Introduction :
In March 2000, Arinso International, a Belgian software development company, announced an Initial Public
Offering. In this paper, we will discuss this IPO. We start by a brief description of the company. Then, we will
focus on the main reasons for this IPO. The main features of the capital operation are discussed in the next
section.
1.Company profile:
Arinso International is a Belgian group that consists of 11 ICT consulting companies, which
mainly operate under the name of Argus Integrated Solutions. These companies are
specialized in implementing and maintaining Enterprise Resource Planning systems, mainly
focused on Human Resource management. Arinso was founded in 1994 by a group of former
SAP-HR consultants. The main driving force behind the foundation and largest shareholder is
Jos Sluys, who is for the moment still the CEO of the group. Through its subsidiaries the
group has an international coverage, it offers its HR applications and services in Europe, the
US, Canada and Latin America. Today, it employs 1250 staff in 22 countries.
The main activity of Arinso is the provision of Human Resources Solutions with a focus on
implementing Human Resources Management, Benefits and Payroll systems. These solutions
are customized to the specific needs of the clients. Since their products are tailored, the clients
of Arinso are mostly well-established large companies. Some of its clients are for example
Fortis, Volkswagen Belgium, KB Luxembourg, Nestle, Bayer, Haliburton, … Its HRsolutions are based on the SAP, ORACLE and Meta4 operating systems. With the companies
providing these operating systems Arinso established partnerships.
In 1999 Arinso also entered into the areas of e-HR Services and HR Business Process
Outsourcing. Arinso expects that these two activities will give the company a competitive
advantage in the HR markets in which it operates. It is also developing more general human
resource packages, which must make it possible to enter the HR market of the medium sized
companies.
Figure 1 shows the evolution of the capital over time of Arinso until the IPO. One of the most
important changes in capital is the transaction (6). Transaction (6) describes two capital
increases because of the contribution of Argurs Integrated Solutions Inc. (US) and Argus
Integrated Solutions Inc. (Canada). The capital of Arinso international N.V. is increased with
BEF 42,517,442 and BEF 14,003,228; following the contribution of 100,000 shares of Argus
Integrated Solutions Inc. (US) and 1,000 shares of Argus Integrated Solutions (Canada),
respectively.
Date
Type of transaction
Modification
of the capital
BEF 1,250,000
Number of Amount of the
new shares capital in BEF
1,250 BEF 1,250,000
14.04.1994 (1) Formation
04.09.1998 (2) Capital increase and modification
of nature of shares
BEF 1,250,000
BEF 2,500,000
26.08.1999 (3) Capital increase by contribution
in kind
BEF 7,613,142
3,806,571 BEF 10,113,142
(4) Capital increase by conversion of
issuance premiums
BEF 229,192,468
BEF 239,305,610
(5) Splitting of the shares into 2
BEF 239,305,610
17.12.1999 (6) Capital increase by contribution
in kind
1. BEF 42,517,442 1,758,669 BEF 281,823,0532
2. BEF14,003,288 1,356,210 BEF 295,826,340
Figure 1: Evolution of capital
Total number
of shares
1,250 (par value)
2. Advantages and disadvantages of an IPO
In the prospectus, several reasons are mentioned why Arinso did an IPO. The main reasons
are :
-easing the financing of future acquisitions.
First of all, this IPO leads to a large cash inflow for Arinso.
According to the
prospectus, around 100 million Euros is expected. Secondly, a stock listing opens the
possibility for future secondary equity offerings. If the stock performs well, it will not be
difficult to attract new investors.
-creating a solid capital structure
Increasing the equity leads to a lower debt equity ratio and thus less financial risk for
Arinso. Before the IPO, the debt equity ratio was about 1.23. After the IPO, it decreased to
0.25. This is a very low leverage ratio. Considering several theories (e.g. the static trade-off
theory), this ratio could even be too low to be optimal.
-motivating the personnel by setting up stock option plans.
Arinso hopes to increase the commitment of the personnel by giving them options. If
the stock price does well, these options can be exercised and thus create extra revenue for the
staff. On the other hand, the link between the performance of the staff and the performance of
the stock price is not always that straightforward. It could then be a source of disappointment
if the workers really perform well whereas the stock price is, due to others factors such as for
example a negative investment sentiment, underperforming.
-increasing name recognition and reputation
1,250,000
5,056,571
5,056,571
10,113,142
11,871,811
13,228,021
Undoubtedly, a stock quotation enhances the visibility of the company. Whether it
always increases the reputation of the company, is open to debate. A poorly performing stock
can hurt the credibility of the firm and thus negatively influence its performance.
-creating liquidity for the current shareholders.
