Warburg Pinus and emgs: The IPO Decision
With wide geographic and sectorial reach, Warburg Pincus had a flat structure and decentralized deal approval process. In the first part of our report, we commented on the merits of these features and how they helped the group make investments. Warburg Pincus acquired emgs in 2004 and was considering its IPO. Throughout time, Warburg Pinus had added real value to emgs via operational, financial and strategic improvements. We believed that emgs was ready to go public and will give our views on the two options of listing location. Basically, the NYSE offered higher liquidity and better valuation but, at the same time, imposed higher cost in terms of reporting, investor relations and so on, while a oslo listing was simpler and within the management ‘s comfort zone.
In this report, we conduct two valuations of emgs as an oilfield service firm and a technology company respectively. By assigning different WACC and FCFF, we determined that the emgs was worth $1266.85MM based on OHM information and $616.65MM using tech comparables. At last, we discussed the reason of the gap in value and why we thought it was more suitable to consider emgs as an oilfield service company.
Warburg Pincus has a flat structure, which is unique in the industry for organization of its size and geographic reach. In this structure, 17 members formed the executive management group, and coordinated activities across sectors and geographies on a macro level. This could take advantage of geopolitical trends and economic growth in specific areas, moving the firm to move on fancy opportunities. Besides, Warburg Pincus’s deal approval process occurred in a decentralized way. Partners specified in the certain area would take charge of the decision except for unusual situations. The executive group would discuss each case, while the senior partners were primarily playing as consultants. In addition, the team would involve other professionals in discussing. This makes each deal fully considered and unbiased. After the investment had been made, the investment team would publish a detailed memo to the whole firm, demonstrating its potentials and risks. What’s more, Warburg Pincus’s approach to geographic expansion also mixed centralized and decentralized control. The firm’s not taking deal fees made investors’ interests closely aligned with those of the management team. In conclusion, these are strengths to the firm.
In many ways, Warburg Pincus added value to emgs. After it acquired emgs in mid-2004, it expected to invest another $10 million to $20 million the following year to cover operating losses and support the growth of the business. In addition, Harris and Krieger helped build a strong board of directors, recruiting lots of professionals. They worked with the emgs management team to formulate financial and capital strategy and tactics, set up the organization and processes, and develop the habits of a well-managed company. They assisted the team in recruiting a chief financial officer, a sales force targeting the Americas, and marketing support. As Harris said, they were making a venture capital investment with all of its risk elements and wanted to ensure that they could help nurture the company and the management team from its technology-focused approach into a successful commercial enterprise.
With expanding customer list, emgs had seen huge growth since 2004, with revenues rising from $18 million to $118million and net income from a $17 million loss to a first-ever operating profit of $17 million. Taking momentum factors into account, such as high commodity price and opening IPO window, we believe that emgs was eligible and profitable to go public. One issue was where to conduct the IPO – the Oslo Bors or a U.S. exchange. Essentially, we are in favor of a US listing. The biggest advantage was the long-term liquidity. If listed in Oslo, where the...
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