at the New York Stock Exchange.
“Prelisted clients are always asking us, ‘What’s the potential discount
if we were to IPO now?’ ” says Lisa Carnoy, Co-Head of Equity
Capital Markets at Bank of America Merrill Lynch. “In normal market
conditions, the IPO discount is usually 10-15% below comparable,
already public companies. Now the discount has widened out quite
dramatically to comparables — it’s going to be more like 20%+
discount. Again, that’s theoretical since there’s been exactly one US
IPO in each of the past two quarters.”
Eight out of ten largest US follow-on offerings occur
In 2008, despite the steep drop in IPOs, US follow-on markets were
quite active, including many of the largest offerings ever launched.
463 follow-on deals by US companies raised US$163.2 billion.
With nancing in such short supply, in order to raise cash through
follow-ons even the blue chip companies had to agree to aggressive
nancing terms. “In most follow-ons, the stock price was down 15-
20% but the companies still took the capital,” says Carnoy. “In most
cases, the stock came at a signicant discount to where the deal was
launched, but in all cases the dollar proceeds targeted at launch were
achieved.”
In 2008 US follow-on deals, 59% of funds raised came from nancial
companies seeking capital to repair balance sheets or to nance
Companies are waiting for an upturn in
the market and better pricing. When the
market opens, they want to be rst out.
acquisitions. Indeed, eight out of the ten largest follow-on offerings
by US companies ever (or at least since 19931) took place in 2008
— almost all in the nancial services sector including Wells Fargo
(US$12.7 billion), JPMorgan Chase (US$11.5 billion) and Bank
of America (US$10 billion). Other US sectors active in the 2008
follow-on markets were energy and power (11% of funds raised by US
companies), industrials (10%) and real estate (8%).
PE rms may start to monetize or deleverage through an IPO
PE rms starting the monetization process or deleveraging their
balance sheets may be a signicant source of IPOs in the coming
years. It may become worthwhile for a PE rm to do an IPO at its
entry-point price through a multiyear process, particularly for its
distressed assets. “If you bought a company that’s worth US$5 billion,
maybe you’ll do a US$1 billion IPO. But then you’ll do two or three
follow-ons to exit the investment. So it’s getting the clock started on
that monetization process,” says Carnoy. “Even if the rst deal is at a
suboptimal valuation, it may be worth it to get the company seasoned
in the public markets and set the stage for larger sell-downs later.”
Many PE rms are burdened with numerous short-term loans about
to come due, having borrowed billions in debt to purchase portfolio
companies in recent years. For such highly leveraged PE rms which
need to renance their debts soon, an IPO may be a more attractive
and obtainable source of capital than other debt alternatives.
“A nancial sponsor may also do an IPO where it’s not actually
monetizing its investment, it’s simply renancing debt, reducing the
leverage multiple,” says Carnoy.
A US pipeline with M&A targets, dual trackers and carve-outs
Large corporations, private capital investors and other strategic
partners are now examining possible M&A targets in the IPO pipeline.
Since the IPO market has shrunk, many private companies may
eventually succumb to a merger or an acquisition. “Challenged to nd
growth capital, emerging companies are now considering a number
of options, including selling themselves to a large existing company,
selling a stake to a strategic investor, merging with a competitor or
forming a strategic alliance with existing companies in the short-
term,” says Jackie Kelley, Ernst & Young’s Americas IPO Leader.
Although US M&A activity was down 31% from the previous year to
US$1.0 trillion, those cash rich sectors such as pharmaceuticals were
able to close deals.2
1 These were the largest follow-on offerings at least since 1993, when Dealogic began
tracking follow-on offerings
2 M&A review full year 2008, Dealogic, January 2009
As in the last bear market in 2000-02, carve-out offerings may be another
key source for US IPOs when the window reopens. An IPO carve-out
creates an independent public company when a parent corporation
divests a division which is typically experiencing rapid growth. The
2009 IPO of the Mead Johnson Nutrition Co. was a carve-out of
biopharmaceutical parent company Bristol-Myers Squibb, which priced
at the high end of its range, and sold more shares than anticipated.
Quality US companies wait for IPO window to reopen
Compared with recent years, there are fewer companies in the US IPO
pipeline, but of those that remain, many are quite large and of high
quality. “Companies are waiting for an upturn in the market and better
pricing,” says Kelley. “When the market opens, they want to be rst out.”
In the past, companies that didn’t navigate through the registration
process on a timely basis, might have been scrutinized and risked
a negative image by waiting in the pipeline. “But now, sitting in
the pipeline and waiting for a window of opportunity is seen as a
reasonable strategy for a company with a strong business plan and
nancial results,” says Kelley.
According to an Ernst & Young survey in November 20083, 35% of
executives anticipate the broader markets will reopen in the second
half of 2009, 43% look to the rst half of 2010, while 14% forecast
the second half of 2010. “When the market stabilizes for two or three
consecutive quarters, we will see stronger IPO pipeline activity,”
says Pinelli.
Brand names or growth companies likely to go public rst
When market stability and investor condence is restored, US IPO
activity will resume. Specic preconditions to an IPO market recovery
include positive fund ows into equity mutual funds, a healthier
follow-on market, companies delivering on quarterly results, analysts
raising estimates and investor receptivity to IPOs. “Until the mindset
changes of the private company, including its board and investors, it
is going to be very difcult for their stakeholders to accept the price
buyers are willing to pay,” says Cutler. “Many companies will sit and
wait for valuations to improve.”
Two types of companies are likely to be rst to go public in the US when
markets recover. First, the larger, highly liquid, well-known, established
brands with a stronger revenue base and proven sustainable business
models and second, the unique companies from the emerging markets
or “hot” growth sectors such as technology, clean technology and
biotechnology. Risk-averse investors will be seeking companies with
a leading market position, proven track record, strong management
3 Survey of 94 executives attending the Ernst & Young Strategic Growth Forum in Palm
Springs, California, November 2008
19
The United States

Figure 5: US IPO activity by year

team, good nancial and controls system, sustainable long-term growth

Capital raised (US$b) Number of deals
and a leverageable business model.

210 Such growth companies may receive strong impetus from the US$787
186 187
172 billion economic stimulus plan to jumpstart the US economy. Obama’s
plan emphasizes government spending on US infrastructure, renewable
and alternative energy, healthcare and technology. Since Wall Street is
60 31 expected to invest in the sectors that stimulus program dollars will be
supporting, US governmental policy could increase chances for IPOs
$9 $35 $33 $34 $34 $26 in these sectors in the next few years. Says George Magnus, Senior
2003 2004 2005 2006 2007 2008 Economic Advisor at UBS, “This is the kind of scenario in which new
technologies and innovative capabilities are born.”
Source: Dealogic, Thomson Financial, Ernst & Young
Early IPO preparations remain good business practices
“If companies want to ride the rst wave up as the IPO market turns
around, they should start planning now for the organizational change,
which can take 12-24 months,” says Kelley. Companies that exceed
Figure 6: North, Central and South American overall market returns have usually implemented the more time-
IPO activity, by year consuming critical changes for IPO readiness, a full 12-24 months
prior to going public (e.g., strategic planning, building the team and
Capital raised (US$b) Number of deals establishing the internal control, nancial and accounting systems).
361
Less time-consuming changes tend to be implemented later on in the
333 process, usually in the last six months (e.g., public company board
305 305
composition, the investor relations function and employee/executive
compensation issues).4
100
Some US companies are already beginning the transformational
69 IPO readiness process. “They’re putting corporate governance
$11 $44 $44 $50 $77 $34 processes in place, strengthening nancial reporting systems, being
accountable to quarterly results, holding mock earnings calls with
2003 2004 2005 2006 2007 2008
investors, making sure forecasts can be met, building up internal audit
Source: Dealogic, Thomson Financial, Ernst & Young departments and hiring key executives,” observes Kelly.
A robust infrastructure should facilitate regulatory compliance, protect
against risk exposure and provide accurate guidance to forecast
nances. “Companies should be investing in themselves now, looking
internally and saying not only how do we get through this challenging
period, but also operate better, smarter and more efciently when we
emerge?” says Kelley. “IPO or not, strong corporate governance and
business practices are fundamental to success.”

Jackie Kelley, Americas IPO Leader, Strategic Growth Markets,

Ernst & Young US
Maria Pinelli, Americas Strategic Growth Markets Leader,
Ernst & Young US

4 Top 10 IPO readiness challenges – A Measures that matter global study,

Ernst & Young, 2008.

20 Global IPO trends report 2009


“Investors want certainty,
visibility and results”
Ernst & Young: What’s your outlook for US
IPO markets in 2009, and when will the
window for new offerings reopen?
Lisa Carnoy: We do think the IPO market will
reopen in 2009. It is very difcult to pinpoint
exactly when, but there are a few things
that we look for to give us some indication.
One would certainly be the trading activity
in the secondary market, because higher
stock prices will lift valuations for IPOs too.
Another factor we would look at is fund ows
into equity mutual funds. We would also
look at volatility of the market, which has
been exceptionally high. Finally, follow-on
offerings — equity deals for already public
companies — can be a good indicator of
investor receptivity to IPOs.
The last time period that was extremely
challenging for IPOs was 2001-03. It took
about two or three quarters of a decent
equity market before the IPO market came
back with any great strength. Most people
would say this is the most severe and
most extended downturn since the Great
Depression. But there is still capital being
allocated to equities, and there is still a lot of
capital being allocated to new investments on
the follow-on front.
While I don’t expect highly speculative early-
stage IPOs to be coming to market in the
near term, there are more mature, larger
companies that are on le or considering
an IPO. I do think the market will be open to
them during the course of 2009. If you look
at the list of companies that are currently
on le, there are many quite sizeable, quite
protable companies that are in the queue.
Some of them are cyclical, but some are
actually pretty countercyclical and pretty
resilient. We do think that there will be
markets for some of those IPOs over the
course of 2009.
Ernst & Young interview
Ernst & Young: What would be the likely
prole of the rst US companies to
go public?
Lisa Carnoy: I would characterize the likely
company proles in two ways: sector and
scale. From a sector perspective, perhaps
more countercyclical companies or stories
where there is highly visible growth — for
example, the education sector, infrastructure,
clean energy or alternative energy.
Companies with a subscription model have a
high degree of visibility to their revenues and
their protability over the medium term.
In terms of scale, Investors will want
companies that have had a certain level of
performance and size in terms of market cap,
revenues and protability. Also, bigger deals
and bigger oats as opposed to micro-caps
under US$500 million, which is typically
the majority of the IPO market. These are
companies with market caps of at least
US$1 billion, and in some cases are even well
into the mid- and large-cap arena, meaning
over US$5 billion.
One of the potential sources of these IPOs
would be the nancial sponsor community.
Over the last three or four years, there
have been a number of very large leveraged
buyouts. The sponsors may want to pursue
an IPO to start the monetization process or to
deleverage the balance sheet ahead of near-
term debt maturities. The nancial sponsors
may not like the current equity valuations,
but they may view the IPO market as the best
available source of capital or liquidity.
Ernst & Young: Could you be more specic
about why private equity (PE) will be a
source for US IPOs?
Lisa Carnoy: Historically, the PE rms
would look for returns that were multiples of
Lisa Carnoy
Global Head of Equity
Capital Markets, Bank of
America Merrill Lynch
their entry points. For example, if I bought
a company for US$10, I’m not going to IPO
it until it’s worth at least US$20, or in some
cases US$30 or more. Because there’s been
such a lack of activity and so many of their
current investments are under water, they
may now believe that even if they can IPO a
company at US$10 or US$15, it’s still worth
going through the process.
Because many of these deals were so large,
it’s going to be a multiyear process to get
out of the position. If you bought a company
that’s worth US$5 billion, you’re not going to
do a US$5 billion IPO in all likelihood. Maybe
you’ll do a US$1 billion IPO, but then you’ll
still have to do two or three follow-ons to
exit the investment, and so it’s almost about
getting the clock started and beginning that
monetization process. And even if the rst
deal is at a suboptimal valuation, it may be
worth it to get the company seasoned in the
public markets and set the stage for larger
sell-downs later.
Another factor would be the opportunity
to deleverage. Many of the recent deals
from 2006–07 had enormous leverage
multiples, of eight or nine. Some of these
debt securities that were used to nance the
buyouts were relatively short term, three
to ve years. A sponsor may also do an IPO
where they’re not actually monetizing their
investments, they’re simply renancing debt.
So we’re reducing the leverage multiple
from six to ve to four. Again, while current
valuations may not be that attractive in
the equity market, if it’s a source of capital,
it just may be more attractive than other
alternatives in the debt market, which
has been closed for most of these highly
leveraged companies.
21
The United States
Ernst & Young: Given the high volatility
of PE-backed IPOs, why wouldn’t nancial
sponsors wait longer to exit via IPO?
Lisa Carnoy: If you’re sitting on a portfolio of
20 or 30 names and some of them are really
distressed, if you have something that’s even
modestly working, you may want to show
some positive action to your investors — to
the limited partners(LPs). In some cases,
if you can have a secondary component,
For IPOs to return, we need to see positive equity-fund ows,
a secondary market rebound, already public companies
delivering their quarterly results and analysts raising estimates
you can return some capital to your LPs.
That in itself would be a positive event in
the current environment. If you’re in a fund
where you’re not buying something and you
may be restructuring some of your existing
investments, to show any positive movement
is a good thing. If you think the company is
going to continue to perform, you might want
to start the monetization process.
Ernst & Young: What are US companies
that have postponed or cancelled their
IPOs doing now?
Lisa Carnoy: Some companies are still
using this time for preparation of their
nancial reporting, investor relations team,
Sarbanes-Oxley — all the incremental kind of
management focus that they would need to
be public.
If they need alternative capital, some are
looking to bank debt or other sources of
credit. Some are looking for private equity
or growth equity gaps. Certain private-
equity rms don’t really use leverage but
22 Global IPO trends report 2009
invest equity in pre-IPO investments. Some
companies are going to consider a dual track,
preparing for both an IPO and an M&A sale.
Ernst & Young: What are the likely funding
sources for US pre-IPO transactions?
Lisa Carnoy: There are pools of private
money in some different arms of the same
institutions that you would go to during an
IPO. It might be a very large mutual fund that
has a small fund or a small bucket of money
that can be invested privately (typically up to
10%-20% of certain funds).
Historically, there were a lot of hedge
funds, but hedge funds have become pretty
dormant in the new-issue market right now.
They obviously have a lot of issues as they
deleverage and see money ow out. Then
there are certain kinds of private placement
dedicated funds. The sovereign wealth funds
have been very, very important — but those
are mostly for much larger deals. They
want branded, large-cap, multibillion-dollar
opportunities, so they’re not typically pre-IPO
investment unless it’s very large. They’re
active for follow-ons, but not for IPOs.
Ernst & Young: What’s your perspective on
the 2008 and 2009 US follow-on market?
Lisa Carnoy: Issuance is way down. But
what’s interesting and probably surprising in
some ways is that if you look at the 2008 US
follow-on market, you see the largest follow-
ons in US history — seven of the ten largest in
US history happened in 2008.
They’re virtually all in the nancial services
sector. So we did a US$10 billion equity deal
for Merrill Lynch and a US$10 billion deal for
Bank of America. JPMorgan did a similar deal,
as did Goldman Sachs and Wachovia, and then
General Electric did an even bigger deal.
These are companies that needed capital
repair of their balance sheets. They really
did not have a choice. It wasn’t so much “Do
I go or don’t I go? Do I like the price or don’t I
like the price?” In most cases, the stock price
impact was very severe. Stock prices were
down 15–20%, but they still took the capital.
In most cases, the stock came at a signicant
discount to where the deal was launched, but
in all cases the dollar proceeds targeted at
launch was achieved.
In the 2009 follow-on market, I think we will
see a lot of activity. The nancial services
sector is not done, so whether it’s banks,
investment banks or insurance, nancial
services companies will come back to the
market — though perhaps not as much as in
2008. What I think you’ll see is capital repair
now in the industrial sector.
Ernst & Young: What are the most common
questions that clients ask and what is your
response?
Lisa Carnoy: They’re asking: when will
valuations return to earlier levels, since
virtually every industry is down? We can’t
predict when, but we can talk about what
the fundamentals are that would help drive
valuations. They are also asking: what is
the potential IPO discount if they were to go
public now? That certainly has widened as
well. Finally, they want to understand which
investors are still looking at deals.
 Ernst & Young interview

