A Case Study of Warburg Pincus

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History of Warburg Pincus

In 1939, Warburg Pincus was formed from Lionel I. Pincus & Co. as small private investment counseling firm by Eric Warburg. The firm had handled professional approach after merging within 1967, an investment of $25 billion with 550 companies in 30 countries, like Beijing, Frankfurt, Hong Kong, London, Mumbai, Menlo Park, New York, Shanghai, and many more. In the first year of organizational performance, it has proven by total return and market value of the investment, which was around $56 billion. The overseas operational offices were maintained various target sectors to reach its objectives, like real estate, media, communications, financial services, information technology, healthcare, energy, and retail sectors of industrial and consumer goods.

With only 17 employees on an executive management group, the firm had maintained a unique flat structure and decentralized way according to size and geographic reach to local and international market. This management and organizational structure was given many opportunities to the organization in particular area. The high level of organization, executive group was discussing deals in early level, and senior partners were participating in consultative roles of Warburg Pincus. Every level of firm’s employees was participating in their working from formal and informal ways.

However, after investment on IPO decisions, investment teams were publishing detailed memo on upside potentials and risks factors on specific investments. These make happened to expand geographically and control by centralized and decentralized ways. One of the greatest examples was seen in India, where, one of the U.S. based firm was targeting and expecting major returns from India, which was also an Asian expansion in 1990. They were also investing on practices of Asia by special recruiting and training of employees. They were also investing on time and fund transferring facilities on India from other Asian countries, like China, Hong Kong, Singapore etc. By investing on local teams, the firm was raising 11 funds with $27 billion until 1971. The firm was also supporting different cultures and languages on overseas market by many investment professionals.

After 1990, the firm was focusing on opportunistic energy investments, which was a lucrative area for most of the venture capital firms. They were also focusing on not only attractive returns, but also established relationship with proper understanding and fundamentals. With successful 15 explorations and productions, the firm was invested on 25 energy companies as private equity investors within 1996.

Therefore, IPO was another financing event of the company to position itself in public. It has also built organizational capabilities to add value to firm and partners’ of the organization.

Advantages of EMGS Technology in Various Oil Explorations

The demand of international oil and natural gas are increased day by day with recordable and high prices after 2006. These demands are increased because of lack of reserve and replacement of these resources as renewable deposits. There are 274 offshore rigs running their operations in 2006, with more than 10 years of operations. These companies were also serving drilling platforms by generating about $124.3 billion annual revenue with 14.6% of profits. Though the profits were high, companies who have less profit generation in the market, they were looking for cutting costs to compete in market. To look for political and financial uncertainty, these companies are concerning on new technologies to become risk averse in oil production sectors. Therefore, for exploration and production, the companies are looking for producing hydrocarbons at possible lowest costs, but there are only 25% probabilities of success on potential wells offshore. Therefore, to oil exploration, there are mainly four features in assessment of oil companies’ technologies:

  • Source Rock: Buried fossils and plants, which were more likely to have become oil,
  • Migration Patterns: The movement of oil from high pressure to low one,
  • Presence of Sand: Reservoir of porous dolomite or sandstone, which would settle oil;
  • Trap: Shale base and lid, which keep the oil place

The first two features are depended on geological studies, and last two on geophysics. From 1960, there were a seismic acquisition, which approach sent sound waves within seabed, which is very helpful to determine structure and composition. After 1980, two-dimensional seismic mapping gave way to 3-D maps, which was very effective to measure and identify probable reservoirs.

However, for having some drawbacks, this technique did not work well for typified technology in oil industries. 3-D seismic approach was introduced and earned $500 million revenue annually from first year of performances in 1991 but this approach was hampered industrial resistance to change their previous approach, and for lack of computational power by all in that point of time. However, there are some major advantages to adopt these technologies:

  • Reducing price of maintaining 3-D approach within very short period of time, from $18,500 to $8,000 for per sq. km
  • Clear identification of sub surface, which is very helpful to know the presence of hydrocarbons;
  • Use of electro- magnetic signal within water, which is very efficient and reducing time of signal to return,

Therefore, these technologies of 3-D approach have very efficient and fruitful outcomes to quick identification of hydrocarbons in any places.

