Warburg Pincus and emgs: The IPO Decision (A)
On a gray morning at the end of November 2006, Jeffrey Harris and David Krieger, managing directors in Warburg Pincus’s energy practice, sat in a cab mired in London traffic on the way from Heathrow. They had just arrived for a two-day “beauty contest” to choose a group of investment banks that would take the Norwegian company Electromagnetic Geoservices AS (emgs) public. “There are basically three questions,” mused Harris. “Where do they think we should list, what do they think we can get for valuation, and when do they think we can do it?” “I think there’s one more,” said Krieger: “Do they understand emgs’s business model enough to convince the equity markets?” In 2004, Warburg Pincus had acquired emgs from Norway’s state oil company, Statoil. emgs had technologies, primarily three- developed seabed logging (SBL), an innovative technology that allowed oil companies to determine the presence of hydrocarbons (oil and natural gas) in deepwater formations prior to drilling. Previous dimensional (3D) seismic mapping, allowed explorers to see the potential formations that might trap hydrocarbons in the seabed, but they could not determine with much certainty whether there were fluids in these formations or if those fluids were water or the more valuable hydrocarbons. The cost of drilling a well in deep water (water depths greater than 300 meters) ranged from $20 million to $100 million. emgs’s patent-protected technology, while embryonic, increased the probability of correctly assessing the presence or absence of hydrocarbons before drilling a well from an average of 25% to more than 90%. Since 2004, the company had grown from an early-stage money-losing company “having a vessel that worked only on Tuesday” to operating four vessels, with estimated net profits of $17 million on expected 2006 revenues of approximately $110 million. The technology was now applicable to greater water depths and different bottom...
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