Corporate Finance chapter 19

7/17/2019 Corporate Finance chapter 19

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19-1

RAISING CAPITAL

Chapter 19

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2/31

19-2

KEY CONCEPTS AND SKILLS

Describe the venture capita !ar"et an# its r$ein %inancin& ne' businesses

Articuate h$' securities are s$# t$ the pubic(

an# the r$e $% invest!ent ban"ers E)pain initia pubic $%%erin&s( an# the c$sts $%

&$in& pubic


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19-%

C*APTER O+TLINE

19,1 Ear-.Sta&e /inancin& an# 0enture Capita

19, Sein& Securities t$ the Pubic2 The 3asicPr$ce#ure

19,4 Aternative Issue 5eth$#s

19,6 +n#er'riters

19,7 IPOs an# +n#erpricin&

19,8 hat C/Os Sa- ab$ut the IPO Pr$cess

19,: SEOs an# the 0aue $% the /ir!

19,; The C$st $% Issuin& Securities

19,9 Ri&hts

19,1< Diuti$n

19,11 Issuin& L$n&.Ter! Debt

19,1 She% Re&istrati$n


4/31

19-4

19,1 T*E /INANCING LI/ECYCLE O/ A/IR52 0ENT+RE CAPITAL

Private %inancin& %$r ne'( hi&h ris"businesses in e)chan&e %$r st$c" In#ivi#ua invest$rs 0enture capita %ir!s

+sua- inv$ves active participati$n b-0C

+ti!ate &$a2 ta"e c$!pan- pubic=the 0C 'i bene%it %r$! the capita

raise# in the IPO *ar# t$ %in# E)pensive
http://www.pwcmoneytree.com/


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19-&

0ENT+RE CAPITAL STAGE /INANCING

/un#in& pr$vi#e# in severa sta&es

C$ntin&ent up$n speci%ie# &$as at each sta&e

/irst sta&e

>Gr$un# %$$r? $r >See# !$ne-? /un# pr$t$t-pe an# !anu%acturin& pan

Sec$n# Sta&e >5e@@anine? %inancin&

3e&in !anu%acturin&( !ar"etin& #istributi$n


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19-'

19, SELLING SEC+RITIES TO T*EP+3LIC

1, 5ana&e!ent $btains per!issi$n %r$!the 3$ar# $% Direct$rs

, /ir! %ies a re&istrati$n state!ent

'ith the SEC4, SEC e)a!ines the re&istrati$n #urin&

a


7/3119-(

SELLING SEC+RITIES TO T*E P+3LICBCONT,

7, A prei!inar- pr$spectus( cae# a redherring( is #istribute# #urin& the 'aitin&peri$#

. I% pr$be!s( the c$!pan- a!en#sthe re&istrati$n( an# the 'aitin& peri$#starts $ver

8, Price per share #eter!ine# $n the

e%%ective #ate $% the re&istrati$n an# thesein& e%%$rt be&ins


8/3119-)

TO53STONE/IG+RE 19,6

Investment banks insyndicate divided intobrackets

Firms listed alphabeticallywithin each bracket

Pecking order

Higher bracket =

greater prestige

Underwriting successbuilt on reputation


9/3119-9

19,4 ALTERNATI0E ISS+E 5ET*ODS

Pubic Issue Re&istrati$n 'ith SEC reuire#

Genera cash $%%er $%%ere# t$ &enera pubic

Ri&hts $%%er $%%ere# $n- t$ current

shareh$#ers IPO Initia Pubic O%%erin& +nseas$ne# ne'

issue

SEO Seas$ne# Euit- O%%erin&

Private Issue S$# t$ %e'er than 47 invest$rs

SEC re&istrati$n n$t reuire#


10/3119-10

5ET*ODS O/ ISS+ING NESEC+RITIES

TA3LE 19,1


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19-11

19,6 +NDERRITERS

+n#er'ritin& services2 /$r!uate !eth$# t$ issue securities Price the securities Se the securities Price stabii@ati$n b- ea# un#er'riter inthe a%ter!ar"et