For IPOs to return, we need to see positive

equity-fund ows, a secondary market
rebound, already public companies delivering
their quarterly results and analysts raising
estimates. It’s all about visibility. Investors
want certainty, visibility and results. One of
the issues has been that as earnings have been
revised downwards and guidance has come in,
it really has make investors more wary.

We’ve typically talked about an IPO discount

of 10% or 15% from fully distributed levels.
It’s theoretical, but this range has been the
general guidance over a long-term period.
same time appeal to a different investor base.
There are some periods in which IPOs have
Corporate debt in some cases is yielding
come at virtually no discount to the company,
18% — that’s very equity-like, right? Why
and other times where the discount is very
shouldn’t equity investors look at high-
wide. I would say now it’s widened out quite
yielding debt or preferred securities? And
dramatically, and if we were advising clients,
perhaps debt investors will look to equity
it’s going to be more like 20%+. Again, that’s
warrants. You’ll see some new innovation
all theoretical since there’s been exactly one
and some new cross-selling across different
US IPO in Q4 2008 and Q1 2009.
securities and investors.

Ernst & Young: What are the major recent

changes in capital markets of most
relevance to your prelisted clients?

Lisa Carnoy: There has now been a

consolidation of the investment industry.
So as you see the emergence of Bank of
America Merrill Lynch, and then Goldman
Sachs and Morgan Stanley becoming banks,
there is going to be some change in terms of
the number of rms competing and the range
of capabilities.

Over time, there may be greater convergence

across different securities and asset classes.
Historically, equity investors focus on equity,
debt investors focus on debt, high-yield
investors focus on high yield. But given
what’s happened in the market, there should
be much more cross-selling of different
securities, perhaps some innovation of new
securities to nance companies and at the

23
China
China launches the most
IPOs despite stock market plunge
Key trends
• China leads in IPO numbers and comes in second for
fundraising, with markets driven by 22 privatizations of
State-owned enterprises(SOEs)
• Due to retail speculation and unreasonably inated
valuations, Shanghai stock market plunges 65% which drags
down IPO markets
• Most (78%) of mainland issuers list in Shanghai and
Shenzhen, while those with foreign holding structures (15%)
prefer to list in Hong Kong or overseas
• Since bank loans are difcult to obtain and unattractively
priced, mainland companies turn to private investors for
pre-IPO nancing, particularly private placements
• Mid-sized private companies with reliable cash ows
in sectors such as food and beverage, utilities and
telecommunications are likely to go public rst
Following an unprecedented boom in 2006-07, China’s IPO market
began its dramatic decline in late 2007, about a half year before
the nancial contagion spread into China. Speculation by retail
investors and unreasonably inated valuations contributed to the
Chinese equity fallout. By the end of 2008, the Shanghai index had
fallen 65%.
In 2008, the IPO markets of Greater China (the mainland and Hong
Kong) generated 127 deals worth just US$17.9 billion, a decline of
51% by deal numbers and 73% fund raised from the previous year
(see Figure 7, page 26). Chinese IPO activity hit a three-year low in
2008 with most IPOs trading below their offer prices. Even so, among
all countries, China still ranked rst for number of IPOs, placed second
only to the US for amount of capital raised and hosted 4 out of the top
20 IPOs in 2008.
In the rst quarter of 2009, nine IPO deals from Greater Chinese
companies raised US$ 210.7 million. Five of these deals listed on
the Hong Kong Stock Exchange (HKEx) while the rest listed on
exchanges outside Greater China.
24 Global IPO trends report 2009
Infrastructure privatizations drive Chinese IPOs
China’s largest IPO in 2008 (and the second largest globally) was
the US$5.7 billion offering of China Railway Construction Corp.
Ltd., followed in size by the US$1.56 billion offering of China
South Locomotive & Rolling Stock Corp Ltd. Both of these top two
privatizations dual-listed on the SSE and the HKEx and were trading
above their offering price at the end of 2008. Most offerings from
Greater China were relatively small (due to numerous smaller IPOs
in Shenzhen), with an average deal size of US$141 million, a 44%
decline from last year’s average of US$254 million.
In 2008, 22 privatizations of SOEs in China accounted for over
half (54%) of total capital raised (US$9.7 billion). The leading
industries by funds raised were industrials (building/construction,
transportation/infrastructure) which raised US$8.8 billion or
49% of total funds raised in Greater China; materials (metals,
mining, chemicals) produced US$3.0 billion; and consumer staples
(agriculture, food, textiles) yielded US$ 2.3 billion. The top sectors
by number of deals in China were materials with 30 deals, industrials
(26) and consumer staples (17).
“While the shock to the Chinese nancial services sector was not as
pronounced, other Chinese sectors such as real estate and
manufacturing — where many factories are owned by Hong Kong
businesses — have been badly affected by the nancial crisis,” says
Rowena Chu, Chairman of Equity Capital Markets, Asia at Deutsche Bank.
In 2008, mainland companies conducted 123 follow-on offerings
worth US$23.6 billion while Hong Kong saw 117 follow-ons valued
at US$6.5 billion.1 More Chinese follow-on offerings are expected
in 2009 since investors will be recapitalizing companies across all
sectors. “These sources of nancing are still in demand and are likely
to be preferred until there is a broader market recovery,” says John
Lydon, Co-Head of Equity Capital Markets Asia, at Deutsche Bank.
Falling exports diminish China’s growth prospects
As the world’s third largest economy, with stable economic
fundamentals, and huge accumulated reserves of US$1.9 trillion,
China’s government is focused on nipping the economic slowdown
in the bud. Through its $586 billion scal stimulus package, Beijing’s
goal is to stem falling stock prices, facilitate business access to bank
loans, restore investor condence and allow the economy to recover
by the second half of 2009. China’s two-year governmental spending
program targets assistance for the infrastructure, nance, consumer
1 Dealogic, Equity Capital Markets Analytics, March 2009
Chinese prelisted companies should use the
downturn to improve their infrastructure,
corporate governance, nancial
transparency and accounting standards
goods, manufacturing and retail sectors, since these domestic sectors
may be able to prot from the still-growing economy.
However, the mood in China is becoming less than optimistic. The
growth engine of China’s economy has been export industries, most
of which have been crippled by the nancial crisis. Although domestic
demand remains quite strong, it is insufcient to compensate for the
loss in external demand. Some economists expect that weakening
export demand and growing domestic unemployment will lower
Chinese GDP.
Most mainland issuers list at home
The mainland stock exchanges became an important funding source
again after a series of nancial reforms in 2006. However, at the peak
of China’s IPO boom in mid-2007, oversubscribed Chinese IPOs and
rampant retail speculation inated share prices and contributed to the
subsequent rapid market decline. By 2008, Chinese investors clearly
had lost their appetite even for blue-chip companies.
Since mid-2006, high valuations and an active stock market have
made it attractive for Chinese companies to list locally. Moreover,
Chinese regulators discourage mainland companies from listing
abroad. In 2008, 78% of mainland issuers listed domestically.
Shanghai hosted 3 large IPOs valued at US$8.5 billion, while
Shenzhen saw 69 smaller listings worth US$4.1 billion. In addition,
China plans to launch a NASDAQ-style stock market for start-up
companies called the Growth Enterprise Board (GEB) on the
Shenzhen Stock Exchange.
Hong Kong remains the preferred listing destination for privately
owned companies with a foreign holding structure seeking to raise
capital. However, only 15% of mainland issuers chose to list on the
HKEx. The HKEx saw just 24 IPOs worth US$4.8 billion in 2008,
a 68% decline in deal numbers and 86% decrease in funds raised
compared to the previous year.
Established exchanges around the world have strived to attract
Chinese issuers in recent years. However, in 2008, overseas exchanges
experienced a steep drop in its Chinese listings. Altogether, overseas
exchanges hosted just 31 Chinese IPOs valued at US$0.9 billion, a 60%
decline by number of deals and 91% drop by funds raised compared
with 2007. The US exchanges were hardest hit, with only 5 Chinese
deals in 2008, compared to 31 deals the previous year.
Companies turn to private investors for pre-IPO nancing
Many mainland companies are still seeking expansion capital —
just away from the equity markets. However, for most mainland
companies, alternative nancing has been difcult to obtain and
is unattractively priced. The primary funding sources in China are
local banks and large state-owned banks. The Chinese government is
encouraging banks to provide loans to small- and mid-cap businesses
by cutting interest rates. Despite these efforts, however, liquidity from
banks remains highly restricted.
In order to obtain funds, many mainland companies must turn to
private investors. “Investors such as hedge funds, private equity and
venture capital rms are currently looking at the pre-IPO market —
particularly private placements through the issuance of new shares,
or the sale of existing shares,” says Lydon. Private Chinese companies
may follow this pre-IPO nancing process now, then at a later date,
raise additional capital through an IPO and then, subsequently, pursue
a series of follow-on offerings.
Prelisted companies are reluctant to accept hefty discounts
Currently, the Chinese government is encouraging the development
of both local and foreign private equity (PE) funds in order to reduce
dependence on bank loans. Through signicant fund investments and
deregulation, Beijing seeks to attract foreign private capital funds
and cultivate local, yuan-denominated PE funds focused on China’s
staple industries.
Some PE rms see current markets as an opportunity to buy into
and nance Chinese companies at low prices. “However, there is
still a large gap between what PE funds are prepared to pay and
the valuations prelisted companies expect,” says Philip Leung,
Ernst & Young, Far East IPO Leader. Chinese companies are not
prepared to accept a large discount when offering their shares to
PE rms. At the same time, PE funds are reluctant to offer Chinese
companies as high a market valuation as would be available from a
public offering.
Dual-tracking Chinese entities explore M&A options
Currently, many Chinese companies are taking a dual-track approach.
While many unlisted Chinese companies are still preparing the IPO
process to raise capital, they are also looking to grow organically by
acquisitions or by forming joint ventures with overseas or domestic
partners. In 2008, especially in the rst half, many leading Chinese
SOEs and corporations made acquisitions. Despite the credit-crunch-
induced slowdown, deal-makers expect that M&A activity in China will
continue to grow. The Chinese government has recommended that cash-
rich Chinese corporations buy overseas, especially in sectors like natural
resources, nancial services and chemicals. Once Chinese companies
have completed their IPOs, they may use their capital to pursue
acquisition opportunities, domestically or abroad.
25
China

