Dean's Office Official Model Question Paper

Investment Banking vs. Commercial Banking

• Investment Banking: Focuses on corporate capital raising (underwriting IPOs, rights issues, bond offerings), financial advisory (mergers and acquisitions), and merchant banking services.
• Commercial Banking: Focuses on accepting public deposits and extending direct loans to individuals and enterprises, earning profits through the net interest margin spread.

Firm Commitment vs. Best Efforts Underwriting

• Firm Commitment: The investment bank guarantees the capital issue by purchasing the entire security offering from the issuing company upfront, bearing 100% of the price and unsold inventory risk.
• Best Efforts: The investment bank acts purely as an agent, agreeing to use its best marketing efforts to sell the shares without legally committing to purchase unsold shares.

Red Herring Prospectus

A red herring prospectus is a preliminary registration document filed with securities regulators (SEBON) containing detailed disclosures regarding the company’s business operations, financials, and risk factors, but deliberately omitting the final offer price and quantity of shares to be issued.

Leveraged Buyout (LBO)

An LBO is the corporate acquisition of a company financed predominantly using borrowed debt capital (typically 70% to 90% debt), using the acquired company’s assets and future cash flows as collateral to secure and service the acquisition debt.

Role of BRLM

The BRLM is the lead investment bank responsible for conducting corporate due diligence, drafting the offer prospectus, managing regulatory approvals (SEBON/NEPSE), conducting investor roadshows, managing the book-building bidding process, and pricing the issue.

IPO Mechanisms under SEBON Regulations

[FIXED-PRICE METHOD]   ---> Pre-determined par price (Rs 100) -> Lottery allotment.
[BOOK-BUILDING METHOD] ---> Price discovery via Institutional Bidding -> Floor/Cap Band.

1. Traditional Fixed-Price Method

• Shares are issued at a predetermined fixed price (typically nominal face value of Rs 100 per share in Nepal).
• When issues are oversubscribed by 20x–50x, shares are allocated to retail applicants via an automated electronic lottery system (minimum 10 kitta per lucky applicant).

2. Book-Building Mechanism

• Objective: Market-driven price discovery for fundamentally strong corporate entities.
• Process:
  • The issuer and lead manager establish an initial indicative valuation price range.
  • Qualified Institutional Buyers (QIBs) submit binding bids specifying price and volume.
  • A Cut-Off Price is discovered where aggregate demand matches the total shares offered.
  • Retail investors are then invited to subscribe to the remaining shares at a 10% discount to the institutional cut-off price.

Corporate Valuation Methodologies in M&A

Investment bankers determine enterprise value using a ‘football field’ valuation summary combining multiple methods:

1. Discounted Cash Flow (DCF) Valuation (Intrinsic)

• Projects Free Cash Flows to Firm (FCFF) over a 5-to-10-year horizon and discounts them to present value using the Weighted Average Cost of Capital (WACC), adding discounted Terminal Value.

2. Comparable Company Analysis (Trading Multiples)

• Relative valuation comparing the target against publicly traded peer companies using market multiples: P/E (Price-to-Earnings), EV/EBITDA, and Price-to-Book (P/B).

3. Precedent Transaction Analysis (Deal Multiples)

• Analyzes multiples paid in historical M&A transactions involving similar companies, reflecting the control premium typically paid by acquiring strategic buyers.

Private Equity and Venture Capital Financing Stages

[Seed / Angel Stage] -> [Series A] -> [Series B] -> [Series C / Growth] -> [Pre-IPO / Exit]
(Idea & Prototype)    (PMF Validation) (Scaling)    (Market Expansion)     (IPO / Strategic Sale)

1. Seed / Angel Stage: Founder savings, grants, or angel investors funding proof-of-concept and initial prototype development.
2. Series A (Product-Market Fit): First institutional VC round funding customer acquisition and business model optimization.
3. Series B (Scaling): Expanding operational capacity, hiring leadership talent, and scaling marketing.
4. Series C and Growth Equity: Funding market dominance, geographic expansion, or accretive acquisitions.
5. Exit Route: Realizing liquidity through an IPO on the stock exchange or strategic trade sale to a corporate acquirer.

