The Evolution of Initial
Public Offerings in Italy
Giovanni Sabatini
Prague 3 -11-2005
Giovanni Sabatini
Agenda
Introduction
Reasons to go public/stay private
The evolution of IPO’s in Italy
Empirical evidence
Final considerations
Prague, 3-11-2005
Giovanni Sabatini
Introduction

The role of stock markets in financing investments,
monitoring companies, reallocating corporate control
varies greatly among developed capitalistic economies.
 Market-oriented Systems
– In Anglo-Saxon countries the stock market plays a central
role in those functions

Bank-oriented Systems
– In most Continental European countries and in Japan banks
have played a major role in financing companies
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Introduction

IPO stands for initial public offering, i.e. when a
company sells its shares to the public for the first
time.

Initial Public Offerings (IPOs) have represented the traditional
way of raising capital for high-growth firms. Until ’90 IPOs
have been limited to US and UK, where capital markets are more
developed
In the ‘90s, large privatization programs in European markets
led to a new wave of IPOs
Internet boom created another wave of IPOs worldwide (late
’90s)


Prague, 3-11-2005
Giovanni Sabatini
Agenda
Introduction
Reasons to go public/stay private
The evolution of IPO’s in Italy
Empirical evidence
Final considerations
Prague, 3-11-2005
Giovanni Sabatini
Reasons to go public

Strategic
– Growth: Raise capital - Investments too large to be
provided by the founders
– Diversify (dilution effect) - Share business risk among
many owners

Commercial
– Enter Global competition – Acquisitions (cross-borders)
become more feasible
– Increase visibility – (e.g. listing on the NYSE)

Financial
– Rebalance capital structure
– Cost of credit Increased bargaining power with banks
– Exploit mispricing - If some stocks are mispriced, the
entrepreneurs recognizing that other companies in the same
industry are overvalued, have an incentive to go public

Reputation
– Transparency - Increase the accountability of the firm and
improve the reputation by reducing information asymmetry
– Improve Corporate Governance - listed companies have to
comply with a Code of Discipline
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Reasons to stay private
 Maintain the control over the firm
– in widely held companies, dispersed shareholders do not
participate in the annual meetings (they “vote with their
feet”, selling the shares)
– the control of the firm is held by strong managers who
act for their own interest
 Avoid outside control (eg. regulatory bodies, auditor,
financial analysts) - Public firms must regularly report to
the Authorities and to the investors
 Avoid underpricing - The IPO is expensive as the offer
price is set at low levels to attract investors
 TAX opaqueness
 Direct and indirect costs of going public
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The IPO process
– Approval of the BoD and appointment of the advisory
team
– General meeting of the shareholders and appointment
of the sponsor and legal advisors
– Meeting between the management and the advisors
– Due diligence
– Preparation of the prospectus of the offer and
application for approval (CONSOBB)
– Application for listing at the Stock Exchange (Borsa
Italiana SpA)
 Within two months the Stock Exchange informs the firm
and the Authority and publishes the decision
 The firm has six months to make the offer
– Roadshows to present the issuer to the institutional
investors
– Bookbuilding: institutional investors set their offers in
terms of quantity and price of the shares
– Start of trading (and stabilization of the price, where
allowed)
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The pricing
Mechanisms to set the IPO price:
– Auction
– Fixed Price
– Price range (binding)
– Price range not binding
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Allotment


The offer differs depending on the type of investor to
whom it is addressed
– Private placement (to institutional investors) – this
implies that before the offering the underwriters contact
potential IPO subscribers and collect indicative bids, with
or without limit price (book building)
– Retail offer (to the public) – there is no discrimination
among investors
The prospectus normally prescribes a minimum
number of shares to be allotted to the public and a
maximum number to institutional investors
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Special clauses

