Korbsak Sabhavasu's Blog

The share offering process

2.1 The Nasdaq National Market

Logitech considers itself a global group and has as such thought about the expansion of the market of its shares for some time. The choice to seek an additional listing of its shares on the Nasdaq National Market was fairly obvious in view of the group’s presence in the US, the attractiveness of the Nasdaq National Market for shares of companies like Logitech and the wish to create more liquidity for the shares. Also, such a share offering should facilitate future access by Logitech to the US capital markets.

Nasdaq stands for the National Association of Securities Dealers Automated Quotation System. It is the world’s first electronic stock market and is the second biggest stock exchange world-wide in terms of dollar volume behind the New York Stock Exchange (NYSE), but ahead of London and Tokyo. There are more companies listed at Nasdaq than at NYSE, and Nasdaq attracts both more non-US companies and Initial Public Offerings (IPO) than NYSE. Nasdaq has two tiers for listing; the Nasdaq National Market and the Nasdaq SmallCap Market. Although the regulatory framework defined by the SEC is the same for both tiers, the listing requirements are less demanding for the SmallCap market. The listing requirements include, among other criteria, minimum net tangible assets, net income, market value of float and number of shareholders. For non-profitable (start-up) companies, the net tangible assets and the float have to be higher than for companies showing a profit history[2].

2.2 The shares offered by Logitech

The share offering consisted of 230000 treasury shares which were sold to the market as 2300000 ADS and backed by American Depositary Receipts (ADR). ADR are a type of security recognised in the United States to serve as evidence of ownership of a specified number of shares of a foreign security and are generally created by a United States bank. On December 31, 1996, Logitech held approximately 388000 treasury shares or almost 20% of its issued share capital. Under Swiss law, it was therefore obliged to reduce the number of treasury shares by at least half the amount.

The ADS were sold at $16 each, resulting in gross proceeds of $36.8 million (approximately CHF 54.1 million). After deducting the underwriting discounts and commissions, various taxes, duties and other offering expenses, the net proceeds to Logitech amounted to approximately $31.3 million (approximately CHF 46.0 million). The fairly high costs show that in view of the fact that not all expenses are calculated as a percentage of the offering price, a relatively small offering like Logitech’s becomes rather “expensive”. In fact, Logitech had initially planned to place 2700000 ADS (with an option to place an additional 400000 ADS), which, from a pricing point of view, proved to be difficult. Also, the originally expected issue price of $18.5 per ADS (approximately CHF 270 per share) had to be reduced to $16 per ADS (approximately CHF 235 per share).

The Swiss share price fluctuated between CHF 299 and CHF 247 in the period from February to March 1997, showing that the US offering which was priced in late March 1997 required the company to accept a discount on its Swiss share price. In the recent past, the Logitech share price had increased from around CHF70, in spring 1995, to CHF 140 in September 1995. It then fluctuated between approximately CHF 100 and CHF 150 until October 1996, when it started to climb to a maximum of CHF 299 at the beginning of March 1997. This was due to the excellent results of the third quarter of fiscal 1997 and the anticipation of the US offering. Within two weeks after the offering, the share price increased to approximately $18 per ADS.

2.3 Choice of advisors

A company which plans to list its shares in the US for the first time must make sure it has a professional team of advisors. The company must have confidence in all team members and their ability to work as a team. This is why choosing the right advisors is of crucial importance for the success of a US listing.

The investment banker needs to be able to demonstrate that he will give maximum attention to the initial offering and also show a long-term interest in the company subsequent to the offering. The investment banker needs to have experience in such transactions, have knowledge in the company’s industry, be able to place the shares successfully in the market, act subsequently as a market maker and be competitive in its underwriting fees. Further, the investment banker has to assist the company in deciding on the size of the offering, considering the required capital the company wants to raise, the desired degree of corporate control, investor demand and the desired liquidity of the share. Logitech chose Robertson, Stephens & Company as the lead manager and SBC Warburg Inc. as co-manager to act as its main underwriters.

The legal counsel selected for the filing process usually takes responsibility for drafting the prospectus. Hence, his knowledge of the industry is crucial since the prospectus contains, as mentioned in section 3. below, among other things, a description of the company’s business and an analysis of industry risks. Proper judgement of adequate disclosure required in the prospectus is very important. Logitech’s main legal advisor during the listing process was the US law firm, Wilson, Sonsini, Goodrich & Rosati, and Swiss legal implications were advised by the Swiss law firm Lenz & Staehelin.

The auditors will normally assist the company in reconciling or restating the financial statements according to US GAAP, in determining the required financial statement disclosure and in preparing other sections of the prospectus, such as the management discussion and analysis (see section 3.4 below). Therefore, the auditors need to be familiar with the listing process in general and the US GAAP and SEC requirements in particular. Logitech’s present auditors, Price Waterhouse, have assisted Logitech throughout this process.