S-n#icate &r$up $% invest!entban"ers that !ar"et the securities an#share the ris" ass$ciate# 'ith sein& the

issue Sprea# #i%%erence bet'een 'hat thes-n#icate pa-s the c$!pan- an# 'hatthe securit- ses %$r in the !ar"et


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19-12

/IR5 CO55IT5ENT +NDERRITING

Issuer ses entire issue t$ un#er'ritin&s-n#icate

S-n#icate reses issue t$ the pubic

+n#er'riter !a"es !$ne- $n the sprea#bet'een the price pai# t$ the issuer an# theprice receive# %r$! invest$rs 'hen the st$c" iss$#

S-n#icate bears the ris" $% n$t bein& abe t$ sethe entire issue %$r !$re than the c$st

5$st c$!!$n t-pe $% un#er'ritin& in the +nite#States


13/31

19-1%

3EST E//ORTS +NDERRITING

+n#er'riter !a"es >best e%%$rt? t$ se thesecurities at an a&ree#.up$n $%%erin& price

Issuin& c$!pan- bears the ris" $% the

issue n$t bein& s$#

O%%er !a- be pue# i% n$t en$u&h interestat the $%%er price

C$!pan- #$es n$t &et the capita an# the-have sti incurre# substantia %$tati$n c$sts

N$t as c$!!$n as it use# t$ be


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19-14

D+TC* OR +NI/OR5 PRICE A+CTION

uyers!id a price and number o" shares#eller!

$ork down the list o" bidders

%etermine the highest price at which theycan sell the desired number o"

shares

&ll success"ul bidders pay the same priceper share'(ncourages aggressive bidding


15/31

19-1&19-1&

D+TC* OR +NI/OR5 PRICE A+CTIONEFA5PLE

)he company wants to sell *+,-- shares o" stock'

)he "irm will sell *+,-- shares at .*, per share'

idders &+ + /+ and % will get shares'


16/31

19-1'

GREEN S*OE PRO0ISION

>Overallotment Option A$'s s-n#icate t$ purchase ana##iti$na 17 $% the issue %r$! theissuer

A$'s the issue t$ be $versubscribe# Pr$vi#es s$!e pr$tecti$n %$r the ea#un#er'riter as the- per%$r! theirprice stabii@ati$n %uncti$n

In a IPO an# SEO $%%erin&s but n$tin $r#inar- #ebt $%%erin&s


17/31

19-1(

LOCK+P AGREE5ENTS

N$t e&a- reuire# but c$!!$n Restricts insi#ers %r$! sein& IPO shares %$r a

speci%ie# ti!e peri$# C$!!$n $c"up peri$# 1;< #a-s

St$c" price ten#s t$ #r$p 'hen the $c"upperi$# e)pires #ue t$ !ar"et anticipati$n $%a##iti$na shares hittin& the Street


18/31

19-1)

19,7 IPOS AND +NDERPRICING

IPO pricin& ver- #i%%icut N$ current !ar"et price avaiabe

Dutch Aucti$ns #esi&ne# t$

ei!inate %irst #a- IPO price>p$p?+n#erpricin& causes the issuert$ >eave !$ne- $n the tabe?

De&ree $% un#erpricin& varies$ver ti!e


19/31

19-19

IPO +NDERPRICING REASONS

+n#er'riters 'ant $%%erin&s t$ se $ut Reputati$n %$r success%u IPOs is critica

+n#erpricin& insurance %$r un#er'riters

Oversubscripti$n a$t!ent >innerHs Curse?

S!aer( ris"ier IPOs un#erprice t$ attractinvest$rs


20/31

19-20

19,8 *AT C/OS SAY A3O+T T*E+NDERRITING PROCESS

5$st C$!!$n 5$tivati$ns %$r IPO2 Create Pubic Shares %$r +se in Acuisiti$ns

Estabish 5ar"et 0aue $% the /ir!