Figure 7: Greater China IPO activity by year

Assuming positive US growth and that scal and monetary stimulus

Capital raised (US$b) Number of deals
will play a role, Lydon expects a resurgence in Chinese IPO activity
sometime towards the end of 2009. Chinese industries that might lead
the revival are those with reliable cash ows, like food and beverage,
259 utilities and telecommunications, says Chu. Furthermore, although
large SOES will still occasionally pursue IPOs, even more mid-sized
183 175
127 private companies are expected to go public.
116
144
“However, as an export nation, China can’t expect to make a full
$14 $16 $24 $57 $66 $18
recovery with continued recession in the US and Europe,” observes
2002 2003 2004 2005 2006 2007
Sutton. “Even China isn’t insulated from what I call the elephant in
the room – which is the American/European consumer and the true
Source: Dealogic, Thomson Financial, Ernst & Young
interconnectedness of the global economy.”
Companies should recruit an experienced IPO team
“Mainland companies most often ask, ‘Should we start to prepare, even
Figure 8: Asia Pacic IPO activity by year in such uncertain markets?’ The answer is an unequivocal yes,” says
Leung. Overseas listings require Chinese governmental approval, so
planning ahead of the IPO is essential. If prelisted companies begin to
Capital raised (US$b) Number of deals prepare only after the market strengthens, by the time they are ready
to IPO, they would have already missed the opportunity.
Prelisted companies should also use the downturn to improve their
908 919
805 772 infrastructure (especially their nancial reporting, internal controls
618 and internal cost management). “Improvement of corporate
413 governance, nancial transparency and accounting standards
has become more important,” says Leung. Dealing with the
independence of the auditing committee, remuneration committee
$32 $48 $51 $91 $97 $32
and management is a key challenge in China. Restructuring the
2003 2004 2005 2006 2007 2008 company is also a major issue in China. Whether a Chinese company
Source: Dealogic, Thomson Financial, Ernst & Young wishes to list locally or overseas, it will usually need to restructure,
which takes quite a few months, especially given the domestic
governmental approvals required.
The depressed valuations of developed market companies have created Recruiting experienced executives or strategic partners to guide the
many enticing buying opportunities for Chinese companies. “Many listing process is crucial. In successful IPOs, the top managers already
of our Chinese clients that went public before summer 2008 are have the experience to undertake the listing and operate a public
sitting on excess cash,” says Matthew Sutton, Professional Services, company, and are functioning well in advance of the IPO event. “Take
Ernst & Young China. These public companies are now looking at the advantage of the current opportunities,” advises Sutton. “Due to recent
opportunities to buy assets in their industries or make other strategic numerous layoffs, especially in the nancial sector, it’s an opportunity
plans at greatly reduced prices. “By contrast, companies that did to nd the right human capital (e.g., CFOs) at reasonable prices, since
not achieve an IPO are now trying to raise additional PE capital to many of those people are now available.” Top-performing companies
continue their expansion plans and to make acquisitions,” says Sutton. will then develop the compensation structures which will help to retain
“However, they are having to do so on very demanding terms.” and motivate key talent within the organization.
Despite promise of early recovery, China remains vulnerable
“Given its resilient economy, and relatively attractive growth rates, Philip Leung, Strategic Growth Markets Leader, Ernst & Young China
China should be one of the earliest markets to recover”, says Lydon.

26 Global IPO trends report 2009


“China should be one of
the earliest markets to recover”
John Lydon
Co-Head of Equity
Capital Markets, Asia,
Deutsche Bank
Ernst & Young: What’s the impact of the
global nancial crisis on Chinese IPO
markets?
John Lydon: As a result of the nancial crisis
and global recession, we have witnessed
decreased activity in China’s capital markets,
with both the number of IPOs and value of
capital raised dropping signicantly in 2008.
Fewer than 30 companies listed on the Hong
Kong Stock Exchange’s Main Board last
year, according to Hong Kong Exchanges
and Clearing data — there were some 78
companies in 2007.
Having said that, we think there are still
signicant opportunities in equity capital
markets this year, with investors likely to
be focused on secondary offerings, such as
rights issues. These sources of nancing are
still in demand and are likely to be preferred
until there is a broader market recovery. We
retain a very positive long-term view on China,
including its IPO and wider capital markets.
Ernst & Young: What were the Chinese
sectors most affected by the slowdown
around the world?
Rowena Chu: China was impacted
differently from the United States by the
current economic crisis. While the shock
to the nancial services sector was not as
pronounced, for example, other sectors such
as manufacturing — where many factories
are owned by Hong Kong businesses — were
badly affected.
Ernst & Young interview
Rowena Chu
Chairman of Equity
Capital Markets, Asia,
Deutsche Bank
Ernst & Young: What’s your perspective
on the quiet Hong Kong IPO markets in
2008–2009?
Rowena Chu: The IPO market was quiet in
Hong Kong, especially from the second quarter
onward, when the trading environment further
deteriorated. Despite these conditions, some
key deals were completed successfully.
More generally, we believe that Hong Kong’s
long-term status as a key listing location
for Asian companies remains unchanged.
A reasonable IPO pipeline exists, and a
number of rms have already obtained
listing approval from Hong Kong Exchanges
and Clearing. We have also seen a number
of successful IPOs completed by smaller
companies in Hong Kong, seemingly
supported by friends and family.
Ernst & Young: What is the current
structure of Chinese pre-IPO transactions?
John Lydon: Investors such as hedge funds,
private equity rms and venture capital rms
are currently looking at the pre-IPO market —
particularly private placements through the
issuance of new shares or the sale of existing
shares. For non-listed rms, IPOs often follow
this process any time from around one year
afterward, and Deutsche Bank is highly active
in this space regionally.
Ernst & Young: When might we see a
Chinese IPO recovery and what are the
necessary preconditions?
Heidi Yang
Head of Corporate
Advisory Group, Asia,
Deutsche Bank
John Lydon: Preconditions include a
decline in volatility, a consensus that global
credit markets are on the road to recovery,
indications of the restoration of growth to
major economies and an end to corporate
earnings downgrades. It may be some time
before these conditions materialize, and
it may be even longer before valuations
recover to the halcyon levels of 2007. Given
the resilience of its economy, and growth
rates that are attractive on a relative basis,
we believe that China should be one of the
earliest markets to recover, once these
underlying prerequisites are met.
In terms of timing, assuming that scal
and monetary stimulus will play a role both
globally and within the region, and with
the United States potentially returning to
positive growth during 2010, we may begin
to see greater IPO activity in Hong Kong
or China sometime towards the end of this
year. A few positive signs which have already
materialized include an improvement in
trading conditions in recent months and
more stable regional indices since around
November of 2008.
Ernst & Young: What’s the likely prole of
the rst companies to go public in China?
Rowena Chu: Companies most likely to attract
investors and revive the IPO market will be
higher-quality rms, especially those with
good management and long-term growth
potential. We think industries that might lead
the revival are likely in such areas as food and
27
China
Investors are currently looking at the pre-IPO market,
particularly private placements through the issuance
of new shares or the sale of existing shares
beverage, utilities and telecoms — or others
with reliable cash ows. Looking forward, we
may still occasionally see large SOES pursuing
IPOs, but we expect the ratio to decline, with
a greater contribution from mid-sized private
companies.
Ernst & Young: Will Chinese IPO markets
remain dominated by local institutions
and retail players, or will qualied foreign
investors be playing more of a role when
the market recovers?
Heidi Yang: I expect there to be a greater
degree of foreign participation. My sense is
that in 2008, it will likely be below 50%, but
that is only likely to increase moving forward.
Institutional investors are professionals with
access to expert advice, many having already
experienced peaks and troughs throughout
different economic cycles. Following large-
scale redemptions, many institutional
investors are still holding cash and are
currently seeking appropriate opportunities,
for example via the pre-IPO market.
Hong Kong and Chinese retail investors, on
the other hand, were caught off guard by the
recent signicant contraction of valuations.
They are recovering from the shock and
it may take some time before they rebuild
their condence.
Ernst & Young: What key governmental
policies might have the greatest impact
on IPOs?
Rowena Chu: Rather than specically
targeting capital markets, I believe that the
government is more concerned with caring
for the economy as a whole. Key actions
include scal and monetary measures, such
as the RMB 4 trillion (US$ 580 billion)
28 Global IPO trends report 2009
stimulus package, potential tax reductions for both on a transactional and policy-level
certain industries, and we have also seen the basis, and has included components such
government approve share issuances by two as training programs and secondments for
domestic companies recently. personnel. Effectively, this could demonstrate
the signs of a potential convergence of
Ernst & Young: How does a prelisted listing requirements between the various
Chinese company decide whether to list on exchanges, which could be seen as a positive
Hong Kong or mainland exchanges? step for the future.
Heidi Yang: Recent years have been Ernst & Young: Are there any other key
characterized by a signicant number of issues related to Chinese IPO activity that
A- plus H-share IPOs, with Chinese rms we haven’t yet mentioned?
seeing the benet of being listed in both
Hong Kong and mainland China. When the Heidi Yang: There are a number of very high-
market reopens and as funds start to reinvest quality Chinese companies that are waiting
following widespread redemptions, we think to come to market, many of which have
this trend is likely to continue. started their IPO preparations already. The
greatest hurdle now is that we need a market
Listing requirements and valuations are that is conducive to these rms being able to
probably two of the most important factors raise capital.
when Chinese rms decide whether to pursue
H-share or A-share listings. With mainland
China’s listing requirements being different
from those in Hong Kong, an H-share listing
could require a series of restructuring
exercises for the company. From the
perspective of execution, if the process will
absorb too much of management’s time, or if
the window is particularly short, a company
might prefer to list only in mainland China.
Whether competitors and peers have listed in
any given exchange can play a role, and their
valuations provide precedence, which can
also inuence decisions.
Ernst & Young: What will be the
relationship between Hong Kong and
mainland Chinese stock exchanges in the
near future?
Heidi Yang: Regarding the relationship
between exchanges in Hong Kong and
mainland China, there has been a great
deal of cooperation recently. This has come
Emerging market
companies still dominate
London listings
Key trends
• Emerging market companies, particularly in oil and
commodities, launched seven out of ten largest IPOs
• High-prole energy and natural resources companies go
public in rst half, while capital markets effectively shut down
in second half except for nancial follow-on offerings
• Many public to private deals are likely as many of Europe’s
mid-sized listed companies, frustrated by low stock prices,
cons ider obtaining alternative equity nancing
• Emerging markets issuers still prefer London listings, a
trend likely to continue due to growing preference for more
established regulatory regimes of largest exchanges
• GDRs, often issued by emerging markets companies, will
become more highly regulated by the FSA, with enhanced
due diligence package and documentation requirements
European IPO markets in 2008 were subdued in the face of the deep
recession and global economic crisis. Tight credit markets and falling
commodity prices slashed corporate earnings and dragged down
most major European stock indices more than 40% by the end of the
year. In 2008, 168 European IPOs generated just US$13.6 billion, a
67% decline by number of deals and 85% decline by funds raised from
the previous year (see gure 9, page 30). The average deal size in
Europe fell to US$80.9 million, down 56% from 2007.
In 2008, emerging market companies, particularly from oil- and
commodity-rich states, launched seven out of the ten largest
European IPOs (including one from the Czech Republic, two from
Russia and two from Poland). The biggest European IPO was the
US$2.5 billion offering of Czech coal producer New World Resources
which listed on the London, Prague and Warsaw Stock Exchanges.
The next largest European IPOs were the US$2.4 billion offering by
Portugal’s renewable energy company EDP Renovaveis, which listed
on Euronext in Lisbon, and Turkish Telekom’s US$1.9 billion listing on
the Istanbul Stock Exchange. In the rst quarter of 2009, European
IPO markets produced seven IPOs worth $11.3 million altogether. Six
of these offerings were from Poland.
Western Europe’s IPO markets stagnate
While some emerging market companies still launched public
offerings in 2008, few Western European companies did so. UK - based
companies completed only 19 small offerings worth US$0.6 billion.
Together, Germany, France, Spain and Italy generated 14 IPOs, worth
US$1.4 billion, a steep 94% decline in number and 95% in funds raised
from 2007.
Bolstered by its continuing convergence with the European Union
(EU) economy and a burgeoning domestic pension fund, Poland
hosted numerous (73) IPOs, all of which listed on the Warsaw Stock
Exchange or its junior market, NewConnect. Totalling US$1.6 billion,
most Polish offerings were small cap, except for the US$717 million
offering of power company Enea which was the fourth largest
European IPO. However, by the fourth quarter of 2008, the offerings
momentum of the EU’s largest post-communist economy came to a
halt, despite several large privatizations in the Polish pipeline.
Energy companies and nancial follow-ons sustain IPO markets
In the rst half of 2008, high-prole listings by energy and resources
companies represented the vast majority of capital raised in Europe.
The energy and power sector generated US$5 billion, or 37% of total
capital raised in the region, followed by materials (metals, mining
and chemicals) which raised US$2.9 billion and telecommunications
produced US$2.5 billion. The leading sectors by IPO deal numbers
were technology, with 24 deals, or 14% of the total number of deals
in the region, industrials (building/construction, transportation/
infrastructure) with 24 deals and consumer products and services
with 18 deals.
By the second half of the 2008, Europe’s capital markets were effectively
closed, except for deeply discounted follow-on offerings. Europe saw
667 follow-on offerings worth a total of US$220.1 billion.1 Over half of
European follow-on issuers were banks seeking to repair their balance
sheets or nance acquisitions, while consumer staples companies raised
13% of funds, and energy and power issuers produced 6%.
Europe’s public market valuations decline
Since mid-2007, public market valuations of European companies
across all asset classes deteriorated. By the end of 2008, most
major European indices had declined an average of 40%. “The
next big hurdle is the full-year accounts, to see how many of these
companies actually continue as a going concern from an accounting
1 Dealogic, Equity Capital Markets Analytics, March 2009
29
Europe
Figure 9: European IPO activity by year
Capital raised (US$b) Number of deals
528
508
350
288
168
97
$8 $30 $62 $94 $93 $14
2003 2004 2005 2006 2007 2008
Source: Dealogic, Thomson Financial, Ernst & Young
perspective,” says Mark Jarvis, Ernst & Young UK Inbound IPO
Leader. “Many companies need their second round of nancing.
This could lead to a second round of valuation decreases again and
potentially further selling their stock which would drive prices down
even further.”
Cash-generating businesses still attract private placements
Due to the tough nancial climate, European companies seeking to
fund growth or to monetize have put IPO plans on hold. Businesses
looking to deleverage or with more immediate cash needs are
considering alternative capital sources. According to Michael Lynch-
Bell, Ernst & Young’s UK IPO Services Leader, cash-generating
businesses are the projects attracting earlier-round private placements.
“If you look at the European IPOs that deferred, particularly the ones
planned for the second half of 2008, the majority still managed to
nd capital from institutional investors,” says Lynch-Bell. “These
institutional investors discern the quality behind those assets but
recognize that equity markets are not providing appropriate values
right now.” Such institutions probably would have invested in these
companies at IPO but in current market conditions, prefer to invest in
the companies off market, so as not to be subject to the volatility.
Public-to-private deals and PE-backed IPO exits in near future
As European PE rms scrutinize opportunities to buy into quality
companies at low prices, more public-to-private deals are likely.
“Many of Europe’s mid-sized listed companies, frustrated by low stock
prices, are evaluating coming off the market and obtaining alternative
equity nancing instead, with a view to return to the public markets in
sunnier times,” says Julie Teigland, EMEIA Strategic Growth Markets
Leader, Ernst & Young.
During the credit bull market, nancial sponsors were the IPO
markets’ biggest competition, since they could purchase assets with
attractively priced debt. As a result, in recent years, private equity
detracted signicantly from IPO volumes. “However, beyond 2009,
for all asset sellers but particularly for PE, the public market will
30 Global IPO trends report 2009
Figure 10: Europe, Middle East and African
IPO activity by year
Capital raised (US$b) Number of deals
699
624
426
249
303
103
$9 $33 $72 $105 $113 $30
2003 2004 2005 2006 2007 2008
Source: Dealogic, Thomson Financial, Ernst & Young
be signicantly more attractive versus other exit routes, now that
borrowing costs for credit have become so high,” says Edward Law,
Co-Head of Western Europe, Equity Capital Markets, Deutsche Bank.
Despite M&A slump in 2008, upswing expected in 2009
In 2008, frigid credit markets also took their toll on M&A, making it
difcult for acquirers to borrow money and close deals. In Europe,
M&A deals worth a total of US$1.3 trillion were completed in 2008,
down 30% from 2007.2 The downward trend in M&A volume is
expected to continue in 2009, especially in the rst half. However, by
the second half, more M&A deals are anticipated across all sectors —
the extent of which will depend on 2008 end-of-year accounts. Lower
valuations will make it easier for large companies to acquire smaller
distressed businesses.
Overseas issuers still prefer London
When the markets reopen, emerging market companies will continue
to prefer listing on the London Stock Exchange (LSE), as well as
Deutsche Borse and Euronext, because of their more established
regulatory regimes. The local exchanges of emerging markets will
probably be less favored because of their current domestic volatility.
Nonetheless, a small- to mid-cap company from Western Europe
will continue to prefer a home exchange listing where it is better
understood and more familiar to local investors.
Despite the scarcity of Western European IPOs, London remains
an attractive listings destination for overseas companies. The two
largest IPOs on the LSE in 2008 were from abroad — the Czech
US$2.5 billion offering of New World Resources, and the Mexican
US$1.8 billion otation of Fresnillo, the silver mining group. The top
European exchange for fundraising was the London Stock Exchange
(LSE), with US$5.5 billion raised, followed by the Euronext exchange
in a distant second, at US$2.5 billion and, in third place, London’s
junior Alternative Investment Market (AIM), which generated just
US$1 billion.
2 M&A review full year 2008, Dealogic, January 2009
Although many companies see the nish
line as the IPO, that’s where the challenges
start in terms of compliance, regulations,
the investor market and management