A depository bank is appointed to administer the ADR; hence, the company has to make sure that the depositary has the necessary expertise therein. Logitech’s depositary bank is The Bank of New York.

Another important choice is the selection of a financial printer. Although one would imagine that this function should be a pure routine, the severe time constraints, especially before the final filing, make it absolutely essential to have a reliable printer who can turn around changes to, print and distribute a prospectus quickly. Logitech have worked together with a US printing company, Donnelley & Sons Company.

2.4 Process timeline

Logitech started the SEC project in January 1996 when the Board approved the go ahead of the share offering. Subsequent to this decision and the establishment of a detailed project schedule, various projects started immediately, including the restatement of the financial statements according to US dollars and US GAAP and the selection process of the law firm and investment bankers.

Other important decisions were taken, such as the appointment of a new Chief Financial Officer and certain other executives, the appointment of an audit committee, a no dividend policy as from fiscal 1997 and, at the annual general meeting of shareholders in June 1996, changes in the composition of the Board of Directors. In addition, an authorised and conditional capital increase to facilitate future capital increases and support both the stock option and purchase plans was decided upon.

The timing of the offering remained open at the start of the process in order to wait for optimal market conditions. Therefore, it was important that the various smaller working groups were flexible to ensure a completion of their respective projects at short notice and to be able to change the extent of the projects, e.g. which interim financial data had to be included in the prospectus.

The law firm and investment bankers were selected in spring 1996, completing the main project working group which was made up of representatives of Logitech, the investment bankers, Logitech’s legal counsel, the investment bankers’ legal counsel and the auditors.

Restating the financial figures was essentially completed by the summer of 1996. In September 1996, the timing of the filing was finally decided for March 1997. In order to ensure that the SEC registration process would not delay the share offering, it was decided to do a confidential, i.e. non-published filing with the SEC before the official filing process. As a result, the working group prepared a full prospectus containing a complete set of audited financial statements for March 31, 1995 and 1996 and for the years ended March 31, 1994, 1995 and 1996, as well as interim financial statements at and for the six months ended September 30, 1995 and 1996. In order to achieve this goal in a reasonable time frame, efficient communication was essential within the working group, in particular, considering that its members were on both sides of the Atlantic. The finalisation of the prospectus required a week-long working group session of all parties involved. During this session, the underwriters and lawyers carried out their due diligence procedures which are an integral part of the listing process. The prospectus was filed with the SEC on December 24, 1996.

The confidential filing proved to be extremely helpful as it gave the working group enough time to respond well ahead of the actual offering to the SEC comments which were received one month after the initial filing. Also, the working group, and especially Logitech and the investment bankers, could then concentrate on the marketing aspects of the offering.

By the middle of February 1997, the prospectus was updated with all missing information (except for the share price), the additional disclosures required by the SEC in their comment letter and the financial data for the nine months ended December 31, 1996 and 1995, as well as for the third quarter of fiscal 1997. The so-called “red-herring”, which is the preliminary prospectus distributed to potential investors, was issued and filed with the SEC on February 11, 1997. Thereafter, several subsequent amendments were filed, the last one on March 14, 1997.

The road show, i.e. the presentation of Logitech and its offering to potential investors took place during the first two weeks of March 1997. Thereafter, the SEC declared the prospectus effective, the price was fixed and the auditors had to provide the comfort letter (refer to section 5 below). In the last week of March 1997, the sale of 2000000 ADS was effected, and trading on the Nasdaq National Market started. At the end of April 1997, an additional 300000 ADS were sold under an option granted to the underwriters by Logitech

6. Conclusion

Registering shares with the SEC, in particular, if coupled with a share offering, is a complex process which has to be properly planned and executed using adequate resources and professional advisors. Its timetable is often flexible and includes a series of very tight project deadlines. The amount and detail of information to be disclosed in a US prospectus far exceeds the requirements of other stock exchanges and often creates a feeling by registrants of having to “undress” in front of the SEC. However, this allows potential investors to make well informed decisions. Further, it is important for the company to maintain a close relationship with the US investment community in order to keep the interest in its shares alive.

Despite the tough registration requirements, an increasing number of non-US companies seek a registration with the SEC as a result of the accelerating globalisation of capital markets and the continued attractiveness of US capital markets. Therefore, companies which are planning to tap into international capital markets should carefully evaluate all the advantages and disadvantages of a US filing.

Notes

1 The information included in this article relating to Logitech is taken for the most part from the publicly available prospectus issued in connection with the share offering and as filed with the SEC as part of the Form F-1 or derived from other publicly available data.

2 Information in this paragraph has been derived from “The Nasdaq Stock Market, A practical guide to listing on The Nasdaq Stock Market”, issued by The Nasdaq Stock Market, Inc., 1995. In this publication, detailed information about the minimum listing requirements and the Nasdaq fee structure is shown.