ECM Deals Committee
Evaluates the financial and commercial merits of any proposed New Equity Issue.
What is the ECM Deals Committee?
To decide whether a bank will participate in the New Equity Issue, the Equity Capital Markets (ECM) Deals Committee evaluates the financial and commercial merits of any proposed New Equity Issue.
Most banks won't agree to any New Equity Issue without getting the ECM Deals Committee's clearance.
ECM approval
The ECM Deals Committee considers the transaction's financial and commercial merits, the associated underwriting risk, and the impact of the transaction on the bank's franchise when deciding whether a bank will participate in a New Equity Issue.
The Investment Banking Team will draft and submit an ECM Deals Committee Memo to the members of the Committee for their review to request approval from the ECM Deals Committee for a New Equity Issue.
ECM Deals Committee Meetings
The Head of Equity Capital Markets, a senior representative from Equity Sales and Trading, and a senior representative from Investment Banking who is a member of the pertinent issuer's industry group are normally required to attend the ECM Deals Committee meeting.
Additionally, if a member of the Research Department attends the conference, a member of the Legal Department should also.
Equity Capital Markets produces and maintains a file with the following information for each New Equity Issue:
- A duplicate of the memo from the deals committee.
- A list of those that showed up to the Committee meeting.
- The Committee decides whether to participate in the New Equity Issue and, if so, details of any restrictions put in place by the Committee.
ECM Memo
A possible transaction, such as an IPO, follow-on offering, etc., may be approved (or rejected) by an investment bank using an internal document called an Equity Capital Markets ECM Memorandum or ( ECM Memo).
The investment banking division drafts and distributes the ECM Memo to the ECM team.
This memo will include all the major details regarding the offering.
This memo is crucial for any transaction to go through because it will determine whether a possible transaction is accepted or rejected and hence will take place or not.
Below we will discuss the main constituents of an ECM memo to give you an idea of what it might include:
- But first, we start with the memo's date.
- The ECM transactions committee within the Investment Bank receives this memo, written by the investment banking team working on the transaction.
- This memo will summarize the whole situation, explaining why a meeting is being held and what goals the Investment Bank working on this deal want to achieve.
After that, the memo must describe what type of offering the company plans to undertake.
If the offering is a prospectus, a formal document is filed to the SEC that provides important details about the offering to the public; or a private placement, which means the sale of the stock/offering will be sold to pre-selected investors than selling them on the public markets.
Since this is an IPO representing that a company will go public. An IPO prospectus will be needed, providing key details about the security and the offering, including
- Whether the offering is an Initial Public Offering or a Seasoned Equity Offering (follow-on offering).
- The type of security will be discussed, including which market it will be sold on.
- Whether the institution undertaking the offering will receive its funding mainly from Institutional Investors or Retail Investors.
After that, the memo will briefly go over the issuer's business model, plan, and credit history with the investment bank and other institutions to get an idea of the issuer's credit history.
Additionally, how the issuer intends to use the future earnings that will be reimbursed will be discussed to show how the company intends to use the money it has earned, including a summary of any material changes affecting the issuer and its industry.
This can be important for cyclical companies. For example, if a hotel intended to go public in 2020, its business model would be hugely affected by covid 19.
ECM Deals Committee Technicalities
Now let's dive into the technicalities of the offering:
1. First, we name the major owners of the company and their ownership percentage.
2. A dilution analysis is discussed, used to evaluate the merit of a proposed offering by analyzing the number of shares in the issue divided by the total outstanding after the issue.
Dilution analysis is crucial for answering if the proposed deal increases or decreases the earnings per share (EPS) after the transaction.
3. Moreover, the memo will elaborate on some trading issues and technicalities useful for the ECM deals committee, for instance:
- The name of the stock exchange/s the security will be listed on.
- The volume of the number of shares in the last twelve months.
4. Liquidity will also be measured by the trading volume divided by the number of shares in the issue/offer in the last twelve months.
It includes recent blocks in the last few months, where a block refers to a large order of security to be traded by Institutional Investors. This will also include the date, volume, price, and dealer (which institutional investors traded that specific security.
Financial Analysis and Due Diligence
Next, the relationship between the issuer and the bank advising on the offering will be summarized:
- A three-month and a year-long trading summary. Is our bank a lender to the issuer?
- Is the credit arrangement still in effect?
- Does our bank own stocks in the company? What were the last investment's price and timing?
Then, it will provide Research Coverage, Research Comments, and Historical financial information:
- Firms providing Research coverage
- Our bank’s research recommendation and target price
- Our bank’s earnings estimates
- Other analysts’ recommendations and target prices
- Five-year financial information on the company.
Finally, the key financial metrics of the firm undertaking the offering will be summarized, including:
- The amount of long-term debt the company will undertake.
- If the company will pay any dividends, the amount the company pays, and the frequency of payments.
- Any recent modifications were affecting the payment of dividends.
The company’s valuation will also be discussed, stating the pricing using comparative analysis and the issuer’s market cap and enterprise value.
Before concluding the memo, we will discuss some risks the offering/firm might face at the time of the offering or in the future.
Risks
These risks can be:
- Technological Risk
- Operational Risk
- Financial Risks, including the receptiveness of the market for the IPO.
Finally, the memo will be concluded by including the final details of the issue.
The memo will conclude by containing the closing details of the issue, mentioning the type of security (in the ECM, the security is a stock), the number of securities issued, and its price.
The underwriters (usually an Investment Bank), the commission (ECM committee), and the date.
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