Electronic exchanges for IPOs? Eastern Europe, with their dependence on external nancing and
In recent years, electronic exchanges have become a stronger expected deceleration in growth, will be seen by investors as riskier
presence in Europe. With help from falling stock markets, low-cost propositions, since companies in the East are even more exposed to
electronic rivals, such as Turquoise and Chi-X, have forced the LSE to market turbulence than those in the West.
reduce its fees. “Electronic exchanges have grown the marketplace —
From an industry perspective, issuers in sectors such as utilities,
volumes are higher,” says Jarvis. “They’ve also allowed for much
telecoms, and healthcare are likely to be the rst to go public. Because
greater volatility. People trade quickly, easily and automatically
such defensive sectors are less driven by economic cycles, these
through these systems, so you can trade 24 hours a day.”
companies enjoy stronger earnings visibility and cash ow generation.
Some professionals are skeptical about whether companies and
“The country or exchange of listing is not going to dene investment
investors would risk IPOs on alternative electronic exchanges.
decisions, but rather, the nature of the business,” says Law. “Investors
“You need a very healthy, busy and buoyant IPO market for these
in Europe are typically investing on a pan-European basis nowadays.”
alternative platform sites to ourish,” says Lynch-Bell. “But currently
investors are not risk-tolerant. These are bull market alternatives, Companies should strive for post-lPO operational excellence
since they provide less visibility, liquidity and disclosure.” To achieve a successful IPO, companies will need to be even better
prepared than before. The level of due diligence prior to IPO will be
Emerging markets GDRs will become more highly regulated
higher than in recent boom years, because of the need to satisfy higher
Global depositary receipts (GDRs) are a type of listing used by
levels of investor scrutiny. “For emerging market stories in particular,
foreign companies to raise money from investors in the United
enhancing corporate governance, systems controls and transparency in
Kingdom. Issued in London, GDRs are sold only to institutional
transactions with related parties are key challenges,” says Lynch-Bell.
investors and are not eligible for inclusion in major indices. For
example, New World Resources, the largest European IPO, listed on While preparing for an IPO, executives should also evaluate which
the LSE in a GDR format. additional strategic transactions could enhance the value of the IPO
for the company before going public. Successful companies typically
A common misconception is that GDRs are governed in the same
undertake a transaction in advance of going public.3 These include
way as primary listings. On the contrary, GDRs are treated with a
transactions to acquire a company, to renance, to reorganize the
much lighter regulatory touch, having no formal nancial reporting
business and to strengthen competitiveness. Strategic transactions
requirements and requiring only compliance with EU rules — while
are powerful tools for accelerating development of a business.
primary listings have a tougher governance regime (the UK’s Combined
Code of Corporate Governance). Indeed, many foreign rms issuing “Although many see the nish line as the IPO, that’s where the challenges
GDRs in London have admitted to having weak nancial controls. start in terms of compliance, regulations, the investor market and
management,” notes Jarvis. “When investors look to invest in new
The UK Financial Services Authority (FSA) is in the process of labelling
companies, they’re going to look at the recent historical performance to
listings more clearly so that an investor will no longer be as likely to
extrapolate that out into the future,” says Law. Since investors will continue
confuse a GDR with a main-market IPO. “Many GDR-type structures
to buy only properly managed companies in the secondary market, newly-
coming to London from emerging markets will become more highly
listed companies must focus more on managing a company post-IPO and
regulated by the FSA,” says Lynch-Bell, “with specic requirements for
the underlying operational performance of the business.
an enhanced due diligence package, a lot more documentation, greater
transparency with respect to nancial reporting procedures — all of
which will assist in ight to quality.” Mark Jarvis, UK Inbound IPO Leader, Ernst & Young
Michael Lynch-Bell, UK IPO Services Leader, Ernst & Young
Investors will be selective and company-specic
Many analysts believe that the rst companies to go public will Julie Teigland, Europe, Middle East, India and Africa (EMEIA)
be larger, high-quality companies from the more developed EU Strategic Growth Markets Leader, Ernst & Young
economies. “European investors will probably be most interested
in their own domestic IPOs, in safe, familiar businesses from the
countries that have strong corporate governance and a good 3 Top 10 IPO readiness challenges, A Measures that matter global study,
reputation, such as the UK,” says Jarvis. By contrast, companies in Ernst & Young 2008

31
Europe
“Innovation and productivity have to replace
leverage as the main growth engine”
Ernst & Young: In light of the nancial
crisis, what is your outlook for the 2009
economy?
George Magnus: Obviously the economic
outlook is bleak, despite some recent
indications that the pace of contraction may
be diminishing. What will make the difference
between where we are this spring of 2009 and
an economic Armageddon is the competency
of policy-makers. There isn’t any autonomous
market mechanism that is going to regenerate
the global economy. Most of my attention and
focus is on central banks and governments.
They are all doing unusual and sometimes
unprecedented things at different speeds and
with different intensities.
With luck, some of these things may actually
start to gain traction and we may have
reached bottom in terms of the contraction
in 2009 or, in some countries, the rst
half of 2010. But I don’t really see a kind
of sustainable recovery until 2010 at the
earliest, possibly not even until 2011. And
there’s a risk, of course, that we may have
begun our own lost decade, as occurred in
Japan in the 1990s.
However, that doesn’t necessarily mean that
nancial markets will be challenged for the
next two or three years. They’ve been under
huge pressure since the middle of 2007.
Credit spreads have gone to incredibly lofty
levels even for investment-grade names.
Equities are very challenged, as prots
decay, but it’s possible that some parts of
the nancial market universe will improve
during the course of 2009 ahead of greater
economic stability in 2010 and 2011.
The whole purpose of unorthodox and
unusual policies is to increase the demand
deciency which we’ve got lurching its way
through the global economy; and to try
32 Global IPO trends report 2009
to bring down the cost of capital and get
companies and households spending again.
Ernst & Young: What’s your view on IPO
markets in 2009?
George Magnus: From the point of view
of IPOs, the next two to three years will be
a period in which we are going to see lots
of ownership changes in companies, and
consolidation — the strong taking over the
weak, the big taking over the small.
There might be a lot of opportunities for
new companies to list to the extent that
public policy emphasizes energy, broadband,
healthcare, infrastructure initiatives — such
as Obama seems to be doing. This is the kind
of scenario in which new technologies and
new innovative capabilities are born.
Ernst & Young: What effect will the new
governmental policies have on the economy
and equity markets?
George Magnus: Well, the effects of the
new policies will take time. The only way
you can really have an immediate effect on
the economy is with things like tax credits
and grants to local authorities to stop them
cutting their expenditure commitments on
services. It’s very difcult to actually have an
immediate impact on the economy.
Fiscal policies, however, may not be the
panacea for all countries as there are many
constraints — real and imagined — over the
willingness of governments to use this tool.
But monetary policy in all major countries
and regions in the West is now focused
on increasing the quantity of money and
lowering credit spreads and risk premiums.
In time, this should have positive effects.
However, if we can not avoid a period of
sustained deation, equity markets will
certainly not respond well. Falling nominal
GDP or falling incomes or sales are very
bearish outcomes for stocks.
The whole deleveraging cycle has to run its
course, which is a multiyear phenomenon.
Government basically steps in to ll the
spending gap left by the consumer. After the
contraction is over, we will probably face a
further period of relatively anemic growth
while the economy re-balances and new
growth drivers have to be found.
Ernst & Young: Do you see any lessons
learned from previous market downturns
that might be applicable now?
George Magnus: I don’t think there’s been
anything like this one since the end of World
War Two, not that anybody remembers.
Most business downturns go through their
own process of churning. Companies go out
of business, new companies, new start-
ups come about. But most business cycles
don’t go on very long. On average, business
downturns last 10 months and are self-
correcting. This is different, because this is
a self-reinforcing cycle, characterized by the
unwinding of the debt mountain and of asset
prices built up in the last 10 years.
Ernst & Young: Will companies look to
acquisitions as exit alternatives to IPOs?
George Magnus: There’s going to be a lot
of ownership and creditor change, because
this recession obviously is going to be pretty
savage. There will be lots of opportunities for
companies to acquire companies whose share
prices or debt have tumbled to very cheap
levels or for start-ups. Google and Apple,
the wonder kids of today, basically got going
during the restructuring of the new millenium
and the 1970s, respectively.