Limitations & Lifetime of the EMGS Technology

Two popular scientists of SBL, Eidesmo, and Elilingsurd have conducted a research on using electro- magnetic in 1997, which was used as dropped down well holes to seabed reservoirs investigations. The chairperson of EMGS, Bruheim said that, Statoil should adopt the concept, which would be very fruitful as technological development in oil industries. After 2003, Statoil was shifted the technologies to EMGS, after lab test verification and commercial discovery but it cannot make fruitful return from $20 million investment on the project. This technological project makes EMGS to work as independent and entrepreneurial way, which was bringing positive images to potential customers. At first, the technology was worked very well for the organization as identifiers of presence and absence of oil, and generated handsome amount of return from this technology, with $18 million. However, it also has some major disadvantages, which are:

  • Incurring high costs of drilling a deepwater well, with $1.5 million per prospect of applying it,
  • It also took high costs of moving employees by boats, and time consuming.
  • Incurring losses in 2004, with $17 million, which were $18 million revenues in previous year of operational activities of EMGS,
  • Having high priority of success, but with huge incur of costs.
  • Technological game of SBL was impacted on EMGS in strategically and financial movement in future operations and performances of the business.
  • Recover of gas and oil industries in 2004, also impact on technological lacking of EMGS.
  • Having less market opportunities to develop existing products and services of EMGS by new technologies,
  • Recessional impact on technological improvement to develop or invest more on this technology

EMGS technology was working effectively for limited lifetime obviously, because it has operated from 2003 to 2006. This technology cannot adopt major offshore of EMGS and slower technology is very difficult to rock formation and improvement of drilling costs, because it increased six times higher after adoption of this technology. Therefore, for low efficiency and slowest speed performing, EMGS technologies incurred losses and worked for limited lifetime in competitive market operations, after survey results by SBL.

Impact of limitations on the customers listed in Exhibit 8

There are mainly two main reasons for failure of EMGS technologies, time consuming and incurring high costs. EMGS has maintained national and multi national companies as its customers. The customers of developing countries were also maintained by this company, but after adoption of new technologies, EMGS had lack of resources to meet customers’ demand and to compete with multinationals. The main customers list was given, which was very much affected by new technological adoption of EMGS, which is given in below:

List of Major Customers of EMGS
Fig: List of Major Customers of EMGS

As the company cannot beat multi nationals, this had really large resources to invest in the market. The game changing technology is very much affected to its major and minor customers, which are pointing out in below:

  • High amount of investment of this technology incurred high costs of expenses from customers, but did not give much profit as costs of adopting this technology.
  • Having very limited life, only 4-5 years of life cycle, which is not profitable for its customers.
  • Unable to compete in US competitive environment with lots of large competitors in the market,
  • Inefficient to compete in local and overseas market with price competition and eroding margins like other competitors in market,
  • Lowering strategic buyers of the organization with unprofessional technological development of the organization,
  • Lowering efficiency level of organization to handle customers and organizational operations in proper way,
  • Incurring high commodity prices to its customers and partners of EMGS,
  • There were few autocratically approved countries with EMGS technology to use it as proven technology, which stop potential paths of customers.

Therefore, the major customers of EMGS were losing their confidence and efficiency level from EMGS, which was another main reason for incurring huge loss in 2004, about two times greater than previous year. As most of the customers are running their business successfully in the market, so they have to commercial in their professions. Therefore, it has affected very badly to customer relationship with EMGS. Therefore, it is shown that, new technological development has incurred not only high costs, but also hampering customers’ image to the organization.

Reason of selling the company to Warburg Pincus

The seabed logging which is mainly an innovation to measure the existence of hydrocarbon in deepwater. With this innovation, various hard tasks of oil hunting were made easier. This technology was innovated by Statoil. This technology improved the seismic findings. Statoil at first took different projects based on this technology. In between 1997 to 2003, there were different projects, which made out the SBL from the lab to the real operation. In 2004, Statoil diversified its projects under a different company named ‘EMGS” Statoil invested around 20 million dollars and at that time it was getting positive results. However, later these projects started to loose money. To identify the reason of loosing money, Statoil identified two reasons. Firstly, EMGS needed to be fully independent through provide a true entrepreneurial environment and secondly, position this company in an attractive way to the potential customers. This approach was also performed very well and EMGS got nine patents along with 10 drilling tests, and its success to ensure the presence and absence of oil was spread out. In 2003, the company generated about 18 million USD.

