Getting Transaction Ready

Learn how to avoid costly delays in your company’s future IPO or liquidity plans and stay transaction-ready in all market conditions.

Getting Transaction Ready

Learn as Morgan Stanley’s Sam Adams shares the benefits of a slow IPO market, steps companies can take to be prepared for an IPO and more.

Conference Title:   Morgan Stanley MORG007 | 4004409_MorganStanley_ATEMswitcher_Recording

Date: Tuesday, 13th December 2022

Jeff Urban:        Welcome, everybody.  Thanks for joining and thank you for joining our virtual roundtable on Transaction Readiness from Morgan Stanley at Work.  So, we're all excited to be here.  And we just want to offer a quick reminder that, if you have any questions, please enter them into the chat.  In terms of quick introductions.  Myself, I am Jeff Urban.  I lead our Secondary Transactions desk within Morgan Stanley at Work.


Samantha Adams:         I'm Sam Adams, and I lead our Private to Public Strategy team.


Jessica Young:        Hi everyone.  I'm Jess Young, and I lead our Private Market Liquidity team.


Jeff Urban:        Okay, great.  And just to jump right in, I think we all can agree that 2022 has been a challenging and tumultuous year for many reasons, geopolitical concerns, rising inflation and the subsequent increasing interest rates as a result of the Fed hiking path, and also some expectations for potential negative EPS revisions as we get into the end of 2022 and into 2023.  The IPO window remains very tight.  I think year on year, we're tracking roughly down around 80% in terms of IPO transactions.  And the public markets, as we all know, have compressed.  That's led to discount in valuations for the public comps and relative to private markets, which has resulted in a slower transactional market versus the historical highs on the private side that we experienced in 2021.


            This presents complicated dynamics for corporate management teams, particularly the ones that were looking to pursue an IPO in the upcoming period or years.  And then also, companies that were looking to pursue primary or secondary private transactions.  So, with that, just in terms, we thought we'd kick it off with the first question for Sam, what is the silver lining on a slow IPO market?


Samantha Adams:         Right.  So, I think this year has been tough for everybody.  Things have changed and changed very fast.  The silver lining presents itself in many different ways.  The first one, we were all expecting a recalibration, especially, in the tech market.  That has certainly happened this year.  The second one, from my perspective is, anybody thinking about planning a public offering now has the gift of time to do it a bit more thoughtfully, and really start to dig into the process and infrastructure elements that can support both private and public company activity.


Jessica Young:        Yeah.  I think when it comes to tender offers and private transactions while continuing to stay private, last year when the IPO market was as hot as it was, tender offers and secondary transactions were absolutely still happening.  But what we saw was very low participation rates.  So, less than 30% of participants who are eligible to sell actually ended up selling.  And just over 50% of dollar amount that was available to participants were actually end up being sold.  And so, as things have kind of picked up the second half of 2022, on the secondary side, we've actually seen an increase in participation rates.  Many of our offers are being fully subscribed to.  We're even seeing pro-rations needing to happen to bring those amounts back down to the threshold they're eligible to sell.


Samantha Adams:         And that seems totally legit given what's going on, because the opportunity to participate in a public market stock is a bit less so right now, if you were a company that was on that path and had to shelve plans to go public.


Jeff Urban:        So, maybe on that point, Sam, what are some of the steps that companies can take to be prepared to offer a liquidity program or as they prepare for IPO over the future years?


Samantha Adams:         Right.  So, we think very deeply about what it means to be transaction ready.  Both Jess and I spend a lot of time working with clients and with our internal teams on the right path to get companies to do that.  There are four primary things to think about when you're thinking about any type of transaction, especially a public offering.  The first one is, your cap table, data integrity, and ways to make sure that you can keep your data clean when transaction volume starts to increase.  The second one is really based around scalability.  So, what systems are you using today?  How do they interact with other systems?  Really starting to make investment both in people and resources on integrations and automation as much as possible.


            The third I would say is overall tax and legal compliance.  And if you are a company with a global footprint, this becomes especially complicated.  So, how are people being taxed today?  What does that look like when you're in a position where you have a high volume of transactions and you have to interface with payroll and then, obviously, your end users on what that experience looks like, and then making sure on the legal side everything is on the up and up in each and every country.  You've done the right registrations and the right filings to be able to offer the programs that you want to.