Ernst & Young: What will investors be
focusing on in the equity markets?
George Magnus: The loss of trust in banks
and in equity markets will take a long time to
reverse. But unless we lapse into a sustained
deation or succumb to more vicious
nancial turbulence or protectionism, the
economic outlook should slowly brighten. In
other words, with a kind of U-shaped pattern
of economic growth as I’ve described, over
the next three to ve years, gradually people
will become more interested in equities again,
particularly as prots recover and as people
change their views about how companies will
be rewarded.
For the last 10 to 15 years, for example,
companies mostly have been rewarded for
servicing or nancing things. I think that’s
going to change. Markets will see that
companies will be rewarded for making things
and being at the cutting edge of internet
technology, green technologies or alternative
energies, enhanced social programs and
infrastructure development.
Ernst & Young: Which geographies and
sectors have a brighter outlook?
George Magnus: The argument for emerging
markets has not fundamentally changed,
because the secular drivers of returns
on capital in emerging markets still exist,
although we now have to discriminate quite
heavily among them. As a general principle,
the idea is that these countries still have
a very rapidly growing labor supply and in
some cases signicantly improving levels
of education and productivity. These things
clearly will make the returns on capital still
relatively attractive. Geographically, the
emerging markets will probably be reasonably
buoyant parts of the world in terms of equity
returns over the next 5 to 10 years.
Ernst & Young interview
I suspect Asian economies, including of course
China and East Asia, may be the relative
winners in a more restrained economic
environment. But Brazil has also come a long
way and its manufacturing and commodity
base, along with much better economic
governance, should also be attractive.
By sector, it’s different. Financial services
will probably decline in terms of relative
importance and protability. I like to think a
little bit more positively about manufacturing
and technology. I am quite hopeful, rather
than outright optimistic about the United
States among richer nations. The US
Now companies will be rewarded for making things and being at the
cutting edge of technologies, social programs and infrastructure
development, rather than for providing services or nancing.
Federal Reserve Chairman Bernanke and
newly installed President Obama clearly
have a magic opportunity to put things
right over the next 2–3 years. They have
the competence, and now they’ve got the
authority, to really mount an assault on this
deleveraging recession. New attempts may
have to be made in a few months.
I’m not convinced that Europe is willing to
do this yet. I’m very disappointed with the
response so far from scal authorities in
Europe, particularly in Germany and France.
I’m not convinced that the European Central
Bank has acted quickly enough, though it
seems to be changing now. The European
Union has some particular problems to
deal with both regarding Eastern European
countries that are in economic trouble, and
as far as the economies of southern Europe
and Ireland are concerned. The former have
a mix of serious nancial difculties, while
George Magnus
Senior Economic
Advisor, UBS, London
the latter may nd the coming deation very
challenging politically.
Ernst & Young: What will be the longer-
term impact of the nancial crisis on the
economy and capital markets?
George Magnus: We’re going into a different
form of globalization — more managed,
basically, which may mean more coordinated,
from a global governance point of view.
The recent G20 meeting in London sent out
some important messages in this regard.
For example, it is clear that global nancial
power has become more diffuse, moving
away from the US and towards China and
other developing countries. Moreover, the
IMF is to be strengthened nancially and
institutionally, so that it will exert a more
important role in global and nancial policy.
And the setting out of quite deliberate
rules and guidelines for nancial regulation
and oversight point strongly towards a
more managed and regulated nancial
environment.
It is not possible to say precisely how the
economic and nancial pieces of the global
economy, will settle. In some respects the
global economy may be the better for the
cleansing and new governance that seem to
be taking place. In other respects, the global
economy may not be better, if we make large
policy errors or over-react and constrain
innovation and productivity – which have to
replace leverage as the main growth engine.
All we know is that what we’ve known in the
last 10 years ain’t coming back.
33
The Middle East
The Middle East: Saudi IPO
markets flourished until late 2008
Key trends
• Saudi Arabia became world’s third largest IPO market in
2008, as it raised 10% of global IPO capital, and launched 4
out of the top 20 largest IPOs
• After rampant retail speculation and oversubscribed IPOs,
regulators postponed most IPOs in order to stabilize markets
• Domestic PE investment is expected to grow, with more
strategic stakes by PE funds in pre-IPO companies
• Domestic institutional investors, particularly SWFs, will likely
lead a recovery in Middle East as they focus more on local
economies rather than high-prole overseas acquisitions
• When pricing improves, a substantial backlog of family-
owned businesses will go public largely for prestige,
succession and monetization purposes
For the rst three quarters of 2008, the IPO markets of the Middle
East1 seemed relatively immune to the global nancial contagion.
The Middle East emerged as a major IPO market in 2008, buttressed
by a large backlog of IPO candidates, as well as soaring oil prices,
unprecedented liquidity, protable domestic markets, limited
exposure to toxic assets and GDP growth of 6.5%.2 Accounting for
14% of all global fundraising, Middle East IPO markets (in particular,
Saudi Arabia), produced US$13.2 billion in 51 IPOs — about the same
value and volume as in 2007 (see Figure 11, page 35). New issuances
were also stimulated by the stock market boom, high net worth retail
investors seeking diversication of their portfolios, and an ever-growing
track record of positive investor returns from previous IPOs.
Not until the last quarter of 2008 did Middle East IPO activity slump
signicantly in response to the falling stock markets and an economy
weakened by collapsed oil prices, tighter external nancing, the
exodus of institutional investor money and overheated property
markets. Typically, IPO activity tracks the secondary markets and
d Yemen and the six Gulf Cooperative Council(GCC) states: Saudi Arabia, Bahrain, Qatar,
UAE, Oman and Kuwait.
2 From International Monetary Fund, Regional Economic Outlook, October 2008
34 Global IPO trends report 2009
the Middle East stock markets tumbled on average about 50% in
2008. “When the credit markets dried up, most of the long-term
infrastructure projects had to be revaluated because the majority
required external nancing, the availability, terms and pricing
of which all changed. All of these factors conspired to affect IPO
activity,” says Phil Gandier, Ernst & Young Middle East IPO Leader in
Saudi Arabia.
In the rst quarter of 2009, the Middle East hosted just two IPOs
worth US$83.6 million, both from Saudi Arabia.
Saudi Arabia emerges as a major player
The Middle East’s largest economy and chief oil exporter, Saudi
Arabia, became the world’s third largest IPO market for 2008,
raising 10% of the world’s total capital raised (third only to the US
and China). The top three Middle East markets for IPO fundraising
in 2008 were Saudi Arabia, the United Arab Emirates and Egypt,
accounting for 73%, 10% and 4% of funds raised in the region,
respectively. The top three Middle East markets in IPO deal numbers
were Jordan with 15 deals accounting for 29% of deal numbers in the
region, Saudi Arabia (13) and United Arab Emirates (12).
Making up nearly half of the US$1.1 billion total market capitalization
for Gulf exchanges, Saudi Arabia’s stock exchange, the Tadawul, hosted
4 of the top 20 global IPOs in 2008. The top three Middle East IPOs
were all from Saudi Arabia: the US$2.8 billion offering of Al Inma Bank,
the US$2.5 billion otation of Ma’aden, the mining company — and the
US$1.9 billion offering of Zain KSA, the mobile telecommunications
company. The average Middle East IPO deal size in 2008 was about the
same as the previous year, about US$259 million.
In 2008, the leading Middle East sectors for fundraising were
materials (metals, mining and chemicals), raising US$3.9 billion,
or 30% of total capital raised in the region; nancial services, worth
US$3.3 billion and telecommunications, valued at US$2.5 billion.
By number of deals, the top sectors were nancial services, with 18
IPOs, or 35% of the total number of deals in the region; industrials
(building/construction, transportation/infrastructure) with 12 deals
and real estate with 5 offerings.
After retail IPO frenzy, regulators delay new listings
Since 2005, Middle East regulators have successfully encouraged
local retail investors to invest heavily in IPOs. Seeking to
redistribute wealth to its citizens, most Middle East government
privatizations took place at par value. Even the pricing of private
sector IPOs were set at attractive prices in order to stimulate
demand in the capital markets. As soon as most shares listed, IPOs
In the Middle East, the primary
rationale for an IPO is to gain the prestige
of being a public company, for family
succession or for monetization.
Figure 11: Middle East IPO activity by year
Capital raised (US$b) Number of deals
53 51
47
31
2 6
$1 $1 $8 $9 $14 $13
2003 2004 2005 2006 2007 2008
Source: Dealogic, Thomson Financial, Ernst & Young
delivered a very high rst day trading prot. As a result, most
Middle East IPOs were vastly oversubscribed and performed far
better than the overall markets.
With Middle East equity markets down about 50% since early 2008,
issuers have not been willing to accept low valuations for their
businesses. Retaining their tight control of stock markets, regulators
are postponing most IPOs to prevent new issuances from failing
(most companies are trading below their offer prices), and to avert
greater strain on depressed secondary markets. In early 2009, IPOs
in the Middle East were being delayed as regulators try to stabilize
volatile markets and companies wait for better pricing.
Foreign investors who galvanized growth have withdrawn
Middle East growth was fueled by record levels of foreign direct
investment. Softening of regulations against foreign ownership
restrictions helped to open up Middle East markets to international
investors. Speculation on appreciation of Gulf currencies against the
US dollar provided ample liquidity to banks, enabling increased credit
funding to retail investors.
However by mid-2008, due to the global economic downturn, overseas
institutional investors and currency speculators began to withdraw
funds from the Middle East. Most analysts expect that it will take some
time for foreign investors to return to the region because of their
domestic losses and continued volatility in emerging markets.
Middle East IPOs target local investors
With only local citizens able to invest in most Middle East countries,
the region’s IPOs tend to be highly domestic affairs. Of the 51 IPOs
in the Middle East in 2008, 49 were listed on a home exchange.
Regional IPOs, which are typically big family conglomerates or
government privatizations, almost invariably take place on the local
exchanges.
Historically, the Middle East received very limited amounts of foreign
capital. In 2008, though restraints on foreign investment were
gradually easing, the region picked up around 3% of total net private
capital inows to all developing markets — yet this was a record-
setting amount. Global investment bank players have been largely
shut out, struggling to compete with local entrenched players or joint
ventures with European banks long active in the region. In the future,
local and regional investors will continue to be the primary capital
source for new issuances.
PE activity, especially pre-IPO nancing, expected to grow
Regional private equity (PE) activity has grown to nearly 100
funds focused on the Middle East, raising US$19.5 billion in 2008.3
However, almost all nancial sponsor funds in the region are domestic
players, most notably the Dubai government’s PE fund. Except for the
Carlyle Group, none of the large foreign rms that are active in the
region (e.g., Goldman Sachs, Merrill Lynch, Permira) have launched
local PE funds.
Most of the businesses in the region are still owned by families, in
many cases in the third generation of operation. “Historically, these
family groups acquired businesses but did not dispose of them, so
there just haven’t been a large number of companies for PE funds
to acquire,” says Gandier. As the family businesses start to pursue
IPOs, there will be more M&A activity forthcoming. Since large family
groups must often restructure prior to an IPO, more assets are
coming onto the market.
Although Middle East industry players expect exit opportunities and
entry multiples will continue to decline, domestic PE investment in
the Middle East is expected to grow in 2009. While there may be few
IPOs other than some green-eld companies, there will likely be more
pre-IPO transactions. “You may see more strategic stakes by PE funds,”
says Gandier. “They have the cash and will see great opportunities
in pre-IPO companies that can now be bought at lower multiples,
especially where such companies had planned on an IPO for nancing.”
Homegrown institutional investors likely to lead recovery
Domestic institutional investors, particularly sovereign wealth funds
(SWFs), will most likely lead in a recovery in the Middle East. These
government investment funds (separately managed from ofcial
3 Global Private Equity Review, Preqin 2009
35
The Middle East
currency reserves) have a return-driven function and structure
similar to major institutional funds. “In the Middle East, most local
institutional money comes out of SWFs,” says Jeff Singer, CEO of
NASDAQ-Dubai.
Traditionally, SWFs were very conservative and invested mainly in
money markets. However, in recent years as SWFs accumulated
wealth due to the increasing oil prices, they started to invest in
alternative asset investments. The SWFs of Abu Dhabi, Kuwait, Qatar
and Oman also invested heavily in the assets of Western nancial
institutions. However, in 2008, portfolio losses sustained by the
Gulf’s SWFs may approach US$400 billion, exacerbated by the fall in
Western nancial institutions such as Merrill Lynch and Citibank. For
now and for the foreseeable future, Middle East SWFs are focusing
on their own local economies rather than looking overseas for high-
prole acquisitions.
IPOs are sought after for prestige, succession and monetization
Market stability and richer valuations will be necessary to revive local
investor sentiment and encourage big family conglomerates to turn to
equity capital markets as a funding source. “Family-owned businesses
are happy to remain private,” says Gandier. “Now is the time to get
ready, but they aren’t going to sell the family business at a discount
price, especially when the main driver of the Middle East IPO is not to
raise nance for the business.”
In the rest of the world, the chief purpose of most IPOs is to raise capital
and enhance growth. By contrast, in the Middle East, the primary
rationale for an IPO is to gain the prestige of being a public company,
for family succession or inheritance purposes, or for monetization.
Moreover, “Currently, the mantra from all the different companies is,
conserve cash for 2009 and keep it for 2010,” says Singer.
IPO backlog bodes well for Middle East growth story
Nevertheless, current economic woes in the Middle East are seen
as temporary. A substantial backlog has built up, of a couple
hundred Middle East companies, primarily family-owned businesses,
supposedly planning their IPOs. “Only the pricing for IPOs has
changed, not the strategic rationale, so these companies will come
to the market when pricing improves,” says Gandier. The rst Middle
East companies likely to go public, apart from green-eld companies
and government privatizations, will be those from the most
domestically oriented sectors, such as real estate, nancial services,
infrastructure, petrochemicals and consumer products.
With GDP expected to decelerate to about 4%4, the Middle East is
not immune to the effects of the nancial crisis. Most countries in
4 Gross domestic product (GDP) growth rate, World Bank data, October 2008
36 Global IPO trends report 2009
the region are also grappling with domestic issues such as limited
and expensive bank nancing and reduced economic activity as well
as longer-term pressures related to ination, poor economic and
corporate governance, geopolitical strife and high unemployment.
Even so, the Middle Eastern economies are likely to be a real growth
story. As the rest of the world’s economies stall, the cash-rich Middle
East remains well placed to buy up cheap assets or nance local
infrastructure developments. Their relatively light regulation and
lenient tax regimes will be even bigger attractions as European and
US business environments tighten under the recessionary pressures.
As soon as the market pricing improves, solid fundamentals, massive
nancial reserves and a robust IPO pipeline bode well for a promising
revival of IPO markets in the Middle East, particularly in Saudi Arabia
with the high number of IPO candidates in the pipeline.
Prelisted companies need to improve corporate governance
“Just as elsewhere, if a Middle East company wants to go public,
it needs to attract both large foreign institutional investors to
stabilize its stock price, as well as the local retail investors who are
more speculative,” says Singer. The management team needs to
communicate with institutional investors frequently and regularly, at
least once a quarter, in order to achieve fair and accurate valuations.
In order to attract the foreign institutional investor, a prelisted
company needs to work hard to combat the Middle East’s reputation
for weaker corporate governance. When preparing for their IPOs,
Middle East companies need to be committed to the highest standards
of corporate governance. The most challenging corporate governance
issues for companies include recruiting qualied independent board
members, enhancing internal controls, forming a qualied audit
committee, implementing board meeting and reporting processes,
creating management compensation structures and resolving related-
party transaction issues.5
Philip Gandier, Middle East IPO Leader, Ernst & Young
5 Top 10 IPO readiness challenges, A Measures that matter global study,
Ernst & Young 2008
 Ernst & Young interview