An IPO is often a way for the initial founders to dispose of their shares. However, this
doesn’t seem the case with Arinso since all the existing shareholders only decrease their stake
marginally.
Of course, an IPO also has disadvantages.
A first major disadvantage mentioned in the prospectus is of course the cost of an IPO.
Total costs are estimated at EUR 4.1 million.
During our interview with …., the following disadvantages were mentioned:
3. Important features of the IPO
-Timetable of IPO
Date
Event
06/03/2000
Start of pre-marketing
16/03/2000
Start of the book building procedure
Start of the public offer
28/03/2000
End of the book building procedure
End of public offer barring earlier closing
29/03/2000
Allotment
31/03/2000
Payment
31/03/2000
Listing on the Brussels Stock Exchange
As can be seen in the above table, institutional and private investors could subscribe to
the offer starting from 16 March 2000 until 28 March 2000.
- Number and origin of shares
The offering consists of 1.322.802 new shares and 1.322.802 existing shares.
If the
overallotment option is exercised, 396.841 existing shares will additionally be sold. In this
case, the number of shares in hands of the public, the free float, will amount to 20.9%. If « the
greenshoe » is not exercised, 18.2% of the shares is owned by the public. In any case, the
founder, Jos Sluys, will certainly hold the majority of the shares (61,2% or 63,3%).
+ tabel verdeling aandelen voor/ na IPO ?
- Allocation of the shares
The company aimed at selling 30% of the shares to private investors and 70% to institutional
investors. Also, a maximum of 100.000 shares could firstly be allocated to the staff. The
maximum number of shares one employee could buy was 2000.
- Market of quotation
The shares are quoted on the First Market of the Brussels Exchange.
-Lock up period
The existing shareholders agreed not to sell their shares until 180 days after the IPO. This
lock up period is mostly introduced in order to not destabilize the stock price by creating a
supply surplus.
-Lead/ Co-lead manager
Since an IPO is not a common event for a company, they have to be assisted by financial
institutions that are experienced in these kinds of activities. Arinso chose Fortis Bank as their
lead manager, and Bank Degroof and KBC Securities as co-lead managers.
Valuation:
In order to price the shares, there needs to be an estimate of the value of the shares.
Two estimation methods were applied: (1) Discounted cash flow, (2) Peer group comparison
(1) Discounted cash flow :
In this method, the cash flows that the company is expected to generate in the future, are
discounted at the weighted average cost of capital (WACC) of the company. This results then
gives the present market value of the company. In order to calculate this WACC, the risk free
rate, the market risk premium, and the unlevered beta were estimated to be respectively 6.2%,
1.9% and 1.1. Depending on the amount of leverage, this yields a WACC between 9.0% and
10.2%. The average market value of Arinso is then 647 EUR million.
(2) Peer group comparison
As a means of checking the market value obtained in the first method, it is common practice
to derive the value of a company by analysing price measures of « comparable » firms.
However, finding truly comparable firms is not always so straightforward. In the case of
Arinso, two peer groups were composed. One group of quoted firms whose main activity was
implementing ERP systems and one group of quoted companies whose main activity was
providing e-HR solution. For these two groups, Price earnings and price/sales ratios were
calculated. Based on the earnings and sales of Arinso, the company should then be valued
between 517 and 1841 million Euros. We clearly observe that the DCF method positions
Arinso at the low end of this value interval. However, caution is necessary when interpreting
the results of this second method. This analysis is carried out at a period when stock prices
were at their highest levels and, ex-post, strongly overvalued. For example: the average price
earnings ratio of the first peer group amounted to 90.5 for 2000 and 68.1 for 2001.
Based on these calculations, the preliminary share price range was set between EUR 36 and
EUR 40 per share.
This price range is only informative and could change until 16 March 2000. Then, the final
price range would be announced. Afterwards, near to the first quotation, the final price would
be set and announced.
The self-set goal of the corporate governance structure of Arinso is to ensure the interest of its
shareholders and stakeholders. Arinso also aims to act in accordance with the principles
“Corporate Governance” as recommended by the Belgian Commission for Corporate
Governance. In order to be able to attract independent directors, Arinso will reserve
itself the right to issue warrants.
Other key elements in the corporate governance structure of Arinso are the openness,
regularity and high quality communication. Realizing these elements means that Arinso
communicates on a regular basis with the press, the financial analysts and the shareholders.
An indication that this strategy is appreciated by the parties involved, is the fact that in 2002,
for the second year running, the Belgian Association of Financial Analysts ranked Arinso
fourth in the evaluation for the annual award for Best Financial Information. For the practical
realisation of these key goals Arinso relies on its internal structure, a combination of the
Board of Directors and various committees. We now take a closer look at this internal
structure.