            And finally, if you're using equity as part of your compensation programs, it's really important that you empower your participants to understand the value potential of their equity.  For a tender offer or a public offering or even a smaller secondary transaction, it can be a true wealth building opportunity for everyday people.  And most people have not had the background and any education in what does this mean for me, and how do I actually harness this in a way that I can take the most advantage of this opportunity.


            So, education, making sure that you're covering both the mechanics of what your equity comp programs look like, but also your personal responsibilities around having equity as part of your compensation, understanding market dynamics, and putting people in a position that they have access to the right financial wellness resources.


Jeff Urban:        Great.  Thanks for that.  And, Jess, given that the IPO window is likely to remain challenged through the end of this year and maybe the early part of 2023 as well, what are some ways companies are dealing with these liquidity needs in the interim?


Jessica Young:        Yeah, that's a great question.  As I mentioned, we are seeing things start to pick up going into the end of this year and early 2023.  So, transactions are absolutely still happening.  If I talk to many clients, I think they maybe thought they would have already been public by now or they'd be going kind of in the near term, and of course, that's not the case for the majority of clients right now.  As we're having these discussions with our corporate clients, they're asking the questions to themselves, is a tender offer right.  Is that what we want to do to still continue to offer liquidity, because it is such an added benefit that you really do need to think about, because we really don't know how long the IPO window is going to be closed.


Samantha Adams:         And lots of people have been waiting a long time to recognize value from their equity awards.  And so, now they're probably in a position where they really need an opportunity to do something like pay for college or buy a house, whatever that might be.


Jessica Young:        Yeah, absolutely.  And so, you may be asking your internal teams, is a tender offer, right?  Should we think through waiving transfer restrictions and allowing these one-off secondary sales to happen.  If we've got a large number of RSU holders and a much smaller population of option holders, how do we give these RSU holders liquidity, especially, when typically, private companies have that second trigger?  And so, what are we going to do to give our participants this benefit that they already were banking on.


Samantha Adams:         Right.  And for any companies who were potentially on the path to IPO or and now are shifting to a different style of private company liquidity plan, a lot of the work that you did in preparing to go public is largely reusable in a private format.  So, I discuss with clients all the time is, think about what you need to operate as a public company, so much of that you can use as a private company.  So, going back to the cap table and data integrity, those are just really good practices to be in, if you're private or public.  Thinking about scalable systems.  We know that there's been lots of layoffs in various industries, and now you're starting to have to do more with less as a leadership team.  And so, how do you make investments in back-end infrastructure and automation that set you up to reduce risk, increase efficiency and be nimble.


            Things aren't going to stay this way forever.  Markets are cyclical.  We anticipate that when things rebound, the market will heat up really fast.  And so, being conscientious and thoughtful about your operating infrastructure today allows you to be nimble, if you end up facing a transaction that's maybe a couple of months away when you weren't necessarily expecting it because the market changed so fast.


Jessica Young:        Yeah.  And just to kind of piggyback off of that.  We talked to clients whose leadership team comes to you and says, all right, IPO is not happening, we're running a tender offer.  Let's get it done.  And things like having your cap table all up to date, having your demographics, and you know where your participants are, you have ways to contact them to let them know they're actually eligible for this.  If you have those things already done and out of the way, when you're asked to put together an eligibility file, you actually are able to get that done in a timely manner because you've already kind of put the work in beforehand.


            I'd say the number one thing that takes lots of time and preparation to going into a tender offer is building out that eligibility.  As I mentioned, last year we were seeing super low participation rates.  So, if you had a $50 million tender offer and you wanted to kind of make sure that that was fully subscribed, you're setting eligibility limits far above the $50 million threshold to ensure that that full fully subscribes.  This year probably don't want to do that.  You probably want to set it right at or just above to ensure you're not having to prorate people all the way back, and then giving your participants a bad experience that they thought they were getting $25,000 and they actually get cut back to five.


Samantha Adams:         Right.  And managing your end user experience and expectations is another really key part of this.  We talked a little bit about how making sure you have the right education, financial wellness, resources in place, that's something that you can do now in advance of any type of big transaction.  All of this is going to be mostly new to most of your population.  And if they have a good foundational understanding of the types of programs you're offering, what it means for them, then they're able to make more intelligent choices around how they participate and when they participate.