Jeff Singer
“Local stock volatility is CEO, NASDAQ Dubai

high since the institutional

money has pulled out”
Ernst & Young: What’s your perspective on
the Middle East IPO markets in 2008-09
and why does Saudi Arabia dominate?
Jeff Singer: The fourth quarter of 2009 is
most likely the realistic time here for when
the Middle East IPO markets will open up.
Real estate, nance and consumer products
will probably be the top three areas. As you
look at the Gulf, Saudi Arabia far exceeds
anywhere else for fundraising, and dominates
the region for IPOs. Second is the United
Arab Emirates (UAE) — Abu Dhabi and the
Dubai Financial Markets.
problem and the toxic assets that were Jeff Singer: The market and the downturn
exported out of the US from collateralized are really different from any we’ve ever
debt obligations, it certainly affected seen, but the fundamental lessons are
companies here — those assets are on the the same. The companies that are getting
Middle East bank balance sheets as well. hardest hit are the ones that have the most
Many banks are going to have to take write- debt. The companies that have less leverage
offs at some point on those toxic assets. are doing much better. The mantra from
That’s certainly part of the overall driver. all the different companies is, because of
the credit crunch, conserve cash. That’s
Because of the credit crunch, the mantra of all the different
companies is, “Conserve cash for 2009 and keep it for 2010”

Why are the Saudis so dominant? First, it’s

Third, big foreign institutional investors pulled what companies are going to do in 2009,
the biggest economy. Second, you have a lot
their money out in May, June and July 2008. conserve as much cash as they can and keep
of companies that really never went public.
Broadly speaking, the foreign institutional it for 2010.
They’ve been private for a long, long time.
investor is in search of returns. Up to the rst
The stock exchange in the last few years
half of 2008, returns in the Middle East were Effectively, the debt markets are currently
has become a truly viable market. We’re
actually pretty strong. They were getting closed. If companies don’t have to raise
seeing what looks like pent-up demand for
20% –30% a year. Then when the economy money, they’re not going to. If they need to
companies going public. We’ll continue to see
went down and companies pulled their raise money, debt is very expensive right
more companies out of Saudi Arabia than
liquidity out of the market, the stocks dropped now, and so they’re looking at raising money
anywhere else in the Gulf. And I don’t think
50% –90% in a matter of two or three months. through equity.
it’s anywhere near the demand that would
Foreign institutional investors will return
exist if the market conditions were better
when market sentiment improves. Until then, If that’s the case, then they have two choices:
than they are right now.
they’re sitting on the sidelines of the emerging they can raise it from institutional investors
markets. by making large investments, like through
Ernst & Young: What’s been the impact of
a 144A transaction, or they can go into the
the global nancial crisis for Middle East
Fourth, the slowdown has reduced demand public market. If they decide to go into the
IPOs?
for Dubai construction, and in Abu Dhabi, the public market, then they have to accept that
massive building has slowed. You’re seeing the valuations in this market are a little bit
Jeff Singer: First, the biggest driver of
a softening in the prices, which obviously lower. A lot of companies are looking at the
the economy here is the price of oil. Some
affects the overall economy. To counter investor base this way: rst, would they make
national budgets were based on a US$50-
this, the government is curbing supply. With a large equity infusion, and if so, would they
per-barrel price, and so below US$50 you
the building delayed or slowed down, the go public?
clearly see an impact on nances.
prices probably won’t drop as fast as they
otherwise would. Ernst & Young: What’s the level of private
Second, the overall market conditions
capital activity in the Middle East?
around the world affect us here. If it’s a
Ernst & Young: How are prelisted
nightmare in the United States and London,
companies raising capital during this Jeff Singer: There are the sovereign wealth
it’s at least a bad dream here in the Middle
downturn? funds in Abu Dhabi, and private equity
East. When you talk about the subprime
out of the Dubai government. That’s been

37
The Middle East
Middle East companies have to be extremely
transparent with their investors because of their
reputation for non-transparency
there and will continue to be there in 2009.
There are a few major foreign private equity
companies coming in, from the US and
London, that have made limited investments
here. But most of the local institutional
money comes out of sovereign wealth
funds. The institutional money out of the
US is just starting to get here. I’ve asked
US institutional investors who have made
investments here if they plan to make Middle
East investments in 2009, and the majority
say yes.
Ernst & Young: What role do foreign
institutional investors play in the Middle
East markets?
Jeff Singer: As we’re seeing in the local
markets right now, stock volatility is high
since the institutional money has pulled out.
You really need the large foreign institutional
investors, who are more buy-and-hold
oriented, during times like this to stabilize the
price of your stock. You also need the local
retail investors who are more speculative.
You need to have both to clear liquidity in
your company stock.
To attract the foreign institutional investor,
a company needs to be committed to the
highest standards of corporate governance —
which means independence of the board
needs to be established, as well as
transparency in the company’s reporting,
how often it reports and what items it
reports. Financial statements must be up to
date and accurate, and if the company has
completed acquisitions, all the information
must be very accessible for the investors.
In addition, the company must also be
aggressive in its communications with
investors. Then I think it’s going to take a fair
and accurate valuation and good liquidity in
the stock. But managers need to recognize
that they need to do all these things.
38 Global IPO trends report 2009
Ernst & Young: What’s the rationale for the
NASDAQ Dubai investment in 2008?
Jeff Singer: Back in February 2008, when
NASDAQ completed the OMX deal, it also
made an investment in NASDAQ Dubai, which
was then known as DIFX — now two-thirds of
the company is owned by Borse Dubai and
the other third is owned by NASDAQ. So
we’re not called “DIFX” anymore. Our name
has ofcially changed to “NASDAQ Dubai.”
Ernst & Young: Why are there so many
different stock exchanges in the Middle
East, and what role does NASDAQ
Dubai play?
Jeff Singer: The whole Gulf region is an
emerging market, and you have many,
many companies competing where in an
established market you might have only a few.
The exchange industry is a high-xed-cost
industry. Eventually exchanges will gure out
the cost structure advantages of having fewer
exchanges and will merge. But while we’re at
an emerging status, many of the needs of the
current exchanges are not fullling the needs
of the capital markets — which is why the DIFX
was created a few years ago. So do we have
too many? I’m sure we do, but I think it’s for
the market to sort out.
Going forward in the Middle East, I think
Dubai and the UAE in general have
recognized what it takes to attract the West
into this region. The so-called free zones
allow companies to come in and establish
their regional headquarters. They make it
easier to invest in your business or to set up
your headquarters: you’re free of local laws
and taxes. Dubai is now seen as the nancial
and business headquarters in the Middle
East and North Africa, as the most business-
friendly place in the Middle East.
Ernst & Young: Currently, what are
the major challenges for Middle East
companies preparing for an IPO?
Jeff Singer: The challenges that a Middle
East company faces are very similar to those
that other companies face, except that we’re
in emerging markets. So, rst, as companies
prepare to go public in the Middle East, they
have to take care that they’re going to be
extremely transparent with their investors,
because of the reputation in the Middle East
for non transparency.
The second challenge is that companies that
go public and seek institutional money need
to visit with those investors frequently and
regularly. They can’t just be on the road show
when they raise the money. The management
team needs to reach out to the investors
at least once each quarter. In handling the
phone calls in between, they need to make
sure that they make all material that’s
disclosed available to the investors and make
additional efforts to stay communicative.
Usually companies here adhere to
International Financial Reporting Standards
(IFRS) in their reporting so meeting high
accounting standards is not a huge hurdle.
However, most of the companies here are
younger companies that don’t really know
what it means to be a public company.
Obviously there needs to be a fair amount of
training so that the companies interact with
the capital markets correctly.
Perspectives on IPO readiness
Perspectives on global IPO markets

Top 10 IPO readiness challenges:

a Measures that matter global study SM

The IPO value journey

Planning Execution Realization

1 2 3 4 5 6 7 8 9 10

1. Preparing for the 4. Building the right 7. Managing investor 9. Attracting the
IPO value journey team to take you public relations and right investors
communications and analysts
2. Keeping your options open 5. Building your
business processes 8. Conducting a 10. Delivering on
3. Timing the market
and infrastructure successful your promises
6. Establishing corporate IPO road show
governance

Challenging markets may come and go, but companies that
outperform the overall market prepare early for their IPO transaction.
Businesses need to undergo many months of advanced planning,
organization and teamwork before they are ready to go public. When
the market timing is right, it’s the companies that are fully prepared
which are best able to leverage the windows of IPO opportunity.
Market outperformers treat the IPO as a long-term transformational
process which brings change to every aspect of the business,
organization and corporate culture. We call the process of going
public, the IPO value journey (as shown above). The journey to
public company status must prepare an organization not only for the
dening moment of the IPO event, but also for a whole new phase of
corporate life as a public company.
In 2008, Ernst & Young conducted a global study, called Measures
that matter, that analyzes the top 10 IPO readiness challenges from
the perspective of CEOs and CFOs worldwide who have already
experienced success in their value journey. It also contains insights
from our survey of global institutional investors, as well as the
cumulative experience of Ernst & Young’s global network of IPO
advisors. The key insights from this study are shown on the next page.
To download a copy of
this report, please visit:
http://www.ey.com/ipomeasuresthatmatter

