Terms in this set (25)
Why do companies restructure and chose to do an IPO?
1. Responding to Market Pressure: Management feels that market valuation could be increased by un-bundling healthy subsidiaries and divisions
2. Enhance the ability to attract the best people: The best people want to work for firms that tend to dominate and excel in their fields
3. A mismatched business model: The goals and objectives of the parent company and subsidiary may not coincide
4. Speed up decision making: The ability to raise capital and deploy resources is speed up when the company is independent
5. An independent company may grow faster than a division:
6. Establish Fresh relationships: with employees, the market, and equity based compensation.
Why do spin-offs unlock market value?
1. Increase in coverage by analysts
2. Attract new investors
3. New incentives to management, leads to an improvement in operating performance
4. Strategic choices driven by independence
Advantages of going Public
1. Raise Capital
2. Achieve Liquidity (equity holders of firm may want to sell off their stake, IB's warn against this because it is a bad sign for investors)
3. Higher visibility
Disadvantages of Going Public
2. Full disclosure of financial statements
3. Risk of failure can taint reputation
Timing of IPO
Bull market is critical for IPO to get a good valuation and have investor interest.
What is the fee structure imposed by investment banking firms for underwriting an IPO?
Typically 7% of capital raised plus legal fees.
Why may a firm select multiple underwriters to manage their offering
An investment bank may specialize in a particular industry while another may specialize in raising capital
What is the role of the chosen/lead book underwriter?
- Manage the records of investors who have expressed an interest in purchasing shares
- Allocate shares
- Choose the "syndicate" of banks and brokerage firms that shall actually sell the offering
- Confirm that the company's financial information is accurate
- Decide on size of offer
- Prepare marketing information
What is the extent/level of disclosure required from a firm that decides to go public?
S-1 registration statement : exhaustive and complete
SB-2 Registration Statement: Firms going public with less than 25 million in revenues
Regulation A: Firms raising less than $5 million (thus only a low level of disclosure is required
What does the lead underwriter's "letter of intent" to the client contain
- It protects the underwriter from any uncovered out-of-pocket expenses, in the event the offer is withdrawn during either the IPO
- An agreement for the company to corporate in due diligence.
_ A commitment by the company to grant 15% equity to underwriter.
What is the "quiet period" in the IPO process?
Specified as the weeks before and after the offering, when the firm's ability to communicate with potential investors in its IPO is severally limited
Marketing the IPO
"Road Shows": undertaken jointly by the underwriter and the firm's management team to highlight the firm's business segments and its future prospects to potential investors
How is the indicative price of the IPO determined in US securities Markets?
Via "book-building": the underwriter contacts potential investors to determine how many shares they wish to purchase at different price levels.
What is a Red Herring?
A preliminary prospectus that is used for marketing.
How do "indications of interest" differ between institutional investors and individual investors?
1. Retail investors typically submit "market orders", while institutional investors normally submit "limit order". Institutional orders go first
Firm commitment offering vs best efforts offering
1. Firm commitment offering: The investment bank purchased the entire issue of securities from the issuer, and commits to sell the shares to investors at a set price.
2. Best efforts offering makes no guarantees
How risky is it for the investment bank to give a "Firm Commitment" offering?
Very low, as the investment bank sets the price only the night before the offering, and thus it is in tune with prevailing market conditions.
What methodology do investment bankers use in establishing an initial price for the IPO?
1. Market valuation of similar publicly traded firms in that particular industry
2. A discounted cash flow analysis of the firm's projected cash flows
3. Splitting the firm into its various businesses, and valuing the components
How do investment bankers establish an optimal effective date to launch the new issue?
Post market close, on the day prior to the effective date, the issuing firm and the underwriter discuss:
a. Final offering price
b. Number of shares to be issued
(these decisions are dependent upon the size of the "order book"
How do issuing companies view under pricing?
From the company's viewpoint, it has left money on the table as it could have obtained a higher price for its shares, but under-pricing insurers success
Dutch auction (auction type IPO)
Both institutional and retail investors bid for shares, with the first day price set by equating supply and demand
1. Under pricing is avoided
2. True supply and demand is obtained
1. Analyst coverage may be sparse
2. Retail investors may begin trading at euphoric prices
3. Less potential investors due to less marketing
When do companies issue two classes of stock in an IPO?
The dual class structure attempts to separate economic rights from voting rights. The class B shares put management control squarely in the hands of management
What information is contained in the registration statement filed with the SEC?
The purpose of the Registration Statement is to ensure the public has sufficient and reliable information regarding securities that are sold
Why do share prices rise above IPO prices on the first trading day
1. The pricing discount in IPO price used to attract investors.
2. A bandwagon effect.
3. The investment bank exercises "market power": the bank deliberately sets the price low to transfer wealth to select investors.
When does the "quiet period" end?
25 days after the IPO. This gives analysts time to properly value the company.
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