            And just leverage the time that you have.  Know that something is going to come your way.  And that in any type of transaction, there's a lot of unknown unknowns.  And think about how you can control for the things that you know you're going to need no matter where you are in that private to public journey or offering any type of liquidity program.  Lots of reusable assets can be stood up today that will benefit you in the future.


Jessica Young: Yeah, and you make a great point there with laying that foundation ahead of time.  We oftentimes see, companies are, we got to launch, we got to launch, we've got to hit this date.  So, it's full steam ahead.  You've got either a large or a small team trying to work to get this transaction.  There’re tons of different teams involved.  You've got the equity admin team, you've got your payroll team, you've got your tax team.  So, you've got a lot of moving parts.  You don't necessarily have the time to focus on, at that point in time, making sure your participants understand what it means to hold an option, exercise that option, and sell that option.  Or maybe you've got a single trigger RSU that has released and now there's a taxable event that happens.  They need to then understand what it means to sell those shares.


            So, if you've already got the foundational education happening, your participants understand their equity.  Once that transaction launches, you can then focus on, okay, this is a little bit more detailed.  What is a tender offer?  What does it mean when you sell your shares?  How does this impact your taxes?  You can focus on more nuanced training at that point in time, once you've got the transaction launched and you're not trying to do 100 things at once, since you're already doing that.


Samantha Adams:         Right.  And especially in the world of public offerings, there are so many decisions that have to be made close to the actual, like, we're going to the market today.  The only way to really be able to flex to those decisions in real time is to make sure that that baseline foundation is really well taken care of.  It gives you the ability to flex and change, to changing market dynamics, changing participant needs, leadership often comes in and has some new idea that might be great but is operationally hard to execute, and you have to be able to free up enough bandwidth and resources to tackle those things as they come.


            So, I think the biggest takeaway from today is, start doing everything that you can now, make sure that you have a seat at the table and a voice in the room.  Think about budget needs and resource needs, both from like headcount or external consultant support. Think about how you can leverage your vendors more to take some work off your plate.  And then, as you navigate this, I also think it's really important to communicate that something will probably always go wrong.  And what we're doing today is to ultimately control for the least amount of things that go wrong in the future, but having a good strategy for communicating and escalating through challenges that come up unexpectedly.


Jessica Young:        Yeah.  And one thing I wanted to circle back to you, you had mentioned getting systems in place and infrastructure in place to set yourself up for success when you need to scale.  I think that is incredibly important, whether it's a smaller secondary transaction or a larger tender offer or an even bigger public offering.  I mean taxes.  Taxes, taxes, taxes, that is something that you can–yeah, it is always complicated.  There's always something that unexpectedly comes up and you want to really prepare for that.  And so, work with your payroll provider and any other systems that you have in place to get these setups happening and tested, and everything, well before you actually are needing to use them, it's going to save you so much time and maybe make your blood pressure go down when the transaction actually happens.


Samantha Adams:         Right.  None of us have a crystal ball.  We don't know when the market will turn around.  We don't know what issues are going to come up in real time when we're in the middle of a transaction.  So, it's just thinking about what could go wrong, how do we think about where we want to be?  If you're thinking, this is a best in class company, we want to operate best in class compensation programs, this is a big part of it.  And equity is inherently complicated, especially if you have a global footprint.  And that takes a lot of thought and input and decision making across many different functions within a company, and often needs both internal and external advisement.  So, finding the right partners and making sure that you are tracking these needs right now and communicating them really well, I think can pay in spades when you're up against a hard deadline on a transaction.


Jeff Urban:        These are all great proactive recommendations.  So with that, maybe we'll take a second and see if there's any questions that have come through the chat.


Samantha Adams:         Yeah.  So, while we're waiting for questions, I'm especially really excited for the market's turn around because I love working on IPOs, and that probably says a lot about me as a person.  And I know for Jess that, starting to see the tender offer and secondary side pick up a bit in the last quarter has been really encouraging.  We all strongly believe in having equity programs as part of your regular compensation practices and take it very seriously, and how best to operationalize those and make sure that your participants are getting the most value.


Jessica Young:        Yeah.  And I think it's an exciting time for us, too, because we're having to come up with new ideas.  So, you're not going to go public in the next few months, most likely.  What can we do?  And it's fun, the conversations that we're having about RSUs and things like that, that you just typically in the past have not seen needing to be included because you're going to run a transaction, within the next year, you're going to go public, and now maybe you don't know that.  And so, we get to be creative, which is a lot of fun. 