40 Global IPO trends report 2009


Key trends
Planning
• Even in a challenging economy, companies which outperform
the overall market prepare early for their transformational IPO
journey, so that they are ready to launch when markets recover
• Especially in an uncertain market, outperforming companies
explore alternative exit strategies to an IPO, although public
offerings are generally seen as providing better valuations,
access to capital, visibility and credibility
• Outperforming companies usually go public to nance their
growth strategy and use their proceeds to fund acquisitions or
market growth
• Market outperformers start acting like public companies at least
12 months prior to the IPO by implementing critical changes to
their strategic and corporate tax planning, management team,
nancial accounting, reporting and internal control systems
• Almost three-quarters of outperforming companies in our
survey undertook pre-IPO transactions (e.g., debt nancing,
corporate reorganization and equity nancing) to enhance the
offering’s value
• Although only a quarter of surveyed companies conducted
acquisitions, alliances or joint ventures prior to IPO, in hindsight,
many executives believe that such a pre-IPO transaction would
have added shareholder value
• Institutional investors base an average of 60% of their IPO
investment decisions on nancial performance measures — in
particular, growth in EPS, EDITDA and protability
• Institutional investors attribute an average of 40% of their IPO
investment decisions to non-nancial measures, placing the
most weight to management credibility, corporate strategy and
brand strength
• In their evaluation of IPO companies across different company
size, institutional investors were consistent in their relative
weighting of various nancial and non-nancial measures
Perspectives on IPO readiness
• Compared with hedge funds and mutual funds, pension funds
put more emphasis on long-term nancial measures, (e.g.,
growth in EPS, protability and EBITDA) and on non-nancial
measures, (e.g., management, corporate strategy and investor
relations) when making their buy/sell decisions
• The executive’s choice of stock exchange depends largely on
which exchange offers access to suitable institutional investors
who understand their business model, greater stock liquidity
and deeper institutional pools
Execution
• A strong management team and a highly experienced group of
advisors is critical to IPO readiness execution
• A strong infrastructure of people, systems, policies and
procedures which enables accurate nancial forecasting and
regulatory compliance needs to be in place before the IPO
launch
• According to surveyed executives, the two major accounting
issues are adjusting historical nancial statements to comply
with local and foreign reporting requirements and dealing with
consolidated subsidiary nancial statements
• Two key corporate governance challenges for surveyed
executives are recruitment of qualied independent board
members and enhancement of internal controls
• High-performing companies delegate key communication
responsibilities to their investor relations team, focus on creating
a high-quality road show and keep investors informed through
regular communications before, during and after the IPO
Realization
• Market outperformers deliver shareholder value by
demonstrating effective investor relations and nance function
and, most importantly, operational excellence
41
Perspectives on global IPO markets
A panel discussion:
post-IPO value creation
Zhao Chenning Gary Rieschel
Fountainvest, Partner Qiming Venture Partners,
Founder & Managing Director
This panel discussion took place at the
Ernst & Young IPO Readiness Milestones
conference in Beijing, China in October 2008
Bob Partridge: We often think that the nal
end game is the IPO. However, those of
us who have been through an IPO journey
realize that the IPO is actually just the
end of a certain phase in the lifecycle of
a company. In many ways, it accelerates
growth. It advances the velocity at which
entrepreneurs and management teams
try to create value along that transaction
cycle, that lifecycle of the company. We
wanted to discuss the importance of value
creation post-IPO — some war stories — with
some real seasoned investors who have led
companies on the journey both to IPO and
well beyond. What would experience tell
all three of you entrepreneurs about value
creation post-IPO?
Gary Rieschel: No matter how many times
you tell the entrepreneurs, inevitably they’re
not quite as prepared as they should have
been for the public market. Everyone should
strive to have the team and processes
in place, and to operate already as if the
company is a public company. You’re training
a group of private folks, like me, who are your
investors or your board members, for a group
of people who answer to a totally different
constituency. And most times the chief
executive ofcer, the management team,
42 Global IPO trends report 2009
David Su
Matrix Partners,
Managing Partner
unless they’ve been through it before, they
really aren’t ready for those phone calls.
They really aren’t ready for the press that
treats them in not-so-favorable ways. When
you’re a private company and you’re doing
well, the venture capitalists help you get in
media like the Red Herring, and everyone
likes you. Then you’re a public company. You
make one mistake and no one likes you. If
you’re a private company, it’s much easier to
x things than it is to x them after you’re in
the public market.
Zhao Chenning: Most of the time, we see
Chinese entrepreneurs treat the IPO as a
very important milestone. They think it’s an
end game rather than the beginning of a
new journey.
The IPO is just a tool to bring you to the
public so you have more money available to
execute your business plan. It’s just another
way of nding money to grow the company.
The business plan should have been decided
way ahead of the IPO.
David Su: Based on our own experience, a
lot of valuation is created post-IPO. For many
of the companies we’ve been involved in,
such as Focus Media, the valuation of the
company signicantly increased post-IPO.
Why? Because people really believed in the
story, the leadership, and transparency, and
Bob Partridge
Ernst & Young, Moderator
the company had good communication skills
and strong investor relationships.
Bob Partridge: How is value created?
Merger or acquisition is one way. Organic
growth — expanding into new markets, new
products, new services — is another. All of
these often lead to good value creation. All
of them carry a risk of failure, as well. Do
you have any good experiences that would
inform your views?
Zhao Chenning: It really depends on, again,
what’s your strategy, what’s your core
competence? If you grow by successfully
executing M&A opportunities, and there are
still a lot of M&A opportunities, well, M&A
is the right way to go. On the other hand,
for a lot of successful companies we have
invited today on the retail front, it’s organic
growth. They’re opening new shops and
spending money to strengthen their internal
management systems — these could be the
best ways to create value.
Gary Rieschel: The core-competence point
really cannot be stressed too much. That’s
at the crux of any successful company.
Consider Cisco. Cisco in 1993 had two
assets in the company: it had a very strong
engineering team that had built a proprietary
communication protocol, and it had a killer
direct sales force. So they began doing
acquisitions. But they made a very fundamental

decision and didn’t deviate from using the
sales capability, the channel, the customer
relationship as the key in the company. Cisco
then became a leader in its sector.
Bob Partridge: The examples you gave are
really good examples in developed countries.
But one of the mistakes we often see Chinese
companies make is that once they IPO, they
have the money and they get off strategy.
I met with somebody yesterday who was
associated with a public technology company
that is sitting on a lot of cash. And they
asked me if I knew anything about coal mines
in Australia. I asked why they would be
investing in a coal mine in Australia, and they
said, well, because they’ve got the money to
do that. And I thought, how far off strategy
could they get?
So I can’t overemphasize sticking to
strategy and spending time on the story
regarding why we’re going to the public
markets and creating a sustainable strategy
that does allow for value creation right
up to and well beyond the IPO. What are
the challenges with making entrepreneurs
understand the importance of sticking to
strategy well beyond fundraising?
David Su: In the past few years, many Chinese
companies derived much of their net income
from stock market speculation rather than
their core business, which should not be
their business in the rst place. This year
that will be signicantly reduced. When we
work with companies and entrepreneurs, we
focus on early-growth venture capital. You
really have to have very strong conviction and
dialogue with your investors, shareholders and
stakeholders, about exactly what is the core
competence and the value of the company.
Who you are — the things you do, mergers
and acquisitions, who you hire — all are
Perspectives on IPO readiness
reected in the core values of your company.
Many entrepreneurs don’t do this very well.
They move from one hot sector to the next.
But in the end they have to make the right
decisions, and focus on investing in and
buying companies that really tie into their
core product offerings.
Gary Rieschel: In the successful deals we
make money on, 80% are successful because
you’re going to be sold to someone else,
Don’t manage investors, manage the business.
Stick to strategy. Surprises generally are bad, even if you think
they’re good surprises. There’s a transformation going from
entrepreneur to the CEO of a public company
20% will be because you went public. A
successful M&A exit is a great exit. But the
really sophisticated people that pay a large
amount of money for your company don’t
buy a mess. If you’re cutting corners on
governance, creating a lot of problems with
revenue recognition inside the company — the
days are over where you can expect someone
to buy you out of that. Also, when someone
comes to look at a company, if you’re not
ready to be bought and you’re the last one
in the industry standing, that may not be a
good place to be.
Bob Partridge: Obviously, as an accounting
rm, we see that value creation isn’t
just new business metrics. It’s the
fundamentals of more good infrastructure,
well managed from a cost standpoint,
that’s leveragable but within a great
corporate governance environment. As a
private company, you’re used to being a
private company and you may deal with
your board and maybe an investor. But
you’re suddenly faced with regulators
post-IPO. So that whole area of corporate
governance goes well beyond what
many entrepreneurs would traditionally
anticipate. How do good companies keep
investors interested in buying shares
post-IPO — this is the heart of the matter
and probably why value creation is so
important, isn’t it?
Zhao Chenning: The most important answer
to this question is, try to create value. You
communicate in the most efcient way and
transparent way to the investors. You go on
a road show — not necessarily when you have
your earnings announcement, but whenever
there are important events, e.g., earnings
announcements, the offering. That will help
keep investors’ interest level in your company.
Gary Rieschel: The number one job of
the institutional relations people, the
marketing people, the CEO, is to create
and communicate a simple message about
your company and what it’s doing in an
early-stage investment. Number two: no
surprises. Predictability is valued much more
highly by institutional public investors than
outperformance.
43
Perspectives on global IPO markets
Our amount of capital signicantly increased post-IPO because
people really believed in the story, the leadership, transparency,
and the company had good communication skills and strong
investor relationships
David Su: Communicate performance
effectively. It sounds easy but it’s certainly
difcult to do. Investors don’t like huge
surprises, either pleasant or unpleasant.
Also, great companies can typically
communicate their core value proposition
in two or three sentences. We call it the
elevator pitch. If you have to take hours and
hours to explain, you’re just not going to
get your retail or institutional investors very
interested. There are thousands of stocks on
the market. Why should they pick you?
Bob Partridge: Don’t manage investors,
manage the business. Stick to strategy.
Surprises generally are bad, even if you
think they’re good surprises. Going from
entrepreneur to the CEO of a public
company, there’s a transformation.
David Su: Too many companies that we see
in China treat the whole IPO as a destination.
Typically, six to nine months beforehand,
they get a good chief nancial ofcer who is
going to be the communicator, the company’s
face to Wall Street, the key gurehead for
the whole public listing process. Yet most
of the time, this CFO doesn’t make any key
decisions with the company. And a lot of
times, the moment the company hits some
problems, the CFO disappears.
Although CEOs may be very good at executing
their businesses, what is important probably is
that you really make an effort to communicate
to Wall Street. The CEO can’t just leave it to
the CFO and his investor relations person to
do all the talking now. The leadership style
will need to change a little bit because you’re
under a lot more public scrutiny.
44 Global IPO trends report 2009
Bob Partridge: This is not a short-term
journey, it’s establishing something that’s
sustainable, to get from a small company
to a Cisco, a GE.
Gary Rieschel: Say you’ve taken money
from us, we’ve invested, and you’ve grown
the business. Well you can work for ten
years, and you can raise a billion dollars
from the private equity world — then you
can make a mistake in a public offering in a
bad market and lose everything. The public
market can take all of it away immediately.
Why put yourself in that position? The
insurance policy is a really strong team, and a
professional way of managing that business.
So you’re worth a billion dollars at IPO. But
many companies in Silicon Valley and China
that were worth US$1 billion at IPO are now
worth US$50 million or less. And the CEO and
the investors never could get their money out.
There are hundreds of these companies.
In China, at the time of the IPO, you’re going
to be in exactly the same position as the
investors. You’ll be locked up maybe for an
extended period of time. It’s just not smart
risk management to leave anything for
chance on the team until well past the time
when that window for liquidity would have
occurred. You can lose everything.
Bob Partridge: Do the fundamentals
change for a company in the pre-IPO
journey when they think about post-IPO
value creation? Should they be thinking
differently?
David Su: Realistically you’re not going
to see too much IPO activity in the next
12 to 18 months, because many of those
companies’ comparables are trading at very
depressed values, even compared to a lot of
private equity investors.
Public equity actually presents a much better
value right now to a lot of those companies.
If a company has capital to allow its own
business to expand within the next one to
two years, it should not do its IPO right now.
Instead, they should think about continuing
to grow, expand into other geographic
regions and maybe raise some more equity
nancing. And focus on execution. Don’t
worry about public markets just yet. Get your
systems and processes in place.
Zhao Chenning: I agree. Focus on
fundamentals. Focus on what you are doing
in business rather than nancial gain. That’s
number one. Number two, it’s actually a
great time for you to observe how and why a
company has failed. So watch your balance
sheet, watch your strategy. Don’t do things
you don’t understand. Don’t think you
understand everything.
Bob Partridge: Don’t invest in coal mines in
Australia!
Gary Rieschel: Understand your business
better. If you’re in a smaller company and you
have public competitors, know them better
than they know themselves. Talk to their
customers, talk to the analysts so that you
know what you’re dealing with at the time
you go out. Because you’re going to have to
differentiate yourself from the competitors,
and I don’t see that many people do a really
great job at that.