Green shoe option – allows the underwriter to place a further

Overallotment – the underwriters assign

Lock-up agreement – controlling shareholders and other

Bonus shares – additional

Remedy share – commitment by the IPO promoters that
fraction of IPO shares on the market (generally between 10-15%
of the IPO shares within 30 days from the listing)
an amount of shares
to IPO subscribers that is larger than the IPO size; the short
position is covered after the listing (by exercising the green shoe
option or by repurchasing the shares)
insiders commit not to sell their portfolio shares within a certain
period of time after listing (signalling their positive expectation
about the firm value)
shares assigned for free to investors
retaining IPO stock up to a certain deadline (used in privatization
offerings)
additional shares will be assigned for free to subscribers, in the
event that the business targets declared in the prospectus will not
be reached
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Agenda
Introduction
Reasons to go public/stay private
The evolution of IPO’s in Italy
Empirical evidence
Final considerations
Prague, 3-11-2005
Giovanni Sabatini
ITALIAN STOCK EXCHANGE
Facts & Figures
1996
1997
1998
1999
2000
2001
2002
2003
2004
1996
1997
1998
1999
2000
2001
2002
2003
2004
Capitalization
Capitalization
Turnover
Euro/billion
% GDP
20,3
30,2
44,8
64,4
67,8
47,3
35,7
36,6
42,2
Euro/billion
199
310
484
714
790
575
447
475
569
Capitalization
Euro/billion
3
5
4
5
6
5
5
5
5
EXPANDI
Turnover
..
1
2
1
1
..
..
..
..
81
174
423
503
839
637
562
567
641
N. listed firms
31
26
20
17
15
12
13
11
13
MTA
N. listed firms
213
209
219
241
237
232
231
219
219
14
14
25
28
16
13
11
9
7
N. delisted firms
18
18
15
6
20
18
12
21
7
NUOVO MERCATO
Capitalization Turnover
N. listed firms
Euro/billion
7
22
13
6
8
7
Source: Relazione annuale 2004, Consob
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N. IPOs
Giovanni Sabatini
4
30
21
10
14
19
6
39
44
44
41
37
Div/P
Earnings/P
2,1
1,7
1,6
1,5
2,1
2,8
3,8
3,4
3,4
6,9
4,6
3,9
3,4
4,5
6
5,9
6,4
6
Characteristics of
Italian Industral Structure

Limited firms size
 Highly Concentrated Ownership
 Family- Owned
 Leverage
 Limited presence in high-technology
business
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The Italian IPO waves
 There are waves in the history of Italian IPOs:
– 1985-1988 (bullish market): 69 IPOs firms, of which 32%
financial, 58% industrial (mainly construction and
electronics) and 10% services. Most were carve-outs
– 1989-1994: only 19 IPOs (52% of which were financial
companies)
– 1995-1997: 34 IPO (76% of which were financial
companies) most of them were small-medium companies
taking advantage of the tax benefits granted by the “legge
Tremonti”. No carve-outs
– 1998-2000 (dot.com bubble): 85 IPOs, most were hightech firms in the services category (media, software,
information technology)
– 2001-2004 (slowdown): 35 firms, the majority of which
the were public utilities
– Today: 13 firms, of which 4 listing in the Expandi segment
 The pattern supports the evidence that firms tend to
time the IPO when the moment is more convenient
(“window opportunity”)
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Ipo filed in Italy from 1985 to 2004, by
year of listing (Borsa Italiana, 2005)
MTA (main market)
Nuov o Mercato
Mercato Ristretto/Expandi
35
32
30
30
25
21
20
17
15
15
11
10
11
12
10
9
7
5
13
12
6
3
4
4
3
2
1
1
6
5
4
2
1
0
1985
1986
1987
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1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Giovanni Sabatini
1998
1999
2000
2001
2002
2003
2004
The evolution of Initial
Public Offerings in Italy
 IPO firms in the recent years have
different characteristics than the early
IPOs:
– Smaller and younger
– Less concentrated ownership
– More frequently participated by pre-IPO private
equity investors
 IPO pricing in Italy has become more
efficient
 Italian IPOs adopted several clauses of
the going public process in the US
(green shoes, lock-ups, book building)
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Features of the IPO firms:
issue type

Equity carve-outs have been frequent from 1985 to 1988
when listed companies took advantage of the bullish
market momentum to spin-off subsidiaries (this is
consistent with the evidence that carve-outs can time
better the IPO). Independently newly listed firms are
largely predominant from 1995

Privatizations have been frequent across the whole
period (privatizing companies account for more than 15%
of the IPO activity of the last 20 years in Italy)

1985-1988
1989-1994
1995-1997
1998-2000
2001-2004
69
19
34
85
35
of which carve outs
42%
26%
3%
7%
5%
of which privatization
21%
26%
8%
9%
11%
other
37%
48%
89%
84%
84%
IPO sample
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Features of the IPO firms:
age, total assets, net profits