Anti-Takeover Defensive Strategies

When a bidder launches an unsolicited, hostile takeover bid, target boards deploy structural defenses:

1. Poison Pill (Shareholder Rights Plan)

• Grants existing shareholders (excluding the hostile bidder) the right to purchase additional shares at a deep discount if any acquirer buys more than a specified threshold (e.g., 15%), massively diluting the hostile bidder’s stake.

2. White Knight

• The target firm’s management solicits a friendly corporate suitor to acquire the company instead of the hostile acquirer on more agreeable operational terms.

3. Golden Parachute

• Lucrative severance agreements granting senior executives substantial compensation packages if terminated following a takeover, significantly raising acquisition costs.

4. Staggered / Classified Board

• Dividing directors into classes with staggered 3-year terms so that only a fraction of board seats are up for election each year, preventing an acquirer from capturing board control in a single proxy contest.

Case Analysis: IPO Structuring for Himalayan Tech Innovations Ltd.

a. Fixed-Price vs. Book-Building Strategic Evaluation

• Fixed-Price at Par (Rs 100):
  • Disadvantage: Disastrous for a profitable high-growth tech firm generating Rs 150M in profits. Issuing shares at Rs 100 (EPS = Rs 7.50) would require issuing 12 million shares (60% equity dilution!), causing massive wealth transfer from founders to retail lottery winners.
• Book-Building Method (Market-Driven):
  • Advantage: Allows the company to issue shares at a discovery premium (e.g., Rs 300 to Rs 360), raising Rs 1.2 billion by issuing only ~3.5 million to 4 million shares, minimizing founder equity dilution to under 15%.

---

b. Peer-Based Corporate Valuation

• 1. P/E Multiple Valuation:

  • FY 2079/80 Net Profit = Rs 150 Million
  • Peer Average P/E = $22\times$
  • Enterprise Equity Value = $\text{Rs } 150 \text{ Million} \times 22 = \mathbf{\text{Rs } 3{,}300 \text{ Million} \text{ (Rs 3.3 Billion)}}$
  • Value per existing share (20M shares) = $\frac{3{,}300}{20} = \mathbf{\text{Rs } 165 \text{ per share}}$ (on trailing basis).

• 2. EV/EBITDA Multiple Valuation:

  • FY 2079/80 EBITDA = Rs 280 Million
  • Peer Average EV/EBITDA = $12\times$
  • Enterprise Value (EV) = $\text{Rs } 280 \text{ Million} \times 12 = \mathbf{\text{Rs } 3{,}360 \text{ Million}}$
  • Value per share $\approx \mathbf{\text{Rs } 168 \text{ per share}}$.

• Forward Growth Adjustment: Tech revenue is expanding at 47% CAGR. Factoring in FY 2080/81 projected forward net profit of Rs 240M, forward equity valuation reaches: $\text{Rs } 240\text{M} \times 22 = \mathbf{\text{Rs } 5{,}280 \text{ Million}}$ (Rs 264 per share).

---

c. Recommended Book-Building Price Band

Under SEBON Book-Building Directives, the upper cap cannot exceed 120% of the floor price ($P_{\text{Cap}} \le 1.20 \times P_{\text{Floor}}$):

• Floor Price: Rs 300
• Cap Price: Rs 360 ($300 \times 1.20$)
• Assumed Institutional Cut-Off Price Discovered: Rs 330 per share
• Retail Discounted Price (10% discount): $330 \times 0.90 = \mathbf{\text{Rs } 297 \text{ per share}}$

Number of New Shares to Raise Rs 1.2 Billion:

$$\text{Blended Average Price} \approx \text{Rs } 315$$

$$\text{Shares to Issue} = \frac{\text{Rs } 1{,}200{,}000{,}000}{315} \approx \mathbf{3{,}809{,}524 \text{ shares}}$$

• Dilution is kept to just 16%, preserving founder control.

---

d. Syndicate Underwriting and Allocation Structure

1. Lead Manager Syndicate: Lead Investment Bank (50% underwriting) co-managing with two syndicate merchant banks (25% each) on a firm commitment underwriting contract.
2. Statutory Allocation Breakdown (SEBON Book-Building):
   • 40% to Qualified Institutional Buyers (QIBs): 1,523,810 shares allocated via competitive electronic bidding at the cut-off price.
   • 60% to General Public / Retail Investors: 2,285,714 shares allocated at the discounted price (Rs 297) via proportional lottery for 50-kitta minimum application lots.