The impact of MiFID on
the European securities market
A lot has changed since the late 13th
century, when commodity traders in Bruges
conducted their business through informal
meetings at the home of a Mr. Van den
Beurse, which meetings subsequently
transformed into the Bruges, Ghent and
Amsterdam “Beurzen” or stock exchanges.
Today, a one-millisecond advantage in trading
applications can be worth US$100 million a
year to major brokerages, The speed of light
has become the limit on fast execution.
Changing customers
A key change is that exchanges and
brokers are now in competition. Previously,
exchanges thought of brokers as their
customers; but now the market shows us
that in fact the real customers are on the
buy side. The exchanges are beginning to
recognize that if they cut out the broker
“middleman,” they can turn the costs of
trading into revenue for themselves. There
are fascinating things happening on the buy
side, which the exchanges have really only
just begun to pick up on.
The need for human intervention on the
buy side is diminishing, and smart order
management systems and the rise of
algorithmic trading are replacing the humble
broker. Market participants believe that
by 2010, up to 50% of daily trades will be
algorithmic in nature — indeed, with the
average order size being 10 times that on
main exchanges, this seems likely.
On the other hand, the rise of programs
that incorporate so-called dark pools (more
on these below) and accordingly facilitate
block trades are a threat to exchanges.
Benn Steil, Senior Fellow and Director of
International Economics at the Council on
Foreign Relations, poses the question, “Are
exchanges not at risk that trading will evolve
in such a manner that we [almost only] see
peer-to-peer trading?”
Perspectives on IPO readiness
Changes in the European market — MiFID
More recently, and in the European market,
there have been dramatic changes. The
Markets in Financial Instruments Directive
(MiFID), came into force across the European
Union (EU) on 1st November 2007. Its
primary aim was to create a single market in
which to conduct investment business across
all EU countries, applying to all equity trades,
whether on- or off-exchange. MiFID requires
regulated markets, multilateral trading
facilities (MTFs) and systematic internalizers
(SIs) to publish the price, volume and time of
a transaction as close to real time as possible
and in a way that is easily accessible to other
market participants.
MiFID focuses on three key areas. Two of
these regard on-exchange trades (using the
United Kingdom as an example):
1. On-book: business transacted on the
order book (e.g., automatic executions
on SETS) and subsequently published by
the exchange.
2. Off-book: business transacted bilaterally
by intermediaries and investors, away
from the order book (e.g., deals made
by telephone in a SEAQ, SETSmm or
SETS stock). As the transaction takes
place under our rules, it will be reported
to the exchange and subsequently
published to the market.
The third key area pertains to off-exchange
trades:
3. Off-exchange transactions occur outside
the exchange’s structure (i.e., over
the counter), between fund managers,
for example. There is no exchange
involvement (of order books/rule
books), and the trades are not currently
published on the exchange’s data feed.
Post-trade transparency
One of the big changes is that MiFID requires
all trades executed in a security listed on an
EU-regulated market to be published, even
when the trade has been executed outside
of a regulated market. In other words, all
on- and off-exchange business must be
published. MiFID aims to facilitate greater
freedom of choice with regard to execution
and reporting venues. MiFID obliges
individuals to publish trades in equities when
not executed directly on exchange — but it
gives them a choice where to publish.
Thus, for the rst time, MiFID allows us
to see what the MTFs (and the Electronic
Communications Networks in the US) and
dark pools are doing.
Dark pools and the threat to exchanges
On a wider note, deep, dark pools, dark
algorithms and smart order routers are some
of the biggest structural changes in equity
trading to impact the US and European
markets in 20 years. By some estimates, this
sort of trading already accounts for 12% of
American equity trades, and its frequency is
expected to rise exponentially. Some analysts
argue that such trading is threatening the
very existence of traditional exchanges such
as the New York Stock Exchange (NYSE),
the London Stock Exchange (LSE) and
Euronext.
The wave is now sweeping through Europe
via MiFID, and main exchanges like LSE
and Euronext are launching their own dark
pools to take on competition from their own
biggest customers. The trend is moving to
Japan now and is expected to nd its way to
the rest of Asia. “European equity trading is
going through the biggest structural change
since the Big Bang,” says one trader.
Dark pools, to put it simply, are essentially
trading platforms and exchanges that match
45
Perspectives on global IPO markets
block institutional orders — bypassing the main
exchanges completely in off-market deals —
and that don’t publish stock quotes. It’s been
made possible by increasingly sophisticated
technology like algorithmic trading tools.
Algorithmic trading, will by 2010 account
for more than 50% of all shares that change
hands in the US.
Why dark pools? Since most bids and offers
on, say, LSE, NYSE or NASDAQ are shown
publicly, trading on these exchanges is like,
as one report says, “playing poker with
an open hand.” Dark pools, by contrast,
guarantee absolute anonymity and secrecy
to buy-side traders worried about revealing
their strategies, accesses available liquidity
outside the exchanges and is only reported
post-trade. It is, of course, all intensely
regulated and painstakingly legal — dark
pools have taken off in Europe only after the
introduction of MiFID.
A consortium of major banks, including
Citigroup, Goldman Sachs, Deutsche Bank,
Merrill Lynch, UBS, Morgan Stanley and
Credit Suisse has launched Turquoise, a
pan-European dark-pool trading platform. In
retaliation, LSE announced its own version,
initially with a pre-2008 crisis tie-up with
Lehman Brothers, called Baikal (named for
the world’s deepest freshwater lake). Both
Euronext and NYSE have dark-pool plans.
There are, at last report, some 50-odd such
46 Global IPO trends report 2009
platforms, including Chi-X, Turquoise, Posit The IPO is still dependent
and Crossnder, and more are arriving
regularly . Chi-X, the leading MTF in Europe, is on initial and cornerstone
believed to have 10% of the European market investors who understand the
and 15% to 20% of the London market.
stock and business story being
Is exchange choice for IPOs affected?
listed. But watch this space.
The question is whether the market size is
expanding (whether this is 15% to 20% of
the existing 100% or an increase, say 120%
sized market). Stakeholders argue that the
MTFs are increasing total volume, so perhaps
the existing stakeholders are not losing out
so much. Another question is whether the
existing exchanges will create their own MTFs
and buy out the new players, as happened in
the US.
Whatever the nal landscape, the central
question is, will this affect the choice of
exchange for IPOs? Will the cheapest, most
lightly regulated market be the exchange
of choice as long as the stock is captured
by an MTF and can be traded across the
MiFID landscape — i.e., does it matter?
Well, currently it does. The initial IPO is
still dependent on initial and cornerstone
investors who understand the stock and
business story being listed. But watch
this space.
Mark Jarvis, UK Inbound IPO Leader,
Ernst & Young

Managing for success in turbulent times
Today’s complex and turbulent economic
climate requires creative thinking to deal with
ever-changing business issues. Sustained
global economic growth has been replaced
by declining asset valuations and frozen
credit markets. The subprime issues in the
nancial services sector have had an impact
on nearly every facet of the economy. It is
our belief that no sector of the economy will
be immune from the crisis. In spite of this
challenging landscape, many well-funded
companies are seeking to add market share,
expand product/service offerings and recruit
quality people. For these businesses, the
timing may be perfect to acquire competitors
and complementary companies at depressed
prices, gain control of a company by
acquiring distressed debt and adding key
employees.
Companies positioned for growth
Every transaction has tax implications,
whether it’s an acquisition, disposal,
renancing, restructuring or IPO.
Understanding these implications can
mitigate transaction risk, enhance
opportunity and provide crucial negotiation
insights. From the initial due diligence,
through post-deal implementation, it is
crucial to consider the entire transaction
lifecycle and how a particular transaction
strategy might impact your business
objectives.
In the due diligence phase, identifying
potential issues and deal breakers will
increase the likelihood of a successful
transaction. Moving into the deal structure
phase, the focus shifts to increasing
efciency and obtaining tax benets as
well as the impact of the transaction on
the nancial statements. Planning for a
successful merger of workforces, benet
plans, pension rollovers, facilities and other
corporate services are all parts of the
integration phase. The benets of this kind
Perspectives on IPO readiness
An approach centered on the company needs —
The tax lifecycle
Corporate and Employer taxes
income taxes Planning
International Controversy
Company Provision Personal taxes
cross-border taxes needs
Compliance
Transaction taxes Indirect taxes
Leading practice organizations focus on the complete tax lifecycle — planning, tax accounting,
compliance and controversy or audit defense. The tax lifecycle is continuous — each of its
elements is based on what came before and has an effect on what comes next.
of attention throughout the transaction stage for future growth. This is especially
lifecycle can signicantly reduce transaction important for evolving companies that want
execution risk and facilitate better deal terms to look attractive to potential sources of
in the negotiation process. capital, whether IPO, private equity or venture
capital. Whether in-house or sourced to other
Tax and the IPO process
providers, the tax function that is based on the
In today’s business environment, tax functions
tax lifecycle is likely to be poised for success.
must comprise more than ling tax returns
and minding regulatory issues. Leading Because the traditional tax function was
practice organizations focus on the complete structured with a historical perspective that
tax lifecycle — planning, tax accounting, had tax directors looking back at the prior
compliance, and controversy or audit defense. year’s data, it is no wonder that it was not
The tax lifecycle is continuous — each of perceived as a core part of the company’s
its elements is based on what came before strategic team. In today’s demanding
and has an effect on what comes next. By environment, the tax processes cannot
focusing on the tax lifecycle, companies can remain self-contained, and the importance
strengthen their tax functions and set the of the contemporary tax function cannot be
47
Perspectives on global IPO markets

overstated. Decisions made in one area have
an effect on and can trigger actions in each
of the others. It is ineffective to contemplate
a tax-planning strategy without considering
its effect on reporting, its implications for tax
provisions, and its ultimate defensibility in
the event of controversy.
Times and circumstances have changed. Tax
functions continue to remain under pressure
to manage the company’s effective tax rate
while maintaining “no mistakes, no surprises”
controls over the company’s tax compliance
and nancial reporting. Further, in today’s
economic climate, the tax functions of many
companies are also coming under pressure to
help the business’s bottom line. This means
nding cost and efciency savings within the
tax function itself. It also means meeting the
need for cash by implementing tax planning
that improves the cash tax position.
Organic growth affects the tax function by
adding volume and is typically easily managed.
However, the growth achieved by going public
or through mergers and acquisitions affects
the tax function signicantly. A well-integrated
tax function allows a company to handle the
many tax issues that arise as a result of an IPO
or M&A event.
Future market leaders
In today’s world, high-performance
companies have moved to a model for
identifying “next practices,” melding the
workable approaches that others have
taken in the past with their own unique
circumstances and transforming them into
ideas for the future. These next practices are
what help companies grow — and transform
good companies into great ones.
James Markham, Global Strategic Growth
Markets Tax Leader, Ernst & Young

Denition of an IPO
IPO definition: In this report, only IPOs of operating companies are considered. An IPO is defined as: a company’s first offering of
equity to the public.
Comment: This report includes only those IPOs for which the data providers Dealogic, Thomson Financial and Ernst & Young
offer data regarding the issue date (the day the offer is priced and allocations are subsequently made), the trading date (the
date on which the security first trades) and proceeds (funds raised including any overallottment sold). Postponed IPOs or those
which have not yet priced are therefore excluded.
In an attempt to exclude non-operating company IPOs such as trusts or funds, companies with the following SIC codes are
excluded:

• 6091: Financial companies that conduct trust, fiduciary • 6732: Companies that are grant-making foundations
and custody activities
• 6371: Asset management companies such as health • 6733: Asset management companies that deal with
and welfare funds, pension funds and their third-party trusts, estates and agency accounts
administration as well as other financial vehicles
• 6722: Companies that are open-end investment funds • 6798: Companies that are REITs
• 6726: Companies that are other financial vehicles (e.g., • 6799: Special Purpose Acquisition Companies (SPACs)
investment offices)
All charts are created based on the domicile nation of the issuers except for Figure 2: Global IPO activity by stock exchange
(2008) on page 7, which depicts market activity by exchanges as a percentage of global deals and capital raised.

48 Global IPO trends report 2009

 Ernst & Young Strategic Growth Markets Area IPO Leaders
Global
Greg Ericksen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+ 44.20.7980.0220. . . . . . . . . . . . . . . . . . . . gregory.ericksen@uk.ey.com
Gil Forer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+ 44.20.7980.0170. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .gil.forer@ey.com

Areas
Jackie Kelley (US) . . . . . . . . . . . . . . . . . . . . . . . . . . .+ 1.949.437.0237 . . . . . . . . . . . . . . . . . . . . . . . jacqueline.kelley @ey.com
Maria Pinelli (US) . . . . . . . . . . . . . . . . . . . . . . . . . . . .+ 1.212.773.0578 . . . . . . . . . . . . . . . . . . . . . . . . . . . maria.pinelli@ey.com
Julie Teigland (Europe & Germany) . . . . . . . . . . . . . .+ 49.621.4208.11510 . . . . . . . . . . . . . . . . . . . . julie.teigland@de.ey.com
Any Antola (France) . . . . . . . . . . . . . . . . . . . . . . . . . .+ 33.1.46.93.73.40. . . . . . . . . . . . . . . . . . . . . . . . . any.antola@fr.ey.com
Philip Leung (Far East & China) . . . . . . . . . . . . . . . . .+ 86.21.62191222 . . . . . . . . . . . . . . . . . . . . . . . . philip.leung@cn.ey.com
Garry Wayling (Australia) . . . . . . . . . . . . . . . . . . . . . .+ 61.2.82956436 . . . . . . . . . . . . . . . . . . . . . . . garry.wayling@au.ey.com
David Wilkinson (UK) . . . . . . . . . . . . . . . . . . . . . . . . .+ 44.20.7951.2335. . . . . . . . . . . . . . . . . . . . . . . . . dwilkinson@uk.ey.com
Michael Lynch-Bell (UK) . . . . . . . . . . . . . . . . . . . . . . .+ 44.20.7951.3064. . . . . . . . . . . . . . . . . . . . . . . . .mlynchbell@uk.ey.com

Acknowledgments

Project Sponsor Copy Editor

Greg Ericksen, Global Vice Chair, Strategic Growth Markets, Russell Colton, Creative Services Group, Ernst & Young US
Ernst & Young
Research Analyst
Project Leader Eva Chan, IPO Research Associate, Ernst & Young Global
Gil Forer, Global Director, IPO Initiatives, Strategic Growth
Markets, Ernst & Young Art Director and Designer
Jeffrey Wolnowitz, Senior Designer, Creative Services Group,
Author and Chief Editor Ernst & Young US
Jennifer Lee-Sims, Global Associate Director, IPO Initiatives,
Ernst & Young Global

Report contributors
Lisa Carnoy, Co-Head of Equity Capital Markets, James Markham, Global Strategic Growth Markets Tax Leader,
Bank of America Merrill Lynch Ernst & Young
Zhao Chenning, Partner, Fountainvest, China Robert Partridge, Far East Transaction Advisory Services Leader,
Ernst & Young Hong Kong
Rowena Chu, Chairman of Equity Capital Markets, Asia, Deutsche Bank
Maria Pinelli, Americas Strategic Growth Markets Leader,
Scott Cutler, Executive Vice President, America’s Listings,
Ernst & Young
NYSE Euronext
Gary Rieschel, Founder & Managing Director, Qiming Venture Partners
Phillip Gandier, IPO Leader, Ernst & Young Middle East
Jeff Singer, CEO, NASDAQ Dubai
Mark Jarvis, UK Inbound IPO Leader, Ernst & Young UK
David Su, Managing Partner, Matrix Partners, China
Jackie Kelley, Americas IPO Leader, Ernst & Young
Matthew Sutton, Professional Services, Ernst & Young China
Edward Law, Co-Head of Western Equity Capital Markets, Deutsche Bank
Julie Teigland, Europe, Middle East, India and Africa (EMEIA)
Philip Leung, Strategic Growth Markets Leader, Ernst & Young China
Strategic Growth Markets Leader, Ernst & Young
John Lydon, Co-Head of Equity Capital Markets, Asia, Deutsche Bank
Heidi Yang, Head of Corporate Advisory Group, Asia, Deutsche Bank
Michael D. Lynch-Bell, UK IPO Services Leader, Ernst & Young UK
George Magnus, Senior Economic Advisor, UBS

49
Ernst & Young

Assurance | Tax | Transactions | Advisory

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© 2009 EYGM Limited.
All Rights Reserved.

EYG No. CY0053

CSG NY 0901-1020715

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