Warburg Pincus and emgs: The IPO decision
Main issue: Should emgs go public? If so, where should they list?
My suggestion: Emgs should go public and list in Oslo Exchange.
According to emgs’s actual and projected financials for 2006 onward, the Company would just start recovering from the net loss in the year 2006. The shareholder equity is expected to surge from $26M in 2006 to $319M in 2009. Based on the numbers, as the biggest shareholder of emgs, Warburg Pincus (WP) should not exit the company. The growth of emgs is primarily attributable to market appreciation of emgs’s SBL technology. The future of SBL technology is positive. Exhibit 8 shows big energy corporations like ExxonMobil and Shell have established strategic partnership with emgs. And as Exhibit 7 indicates, per vessel in SBL is expected to provide a $3.6 net income and a 26% EBITDA margin. With an expectation of adding one vessel per year, extra funds to emgs can support and accelerate the growth of the business at the point of late 2006. With a history of staying with its companies and helping them grow, Warburg Pincus has helped to create and grow emgs as an early-stage of technology company since 2004, and WP has invested another $10-20M in the following years to over the prior operating losses. And now WP starts to get return. Yet in 2006, providing extra fund out of WP’s own pocket may increase the risk of WP. The growth in revenue indicates a commoditization of SBL. And a typical product life for a technology like SBL is 10-year. With a possibility of increasing competition and decreasing margins, WP should consider cashing out its investment in the fifth/sixth year after 2006. In fact, WP sold its 10% of emgs shares in 2012.

That is why emgs should consider go public. A major advantage of a small company like emgs that is looking to further the growth to go pubic is to generate the capital needed to expand. The new capital can be used to fund research and development, fund extra new vessels even pay out debts. Another advantage is that IPO has an advertisement effect on a company, increasing public awareness of the company and attracting a new group of customers. Also, venture capitalists like WP will be able to transfer their risks in the company to the public through an IPO. An IPO of emgs is just a financing event for emgs so that WP would not have to invest additional funds to support the growth of emgs.

In terms of examining whether emgs is ready for an IPO or not, the predictability and the vulnerability of emgs business, as well as the expected growth rate should be included in the consideration. Based on Exhibit 11 and Exhibit 8, with a decent customer list, emgs has a pretty good of view regarding the revenue in the following years. Given that in the near term, SBL may displace the seismic method in some uses and be used in jobs involving shallower water and deeper targets in the long run, the expected growth of emgs for the next 3-5 years seems not to be a concern. The growth rate is corroborated with the projected revenue number that gets to more than 300 million in 2009. Turning to its competitors, OHM, another SBL competitor went public in 2004 when it recovered from the prior operating loss. But the size and profitability are less favorable compared to emgs. While another competitor of emgs Schlumberger is catching up in the area of SBL by purchasing a SBL startup, emgs may want to go public before other large providers of seismic data services enter the SBL market in order to get a higher valuation.

Looking at the market performance of the late 2006, being a energy-related company is a merit because the current environment of high oil prices. The S&P Energy Index has risen 28% in the tear of 2006 compared to 8% of S&P 500. The value of Oslo Bors of which 37% is in energy companies and 16% is in oilfield service has surged and approximated to S&P Energy Index in 2006 (Exhibit 1). These numbers indicate the energy-related industries