The average age of the IPO firms has reduced
Total assets vary across the periods, with small firms alternating
with large firms
Net profits are always positive, as profitability is a listing
requirement (contrary to US, where firms with negative earnings
can go public)
1985-1988
1989-1994
1995-1997
1998-2000
2001-2004
48
38
48
37
32
Total assets (euro ML)
2593
8517
2327
2200
837
Gross revenues
406
1402
1804
429
323
Net profit
15
35
79
44
30
Firm age (yrs)

Statistics about the accounting value of consolidated assets and
revenues are very dispersed and reveal that large companies
alternated to smaller firms during the period
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Median age of companies that made an IPO in Italy,
USA, and in Europe (Belgium, France, Germany, the
Netherlands, UK) (Borsa Italiana, 2005)
Italy
USA
Europe
45
40
35
30
25
20
15
10
5
0
1985-1988
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1989-1994
1995-1997
Giovanni Sabatini
1998-2000
2001-2004
Fraction of IPO companies that reported zero or
negative profits at the year before the listing, in Italy,
USA, and in Europe (Belgium, France, Germany, the
Netherlands, UK) (Borsa Italiana, 2005)
Italy
USA
Europe
80%
70%
60%
50%
40%
30%
20%
10%
0%
1985-1988
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1989-1994
1995-1997
Giovanni Sabatini
1998-2000
2001-2004
Features of the IPO firms:
net proceeds and control

The mean value of IPO proceeds is biased by large
privatizations in the early 1990s

The firms are generally closely held by large shareholders
before the IPO, and they generally hold more than 50%
after the IPO
1985-1988
1989-1994
1995-1997
1998-2000
2001-2004
74
421
195
379
223
before the IPO
89%
88%
80%
79%
79%
after the IPO
69%
64%
55%
51%
51%
IPO proceeds
Equity capital held by controlling shareholders
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LISTING REQUIREMENTS
(Italian Stock Exchange)
MTA (Large and medium size firms)




firm’s ability of generating positive revenues in normal business
conditions
minimum floating of 25% of the equity capital
publication of the previous three years’ financial statements with
the last year’s financial statements audited
minimum capitalization of € 5 million
Nuovo Mercato (Small and growth firms)






firm’s ability of generating positive revenues in normal business
conditions (even with present negative earnings)
minimum floating of 20% of the equity capital
financial statements audited
minimum capitalization of € 1,5 million
lock- in clause (commitment of the management team to keep at
least 80% of the shared owned at the time of the offer, for a period
of minimum 1 year)
For start-up firms (with life less than 1 year), the lock-in clause lasts for 2
years
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Agenda
Basics
Reasons to go public/stay private
The evolution of IPO’s in Italy
Empirical evidence
Final considerations
Prague, 3-11-2005
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Empirical evidence:
the opinion of the financial community
Survey on the IPO effects (Osservatorio M&A,
Bocconi University, Milan)

IPOs help growth:
– after the IPO, the firms continue to grow (average of 18% revenues
increase)
– 79,6% of the interviewed firms stated that the growth rate without IPO
would have been lower; 43% stated that without the IPO most investments
would have been cut off

IPOs sustain the acquisition process:
– 76,4% of the interviewed firms made at least one acquisition after the IPO
– the average acquisition number is 4
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Empirical evidence:
the opinion of the financial community
(continue)

IPO helps capital structure optimization
– Immediately after the IPO, the leverage decreases
– In the following years the leverage increases and returns to previous levels
after three years
– 68% of the interviewed firms consider the re-leverage process the main
reason for the IPO
– The re-leverage is convenient because after the IPO the firm has increased
its bargaining power with banks

IPO improves the communication with the stakeholders
– Institutional investors
– Regulators
– Shareholders
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Empirical evidence: underpricing
In the first day of the offer there is a positive return from the
offer price to the closing market price (underpricing)
 The long-run performance shows different patterns across time

Av. First Day Ret. and 3 yr Return (% ) - Loughran and Ritter, 2000
80
60
40
20
0
1980-1989
1990-1994
1995-1998
-20
First Day Return
-40
3 yr Return
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-60
Giovanni Sabatini
1999-2000
2001
Av. First day Return (%)
Average 3-year Buy-andHold Return (%)
1980-1989
7,4
20,8
1990-1994
11,2
44,7
1995-1998
18,1
36
1999-2000
65
-53,8
2001
14
na
18,7
22,6
Period
1980-2001
Underpricing (%) for 38 countries
35
30
25
20
15
10
5
0
1984-2002 1983-2000 1978-1999 1985-2001 1991-1998 1986-1998 1980-1998 1959-2001 1960-2001
Austria
France
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Germ any
Italy
Poland
Giovanni Sabatini
Spain
Sw eden
UK
USA
Underpricing and long
term performance