However, this project seemed to be more cash hog than cash generator. After that, it started to sell the surveys it was did for its own use and which will help the other companies. To minimize the use of cost, EMG hired vessels, which was run by the employee of the owner of the vessel only the employees of EMGS did the survey. In 2004, the revenue generation by EMG was declined up to 17 million, which was the result of over expectation upon the company. The oil industry was experiencing a slow down in that time and started to recover in those year. IN this time the former president of PGS and the co founder of Spinnaker with Warburg Pincus, Mr. Bruheim gave opinion about the departure way from this loosing situation. He advised to divestiture of Statoil’s ownership. The management of Statoil found it wiser to sell the loosing concern to a company like Warburg to ensure the future growth. Though the annual market opportunity of EMG’s existing products and services were about 90 million USD, Statoil sold the concern to Warburg for getting rid from a loosing concern. The basic reason was the profit generation by EMG, which was less than the expectation.

Issues involved in deciding whether to list on the Oslo Bors or a US Exchange

Oslo Belrs was an energy related company, which had more influence over the oil industry and also over the stock exchange. OB was making the exchange more sensitive based on more brad exchange. As long-term liquidity was a significant concern for WP, it was not expected to sell its large share in stock market. IT was tried to engage in NYSE and LSE, which were assured with greater liquidity but also charged a higher cost. However, WP found it beneficiary to engage in NYSE either by distributing stock to its limited partners or selling in the extended liquid markets as shares. Thus, the first issue was the need of liquidation. Secondly, the WP dealt with approval process, which was occurred in a more decentralized way. Partners of WP had a high investment with the company and for this, they tried to ensure that their investment would generate profit and thus they got involved in overseeing the crucial decisions.

Thirdly, There were different teams assisted WP to ensure the investment opportunity which had some professionals. These teams were influencing highly the decision of investment of WP, which made it impossible for the higher management to measure the feasibility of the investment. Fourthly, after investing in a certain market, WP decided to enter into the global market and took a mixed approach of centralized and decentralized way. It had its investment in India, Hong Kong and many other countries which made it more differentiated in investment as different countries had difference in invest regulations.

The most important issue related with deciding whether to lift in US Exchange were the developed nature of energy practice in the mid 1990s. However, WP had invested successfully in different markets earlier; the downturn in energy economy hampered the attractiveness of energy practice. WP was expected a high return from all of its investments firstly but for this downturn, most of the venture capitalists lost their attention to invest in an energy company. Finally, the need of financing in the late 1990s was another issue, which triggered the decision comparing Oslo Belrs and US Exchange. To offer an IPO in US exchange became the most important way of financing for the company and after publicized, it was striving to retrieve its earlier achievement.

Recommendation as to where the company should list their stock

The company is improving itself in its growth curve by having various advantages to stock their money and rise up money with capital resources and lowering expenses of further development. The strategic buyers of the organization also have created good perception about organizational performances and its outcomes. The organization is now emphasizing on proven technologies with attractive valuation and greater returns. However, major competitors of organization, other financial institutions are also sufficient enough to maximize their stock value in the market.

For maximizing the growth opportunities, Warburg Pincus should list their stock in US exchange. There are many reasons behind this recommendation, which are shown up in below:

  • Huge share market is enlisted in US Exchange, which has renowned and popular share market in United States.
  • Having large number of customers in US Exchange, which is increasing the potential sources of customers for Warburg Pincus,
  • Successes of public enlisted companies are depending on number of customers and position in the share market. As Warburg Pincus is enlisted on the top of the market, so it should also enlisted itself in larger market of stocks to have more and more customers.
  • The image of any organization has developed by seeing good position in share market. Therefore, it the organization is enlisted in US Exchange, it can prove itself as large priority organization in market.
  • Huge market means huge competition, so, the organization can directly look up to competitors and their movements towards their customers and markets.
  • US Exchange has expanded opportunities to build up its listed organization in overseas market. Therefore, it is a great opportunity for Warburg Pincus to expand itself more in international market.
  • Good market position determines more investment of customers to the organization and more increased value of organization. Therefore, US Exchange can give such possibilities for Warburg Pincus.
  • US Exchange can also highlight the organization to strategic buyers, which can increase the possibilities to increase corporate buyers in the market.
  • Good outcomes open more opportunities for Warburg Pincus to encourage more and more organizations to invest in new and existing businesses. Therefore, it also develops US economic condition by increasing number of companies and organizations in the market.
  • Recession has affected all of the organization not only in US, but also in worldwide. Therefore, if Warburg Pincus has invested in US Exchange, it can morally improve recessional impact of total US economic and social conditions.

Thus, by having too many greatest possibilities and success factors, Warburg Pincus should enlisted its shares in US Exchange to expand its business and develop more and more in competitive environment.

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