1. Board of Directors
1.1. Composition of the Board of Directors
The members of the Board of Directors are appointed for a period of six years by the General
Meeting of Shareholders and a re-eligible. At least two members of the Board have to be
independent in the sense that they are not employee or consultant of Arinso or any of its
subsidiaries; they hold no more than 3% or more of the shares of Arinso; and that they have
no other relationship with Arinso which could affect their independence.
1.2. Tasks of the Board of Directors
A first task is to devise the strategy for the group and assigning the financial and other means
necessary to fulfil the strategy. The second task of the Board of Directors is controlling
management and the different committees. The Board of Directors also decides about the
formation and dissolution of the subsidiaries of the company and it defines the management
structure of these subsidiaries. A last task of the Board of Directors is evaluating the budgets
and figures of the group at periodic intervals.
1.3. Functioning of the Board of Directors
For the Board of Directors to take valid decisions or deliberate, a majority of directors should
be present or represented. In case that these requirements are not met, at least two directors
are required to be present or represented at a new meeting with the same agenda before
resolutions can be rendered legitimate. In case of a tie the chairman of the meeting casts the
deciding vote. In practice decisions are made by consensus. The CEO, the CFO and the
Executive Management Committee inform the Board of Directors on a quarterly basis on the
status of the activities within the different subsidiaries, in order for the Board to supervise
these subsidiaries. The members of the Board have signed a code of conduct concerning
insider trading.
2. The committees
2.1. Auditing Committee
The Boards of Directors created an audit committee that consists of at least 4 members. The
independent directors are always represented in this committee. The tasks and responsibilities
of the Committee are clearly described in the Audit Committee's charter that was established
at the meeting of November 2nd 2000. The Audit Committee assists the Board of Directors
with the fulfilment of its task concerning the realization and control of external financial
reporting, the internal control system on finances and the audit, internal as well as external.
2.2. Remuneration committee (referred to as the ‘Benefits and remuneration committee’ in the
IPO prospectus)
The Remuneration Committee consists of at least 3 members and the independent directors
are always represented. A charter of the tasks and responsibilities of the Remuneration
Committee was established at the same meeting as the charter on the Auditing Committee.
The main task of this committee is discussing proposals concerning the remuneration of
directors and the members of the Board of the subsidiaries. A member of this Committee
cannot attend the meeting or the voting concerning his own remuneration. The Remuneration
Committee also advises the Board of Directors and the Managing Director on the general
remuneration policy.
2.3. Stock option committee
The Stock Option Committee is responsible for managing the different warrant plans and is
also authorized to elaborate and grant new warrant plans. A member of this Committee is not
allowed to attend the meeting or to vote concerning the creation or allocation of his own
warrants.
2.4. Executive Management Committee (referred to as ‘Strategic and management committee’
in the IPO prospectus)
This Committee consists of the regional managers, the country managers of the three most
important countries in the group and the vice presidents of the “Strategy & HR BPO
departments”, both in North America and Europe. The Committee evaluates and advises on
the current and future policy of the Company, on business development as well as financial
and organizational matters. The Committee is also responsible for the communication and
implementation of strategic decisions of the Board of Directors towards the countries.
In the section, we will discuss the evolution of the stock price, following the initial public
offering. The value of the stock was determined to be €40 at the introduction, as can be seen
on the graph. To facilitate the comparison between the Arinso-stock and the Bel 20 price
index, we have brought the latter to the starting level of the former.
Stock Price
50
45
40
35
30
25
20
15
10
5
0
Bel20
2003
2003
2003
2002
2002
2002
2002
2001
2001
2001
2001
2000
2000
2000
2000
Arinso
Graph #: Stock price of Arinso International
Soon after the IPO, the price of the stock of Arinso International started to decline
dramatically. This trend was continued over the next six months, leveling out at around €10
per share before growing again slightly. From 2002 onwards, the stock edged down once
more, almost reaching €5. From there on, it slowly started to regain some of its value.
When we compare the performance of Arinso International with that of the Bel 20 price
index, we note that the stock market crash of 2000 was limited to a section of it, rather than
being a general trend. At the time that Arinso International was recovering from the crash, the
Bel 20 was edging down. The behavior of the stock of Arinso International and the Bel 20
started to coincide in mid-2001, with both growing. Aside the crash early in 2000, the
fluctuations in price seem to be more volatile with the Bel 20 price index, especially from
2002 onwards.
It is a frequent observed phenomenon that the stock price sharply increases during the first
days of quotation, due to excess demand. This is not the case with Arinso. Although the offer
Arinso made was 11 times oversubscribed (and one could expect rising prices), it never
exceeded its initial price. A second phenomenon, long term underperformance, is clearly
observed with Arinso. If the initial investors would sell their shares today, they would loose
about 75% of their investment.