Samantha Adams:         Right.  Absolutely.  In what we do, there's so many rules around it on the day to day, and being able to step out of that a little bit better and think about how we actually can do something interesting and new, and that often starts to set a new standard for how transactions happen.


Speaker:           And so, we have this question from the chat.  The question is, if you were to give a private market company one piece of advice when they're looking to run a transaction in the next year, what would it be?


Samantha Adams:         I can go first.  So, the first thing I would advise is to do an assessment of everything that touches that transaction today.  What system are you using?  When was the last time your cap table was audited?  What is the onboarding, offboarding flow of your participants, and how do you get that type of data in and out of your system?  And then connectivity with payroll, because ultimately everything has to get reported into payroll and be reflected on tax documents at the end of the year.


            So, take stock.  Give yourself a rating, be really honest with yourself, and set aside time to have conversations with your leadership around where you think you need to have improvements, and the timeline that you need them, so that you can have a real discussion for road mapping, a plan to be successful.


Jessica Young:        Yeah.  And I would say stay flexible.  As we just touched on, people are coming up with new ideas, new standards of what we're seeing when it comes to transactions in general, whether it be tender offer or a more broader scope.  Secondary, I think if you get your systems in place and you keep your cap table updated, and your demographics are in a really good spot, whatever's thrown your way, you'll be able to react to and have that successful transaction.  And so, stay nimble and work with resources that you have to ensure you're ready for whatever the next thing is.


Samantha Adams:         And if you are a company that has a global footprint, I think it's also wise to think critically about where it makes sense to offer equity and to run transactional programs as a private company.  It doesn't necessarily make sense in every single jurisdiction.  And so, is this going to be meaningful?  Should we be offering it?  If not, what are the alternative programs that we have that make sure that people have the right pay parity across all organizations.  And also, as you're thinking about the impact to participants, what are the tax issues that go along with having transactions happen in certain countries.  Do you need to settle in cash versus in shares?  You have a little bit of time to actually take stock and think about where all of your people are, what they hold, and what the results for them will be.


Speaker:           And we have another question from the chat here, and that is, what methods of moving private to public are expected to be the most popular in 2023 given the market situation?  For example, SPAC, DPO, IPO.  What do you guys think?


Samantha Adams:         So, great question.  Leading up to 2022, so all through 2021, we largely saw IPOs are still the majority of the types of transactions, lots and lots of SPACs, I don't think that's surprising to anybody, and definitely a handful of direct listings.  Coming out of this type of market, we really expect that we're going to start to see a more standard IPO path.  And so, what that means is, it's a regular initial public offering with 180-day lockup period on the other side of it.  We know that there are some larger companies who have a huge pent up demand for liquidity, and so when they do enter into these transactions, there may be different flavours of what that lockup period looks like, and potentially some early share releases.  But given how volatile the market is, I at least expect that the first few companies that go out and start to test the waters, are going to take a more conservative strategy to going public.


Speaker:           Okay.  And then another question is, when should teams across the organization get involved with supporting equity knowledge?


Samantha Adams:         I would love Jess's input on this, but I'm happy to start.  I think if you lead a stock administration function or if you're the manager of that function, then it's important to build rapport very early.  It's a very cross-functional role.  Tax, legal, compliance, HR, employee relations, accounting, all play really significant parts in making that machine work and having strong relationships with those people far ahead of any transaction, I think just allows you to have that rapport and trust built across teams so that you can effectively operate.


            So, I would say, do it now.  Go to lunch, grab a coffee.  If you don't work in the same location, schedule a virtual meeting so that you can just get to know each other a little bit and talk about the things that are important to you.  Establishing SLAs would be the other thing I would really recommend with each other but also with your participant and users.  How quickly are we able to respond to things, and let's make that a formal commitment.


Jeff Urban:        Maybe just to add on that too, Sam, you've worked through very robust IPO markets in the past.  So, in working through those situations, have you experienced common struggles for private companies, if they've left their data to the last second or a little too close to the window, what could be done to really prohibit those types of situations?  And what have you seen as common issues that have popped up in a busy cycle?