In the recent years the mean underpricing level
in Italy has been decreasing

One interpretation (Giudici, Paleari) is that the
reduction is related to the adoption of book
building as opposed to previously used practices
of setting the price (i.e.: fixed price) and to
greater involvement of institutional investors in
the placement
The long term underperformance is still present
but less than in the past

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Empirical evidence:
money
left on the table

Money on the table is the number of shares sold times the
difference between the first-day closing market price and the
offer price (the average IPO leaves $9.1 million on the table)
– This is approximately twice as large as the fees paid to
investment bankers ($13 billion), and represents a
substantial indirect cost to the issuing firm (Loughran and
Ritter, 2000)


In Netscape’s August 1995 initial public offering (IPO) with
Morgan Stanley as the lead underwriter, 5 million shares were
sold to investors at $28.00 per share. With a closing market
price of $58.25, $151 million was left on the table
Why don’t issuers get upset about leaving money on the table?
– The discount is the condition imposed by financial
intermediaries in order to ensure the success of the
placement

For 15 IPOs with first-day returns in excess of 60% that
subsequently conducted follow-on offerings, all 15 retained the
lead underwriter from the IPO (Krigman, Shaw, and Womack,
2001)
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Aggregate Money Left on
the Table (m illions $)
Av. First day
Return (%)
Average 3-year Buyand-Hold Return (%)
1980-1989
5409
7,4
20,8
1990-1994
9954
11,2
44,7
1995-1998
22436
18,1
36
1999-2000
65625
65
-53,8
2001
2973
14
na
106379
18,7
22,6
Period
1980-2001
Money Left on the Table (million $) - Loughran and Ritter, 2000
70000
60000
50000
40000
30000
20000
10000
0
1980-1989
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1990-1994
1995-1998
Giovanni Sabatini
1999-2000
2001
Empirical evidence:
valuation and ownership

IPOs are typically valued using comparable multiples
– For a sample of technology firms in the Internet boom
period, Chanine (2002) finds that these firms are priced at
a larger discount than non-tech firms, consistent with the
higher first-day returns on tech IPOs

The discount is larger if the incumbent shareholders do
not lose the control after the IPO (Zingales, 1994)
– This has been for decades the case of Italian IPOs, where
the owners, typically families, maintain the control of the
firm after the listing
Prague, 3-11-2005
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Empirical evidence:
IPO
waves

IPOs follows waves, with intense periods followed by
periods of low activity
– A first wave occurred in US in the 1990-1994
– A second wave occurred in US and in Europe in the late
1990s


Historically, continental European IPO market has been
dwarfed by the US IPO market. In 2000, however, in
spite of high volume of IPOs in the USA, continental
European IPO volume exceeded that of the USA
One explanation is that in times when the market is
over valuating certain industries, the firms in those
industries will likely go public to exploit the mispricing
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Empirical evidence:
size and
age effect
 Large firms are more likely to go public as they can
better afford high fixed costs of the IPO
 Large firms leave less money on the table as their offer
price is normally higher due to less uncertainty in
valuation
– IPO firms in Italy are larger than IPO firms in US
 The size effect does not apply when the IPO regards a
subsidiary of an holding company (carve-out) – fixed
costs are indirectly borne by the holding company and
the discount is lower as there is less uncertainty over
the issue
 Younger firms should go public more often than older
firms because they need capital to finance investments
– IPO firms in Italy are older than IPO firms in US
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Agenda
Basics
Reasons to go public/stay private
The evolution of IPO’s in Italy
Empirical evidence
Final considerations
Prague, 3-11-2005
Giovanni Sabatini
Final considerations
Italian IPOs in the past not driven by small
high-growth firms;
 Successful IPOs require developed capital
markets and good corporate governance
systems;
 In recent periods the Italian IPOs adopted
pricing strategies and arrangements (special
clause) in line with US market practices;
 Whatever the reason to go public (finance
growth, become more visible, exploit
mispricing, etc.), IPOs help market
development and improve firms’
accountability to investors.

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