Börsen-Zeitung: Many ways lead to the stock exchange

17 Nov 2020

Börsen-Zeitung: Many ways lead to the stock exchangeRenata Bandov, Head of Pre-IPO & Capital Markets, Deutsche Börse AG

Bull, bear and stock exchange bell. These are the images that many people have in mind when it comes to the IPO of a company on the trading floor of the Frankfurt stock exchange. Not so well known, however, are the different ways to go public - because it does not always have to be the classic IPO.

Yet the Initial Public Offering, for which the three letters IPO stand, is by far the best known and most frequently chosen option when companies decide to go public. It is the first time that a previously unlisted company - either in the legal form of an AG, KGaA or SE - places shares on a stock exchange (Initial). Usually, these are the shares of the existing shareholders as well as new shares resulting from a capital increase of the company. The new shares are initially offered for public subscription before the first day of trading on the stock exchange (Public Offering). The proceeds flow into the company, for example to finance growth in the long term. Existing shareholders also benefit from the public placement of the existing shares - they can sell their shares to generate liquidity or continue to hold them in order to participate in future developments.

TeamViewer AG also chose this classic way. The Swabian technology company celebrated its IPO in Frankfurt last September. In the course of the IPO, the financial investor Permira, which had invested in TeamViewer in 2014, was able to initiate the monetization of its shares. It has paid off: within a year's time, the share price has recorded high double-digit growth. In addition, the company has raised new capital of around EUR 1 billion, among other things for further acquisitions.

When going public, however, the securities do not necessarily have to be offered to the public. Targeted approaches are also possible - within the framework of a private placement. In this special form of IPO, securities are only offered to a selected group of investors. One example was provided by the technology investor Brockhaus Capital Management (BCM) in July of this year. Members of the Management Board and Supervisory Board, employees of BCM and members of the management of the subsidiaries participated in the capital increase with a total of EUR 1 million.

The Swedish music streaming service Spotify, on the other hand, opted for a direct listing - a direct placement - when it made its stock exchange debut in New York two years ago. With a direct listing, only existing shares of the company are admitted to trading on the stock exchange. There is no bookbuilding process prior to the IPO, which makes the listing process more flexible and reduces costs. There is therefore no predetermined price for the acquisition of the shares and thus no risk for discounts of price and valuation. The price is determined on the first trading day by supply and demand. Furthermore, the shares of the founders and existing shareholders are not diluted, as no new shares are issued. Despite the high level of media interest in Spotify's IPO, Europe is only at the very beginning of a potential trend for direct listings. Examples in Frankfurt are iQ International or FCR Immobilien.

Another going-public-option that is currently booming, especially in the USA, are so-called SPACs (Special Purpose Acquisition Company). This year, more SPACs than classic companies went public in New York – that is evidence enough to prove that an established market with sufficient liquidity already exists overseas. A SPAC is a shell company that first collects capital through an IPO in order to then use the capital to take over an operationally active company that has not yet been identified and is not yet listed on the stock exchange.

For this purpose, the financiers and the management team – the so called sponsors - define in advance a time frame for the planned implementation. If the transaction is not completed, the SPAC company is liquidated and the investors receive their capital back including interest. SPACs thus offer retail investors the opportunity to participate in the development of unlisted companies. In addition, SPACs prove to be more resistant to market volatility as they are not tied to a narrow time frame. Interest in this structure is also growing in Germany. The Frankfurt Stock Exchange has created a framework for companies that make SPAC listings possible in Germany as well.

Two further options can be interesting, especially in the course of a company's restrukturing: The spin-off and the carve-out. In a spin-off, a subsidiary or division is spun off from a company or group of companies - and a new, independent company is created. In such a spin-off, the parent company distributes the shares of the spun-off subsidiary proportionally to its previous act.

Renata Bandov, Head of Pre-IPO & Capital Markets of Deutsche Börse AG. The original German version of this article was first published in Börsen-Zeitung on 14 November 2020.