Samantha Adams:         Yeah.  So, I think the biggest thing that goes wrong and really starts to expose any sort of underlying structural problems is, as soon as there's transactions happening on a daily basis, once you enter a public market, taxes have to be remitted, at least in the US, very, very quickly, and that can go awry incredibly fast if you have not put a lot of time into that data integrity, system integration, cross-functional collaboration ahead of it.  The remediation of that, while everything can be fixed, it's quite painful to fix it.  It's a bad experience to your shareholders.  And things just get heated, because through any transaction’s emotions tend to run a bit high.  And so, when there's errors, that only heightens how everybody's feeling about getting to the other side of it.


            So, those things are super important to do now and to do regularly.  If you don't have plans for a transaction, then certainly ahead of any transaction, continue that practice.  Giving people a good way to feel comfortable with what you do, how you do it, and that they're going to trust that there's strong communication throughout it, whether good or bad.  I think it helps alleviate a lot of that stress, Jeff.


Jessica Young:        Yeah.  And I think the same goes for any transaction as well.  We call it internally a health check, but you should regularly be reviewing your data and ensuring that everything is up to date and correct.  If you don't have automation in place, then you definitely want to make sure that you are in there and making updates as frequently as possible leading into a transaction.  The last thing you want is to have somebody load it in as eligible to sell and not actually eligible to sell.  They go through the process, you don't catch it, they sold shares they weren't supposed to.  Maybe somebody terminates during the offer, and you don't have that feed set up.  You don't manually go in and do it.  No one knows.  Somebody that should have been taken out was able to sell.


Samantha Adams:         And that exact situation happens on the other side of an IPO too, and then it's even harder.  You're in the public market, you're breaking trades, you're having to buy back shares, you're having to reverse payroll.  So, it's such a core competency to get ahead of.  That you don't have to wait to do it in the face of a transaction.  These are just good hygiene practices for operating an equity program.


Speaker:           Okay.  And last question from the chat is, do you have any suggestions on how to educate participants on their equity plans?  And does Morgan Stanley at Work offer any solutions for that?


Jessica Young:        I can start there. 


Samantha Adams:         Go for it.


Jessica Young:        As new hires are onboarded and they learn that they have this new equity grant, I think maybe doing some sort of training for them as they're onboarded and learning the ropes of everything, this should absolutely be part of it.  The whole point of granting equity is so your participants understand the value of what you're giving them.  And there's value prior to a public offering.  And so, I think starting from a new higher class and then making sure that you continue that.  Because, of course, as we all know, when you start a new job, your kind of drinking from the firehose just like, okay, so I have equity.  And so, you want to make sure that you come back and continue to educate them.


            So, again, when the transaction happens, this is a little bit more complex.  They maybe haven't done something like that before.  You want to be able to focus on that, but you want your participants to have a good foundation going into that, I feel. 


Samantha Adams:         Absolutely.  I think it's also really important to tie your equity programs back to how you talk about performance in your company culture.  Oftentimes, companies are granting equity as a path to ownership, and ownership is a key value for many of our clients.  And so, helping people understand what it means to be an owner.  Like renting an apartment versus buying a house, think about it in those kinds of terms.  What you put into your work at the company often can translate into a growing business and hopefully a growing stock price.


            And so, really trying to tie it back to things that are meaningful to your business that complement your company culture, I think goes a long way with getting people to engage.  Because, oftentimes, the nuts and bolts of equity education is a little bit dry, like, how does the stock option work?  How do taxes work?  It's not necessarily the most fun topics.  And if you don't have a strong interest in those things, you don't do them on a regular basis, you lose a lot of people and you lose interest fast.  So, always bring it back to why do we do this in the first place?  Why is it important to our values and our culture, is really important.


Jeff Urban:        Excellent.  So, I think that's it for questions.  So, we just want to thank everyone who was able to join.  And if you have any follow up questions at all, please contact your Morgan Stanley or Morgan Stanley at Work representative, we'd be happy to work with you.  And we're all hoping for the best in the year ahead.  Thanks.


Jessica Young:        Thanks, everyone.


Samantha Adams:         Thanks, everyone.



Participating in a new issue/syndicate is subject to availability. IPOs are highly speculative and may not be appropriate for all investors because they lack a stock-trading history and usually involve smaller and newer companies that tend to have limited operating histories, lessexperienced management teams, and fewer products or customers. Also, the offering price of an IPO reflects a negotiated estimate as to the value of the company, which may bear little relationship to the trading price of the securities, and it is not uncommon for the closing price of the shares shortly after the IPO to be well above or below the offering price.

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