November 21, 2005
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Jack Horgan - Contributing Editor

by Jack Horgan - Contributing Editor
Posted anew every four weeks or so, the EDA WEEKLY delivers to its readers information concerning the latest happenings in the EDA industry, covering vendors, products, finances and new developments. Frequently, feature articles on selected public or private EDA companies are presented. Brought to you by If we miss a story or subject that you feel deserves to be included, or you just want to suggest a future topic, please contact us! Questions? Feedback? Click here. Thank you!


Celoxica recently became the first ESL firm to go public. This week's editorial covers that event, IPOs in general as a source of financing and the London Stock Exchange where Celoxica's IPO happened.

Celoxica IPO

On October 27, 2005 Celoxica Holdings plc announced its admission to the Alternative Investment Market (AIM) of the London Stock Exchange. Arbuthnot Securities is the Company's nominated adviser and broker who placed 19,424,000 new ordinary shares with institutional investors, raising £6.1 million (nearly $11 million) or £5.3 million ($9.5 million) net of expenses. The new shares placed represent 37.7% of the Company's enlarged issued share capital. Market capitalization at the time of the placement was £16.1 million. None of the Company's existing shareholders (including Directors) sold any shares at that time. The shares commenced trading under the symbol CXA. In
September when Celoxica announced its intention of filing an IPO, the firm said that is was hoping to raise as much as £10 million.

Celoxica is based in Oxfordshire in the United Kingdom but also has a strong presence in Austin, Texas. The company which traces its history to the Computing Lab at Oxford University employs about 50 people. The firm has licensed approximately 400 commercial seats of its design tools, across a broad range of industries to around 100 customers.

When the company started in 1991 it raised about $30 million. In 2001 it raised another $30 million. Investors in Celoxica include VC firms Advent, Cazenove and Quester and industry investors Intel Capital, Xilinx, Wind River and Creative.
The table below presents some financial data taken from the firm's prospectus.

Phil Bishop, CEO of Celoxica, commented: “We are delighted with our AIM listing, which is an important step in Celoxica's strategic development. The growing complexity of digital electronics combined with challenging and aggressive development schedules are increasing the demand for our design solutions, a trend that is predicted to continue.”

Sinvce previous editorials have covered Celoxica, I will move on to IPOs in general.

IPOs in General

When people setup a new company they generally need money to cover startup costs and ongoing operational expenses until they can establish an offsetting revenue stream. This seed money may come from the founders via personal savings and/or loans. It may come from friends, associates, former employers, a university, government grants, venture capitalists, angel investors and so forth. Sometime the founders will continue to generate income from other sources such as consulting to cover these expenses. Over time additional investment may be required to hire more people, underwrite a market launch, establish a sales presence in other geographies, set up manufacturing operations, and so
forth. This may require the exchange of equity for investment. This introduces the concept of dilution. Existing shareholders end up owning less of the company. However, having a smaller percentage of a firm with greater potential may be better in the long run. Investors may also offer non-monetary assistance as well.

People who invest in a startup company are looking for or at least hoping for a return on that investment, a payback or payoff. The investment can be time, effort, talent, creativity and of course money. While the payback can be in many forms including self satisfaction, working on interesting things, making a difference, and so on, the most common hope is for money. For this to occur there must be a merger, an acquisition, a sale of assets or an IPO (initial public offering). Direct investment by others such as venture capitalist and angle investors may provide working capital but it does not provide liquidity. As a condition of investment, new investors generally receive convertible
preferred stock and go to the head of the line if and when a firm is liquidated. Founders and current employees may be required to sign multi-year employment agreements in order to reap the benefits, after all the main asset of a company is likely to be its employees.

In the case of a merger or acquisition the acquiring party generally provides significant non-monetary benefits. In the EDA industry the major players like Synopsys, Cadence and Mentor, can provide a small firm who has new and exciting technology with worldwide sales and marketing operations as well as a large installed customer base to sell into. In the aggregate the big three EDA firms spend more money on acquisitions than on R&D. Assuming thorough technical due diligence, acquisitions provide them more timely and less risky access to new technology than internal development. The potential of a future IPO gives small firms leverage in negotiating sales price with acquiring firms.

An IPO, initial public offering, is the sale of stock in a company to the general public. The two largest primary stock markets in the U.S. are the National Association of Securities Dealers Automated Quotation Stock Market (NASDAQ which accounts for more than 56% of total share volume and trades the most stocks of any market) and the New York Stock Exchange (NYSE, with about 37% of the total volume and roughly 2,800 listed companies). The leading EDA companies trade on the technology loaded NASDAQ. Cadence recently announced that they would only be traded on NASDAQ. Each exchange has a number of conditions for a firm to be listed. Among the NYSE requirements for initial filing is
aggregate pretax earnings over the last 3 years of $10 million, a minimum of $2 million in the two most recent years and positive in the third year.

According to Hoover's there were 64 IPOs in the third quarter of 2005 for a total value of $9.8 billion. This compares to 62 IPOs in the third quarter of 2004 for a total of $14.1 billion and to 47 IPOs in the second quarter of 2005 for a total of $7.5 billion.

According to NASDAQ the pros and cons of going public are

As the old adage says “There is no such thing as a free lunch.” The preparation of the IPO is itself a major distraction for the executive team The IPO process can take 12 to 20 weeks depending upon a firm's starting point. The Securities Act of 1933 and the Securities Exchange Act of 1934 requires the filing of certain documents before registration, e.g. Prospectus, and after issuance to keep existing and potential investors informed about a company's business and financial conditions. After the IPO ongoing financial reporting requirements include
10-K Annual report within 75 days after end of fiscal year

10-Q Quarterly Report with 40 days after end of the quarter

8-K Report on significant events such as a merger or acquisition with 4 days of the event
These reports contain the basic financial data of balance sheet, P&L and cash flow.

Under the Sarbanes-Oxley Act of 2002 CEOs and CFOs must certify for each annual and quarterly report that
a) they have reviewed the report

b) based upon their knowledge the report does not contain any untrue or misleading statements by commission or omission

c) based upon their knowledge the financial statements fairly present in all material respects the financial condition and the result of operations
The signing officers are also responsible for establishing and maintaining internal controls and evaluating and reporting on the effectiveness of those controls within 90 days of issuing a report.

The typical IPO process consists of the following steps

Select investment bank or “underwriter”

Select advisors, legal, audit, accounting, intellectual property

Prepared Audited financials adhering to GAAP

      2yrs consolidated balance sheet

      3 yrs consolidated income statements

      3 yrs consolidated cash-flow statements

      3 more years of unaudited income statements, 2 yrs unaudited

Develop financial projections

Determine management compensation and stock option programs

Select Board of Directors and form board committees

Establish procedures for Sarbanes-Oxley Act (SOX) compliance

Get liability insurance

Prepare a registration statement and prospectus

File registration with SEC

Multi-city tour or road show

File final prospectus

Obtain SEC Approval

Price and size the offering
The selection of an underwriter is a mutual process. The reputation of the underwriter is at risk and their time and resources have an opportunity cost in that they could be used for more promising deals. If there is more than one investment bank involved, then one is the lead underwriter and the group is referred to as the “syndicate.” The most recognized investment banks include Merrill Lynch, Goldman Sacks and Morgan Stanley.

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-- Jack Horgan, Contributing Editor.


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