November 21, 2005
Please note that contributed articles, blog entries, and comments posted on EDACafe.com are the views and opinion of the author and do not necessarily represent the views and opinions of the management and staff of Internet Business Systems and its subsidiary web-sites.
| by Jack Horgan - Contributing Editor
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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.
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.
The investment bank conducts business, financial and legal due diligence: business due diligence to verify company's business strategy and potential for future growth; financial due diligence to confirm the company's historical financial results and understanding its future operational and financial prospects; legal due diligence to verify the company's legal records, material contracts, and litigation.
In addition to the S1 registration statement and prospectus there are also various legal documents including the underwrite agreement, comfort letter, lock-up agreements and legal opinions. The comfort letter describes the procedures performed and contains representations about financial statements and information. The preliminary prospectus is often called “red herring” because the red ink is used on the front page.
The SEC (Securities and Exchange Commission) reviews and issues comments on the registration statement. The filing begins a round of comments, revisions and amendments that hopefully leads to approval by the SEC.
Typically there is a nationwide road show (New York, San Francisco, Boston, Chicago, and Los Angeles) of company executives to formally present the firm's business operations, financial conditions, performance, markets, products and services to underwriters, analysts and potential institutional investors. The tour can be said to be “marketing the deal”. The goal is to get buy-in from potential investors.
The final prospectus is printed, filed with the SEC and distributed to potential investors.
The offering must be sized (number of shares), valued (price per share) and allocated. This is influenced by the general state of the market and market segment, the response to the road show, the amount of capital being sought, recent IPOs, and so forth.
The difference between what the underwriters purchases the shares and what they sell it for to the public is called the gross spread, typically around 7% of gross proceeds. This is the main source of their compensation. They and other members of the syndicate also receive a commission for selling the securities. The firm going public pays accounting, legal, filing and printing expenses.
During the so called “quiet period” from the filing with the SEC to around 25 days after the start of trading the company is prohibited by the SEC from distributing any information about the company not included in the prospectus. There is also a “lockup” period after the start of trading during which company insiders may not sell their shares. This period is at least 90 days by law.
The lead underwriter is primarily responsible for ensuring smooth trading in a company's stock for the first few days of trading. The underwriter is legally allowed to support the price of a newly issued stock by buying shares in the market or selling them short. An IPO is not declared final until about seven days after the company's market debut. On rare occasions, an IPO can be canceled even after a stock starts trading. In such cases, all trading is negated and any money collected from investors is returned.
London Stock Exchange
Celoxica, based in Oxfordshire in the United Kingdom, chose the London Stock Exchange for its IPO. The London Stock Exchange provide a secondary market for trading in a wide range of securities including, UK and international equities, AIM securities and depositary receipts.
The London Stock Exchange has two primary markets, namely the Main Market and AIM (Alternative Investment Market) the Exchange's global market for growing companies.
The table below highlights the main differences in the admission criteria for the Main Market and AIM:
AIM gives companies from all countries and sectors access to the market at an earlier stage of their development, allowing them to experience life as a public company. Since AIM opened in 1995, more than 1,900 companies have been admitted and more than £17 billion has been raised collectively. About 88% of the companies listed are based in the UK.
The distribution by market value shows approximately 20% at more than £50m, 17% between £25m and £50m and 63% less than £25m as of September 2005.
Geographies other than the US and UK also have their own stock exchanges. I know from my work on preparing the quarterly reports on EDA, IP and MCAD industries for this website and its sister mcadcafe.com website that public firms in other countries provide far less data on their financial performance than do their US counterparts. This makes it difficult to get an accurate picture of those companies.
The top articles over the last two weeks as determined by the number of readers were:
IEEE approved SystemVerilog, IEEE Std 1800(TM)-2005, as a new standard and approved Verilog, IEEE Std 1364(TM)-2005, as a revision to the popular Verilog hardware description language (HDL). SystemVerilog extends the Verilog language, the predominant language used for chip design, to address the growing complexity of electronic system and semiconductor designs. SystemVerilog is a unified language for hardware design, specification, and verification that was developed within the IEEE Standard Association's Corporate Program. The revision to the Verilog language standard resolves several ambiguities and corrects minor errors.
The companies have built on their long-term relationship with a new agreement that designates Cadence as Freescale's primary vendor for EDA software, hardware and services. The companies will work together on EDA initiatives that address the challenges of creating highly advanced semiconductor products for the wireless, automotive, networking and computing segments, with a special focus on low-power, mixed-signal and high-performance designs.
This paper presents a new methodology to provide better estimates of on-silicon performance. The technique relies on the extraction of residual OPC errors from placed and routed full chip layouts to derive actual (i.e., calibrated to silicon) CD values that are then used in timing analysis and speed path characterization.
Synopsys' Composite Current Source (CCS) modeling technology enables designers, for the first time, to perform comprehensive timing, noise and power analysis using a single, open library model. Anchored by the industry's golden sign-off tool, Synopsys' PrimeTime tool, CCS modeling technology extends sign-off to include noise and power effects that are required for today's nanometer designs.
Other EDA News
MIMO Technology for Advanced Wireless Local Area Networks - Technical Paper from DAC 2005
Other IP & SoC News
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-- Jack Horgan, EDACafe.com Contributing Editor.