Enhance Reputati$n $% /ir! Diversi%- O'nership an# O'ner eath

5$st C$!!$n Reas$ns %$r +n#erpricin&2 C$!pensate Invest$rs %$r IPO Ris"

Increase P$st.Issue Tra#in& 0$u!e

Curr- /av$r 'ith Instituti$na Invest$rs

Increase Pubicit- $n Openin& Da-


21/31

19-21

19,: SEOS AND T*E 0AL+E O/ T*E/IR5

St$c" prices ten# t$ #ecine 'hen ne'euit- is issue# 5ana&eria In%$r!ati$n2 I% !ana&e!ent

beieves euit- is $vervaue#( the- '$u# ch$$se

t$ issue st$c" shares, +sua- bene%its currentshareh$#ers but ne' shareh$#ers anticipatethe superi$r in%$r!ati$n an# bi# #$'n the price$% the st$c" $ver ti!e,

Debt usa&e2 Issuin& st$c" !a- in#icate %ir! hast$$ !uch #ebt an# can n$t issue !$re #ebt

Issue c$sts Issue c$sts %$r euit- #irect an# in#irect . are

si&ni%icant- !$re than %$r #ebt


22/31

19-22

19,; T*E COST O/ ISS+INGSEC+RITIES

T$ta #irect c$sts J 1


23/31

19-2%

19,; T*E COST O/ ISS+INGSEC+RITIES


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19-24

19,9 RIG*TS

A ri&hts $%%erin& is an issue $% ne' c$!!$nst$c" t$ e)istin& shareh$#ers

Shareh$#ers are issue# $pti$ns t$ purchasespeci%ie# nu!ber $% shares at a %i)e# price

an# speci%ie# peri$# $% ti!e Ri&hts Bs$!eti!e cae# 'arrants are $%tentra#e# $n e)chan&es an# OTC,

E%%icient !ar"et the$r- #ictates that there is

n$ $n& ter! price a#vanta&e t$ acuirin&shares via ri&hts versus the $pen !ar"et,


25/31

19-2&

RIG*TS BCONT,

Shareh$#ers can e)ercise their ri&hts $r sethe!

In either case( the shareh$#ers neither 'in $r $se

I% invest$rs #$ n$t e)ercise $r se their

ri&hts( un#ersubscripti$n can $ccur, In such a case( un#er'riters 'i $%ten ta"e up the

un#ersubscribe# p$rti$n $% the $%%erin& in e)chan&e%$r a stan#b- %ee

5$st +S ne' euit- issues are s$# 'ith$utri&hts, Para#$)ica-( issuance c$sts '$u#i"e- be ess 'ith ri&hts,


26/31

19-2'

19,1< DIL+TION

Diuti$n is a $ss in e)istin& shareh$#er vauecause# b- issuance $% !$re st$c"

Three t-pes $% #iuti$n are e)tant2 Diuti$n $% percenta&e $'nership

Diuti$n $% !ar"et vaue

Diuti$n $% 3$$" 0aue an# EPS

Diuti$n $% percenta&e $'nership can be$verc$!e 'ith ri&hts,

Diuti$n $% vaue is n$t a resut $% e)pan#e#%inancin&= it t-pica- resuts %r$! ess than$pti!a use $% the %inancin&


27/31

19-2(

19,11 TYPES O/ LONG.TER5 DE3T

3$n#s pubic issue $% $n&.ter! #ebt

Private issues

Ter! $ans

Direct business $ans %r$! c$!!ercia ban"s(

insurance c$!panies( etc, 5aturities 1 7 -ears

Repa-abe #urin& the i%e $% the $an

Private pace!ents

Si!iar t$ ter! $ans 'ith $n&er !aturit- Easier t$ rene&$tiate than pubic issues

L$'er c$sts than pubic issues N$ SEC re&istrati$n


28/31

19-2)

19,1 S*EL/ REGISTRATION

SEC Rue 617

Per!its %ir! t$ re&ister a ar&e issue 'ith the

SEC an# se it in s!a p$rti$ns

Re#uces %$tati$n c$sts

A$'s c$!pan- !$re %e)ibiit- t$ raise !$ne-uic"-


29/31

19-29

19,1 S*EL/ REGISTRATION

Reuire!ents C$!pan- !ust be rate# invest!ent&ra#e

Cann$t have #e%aute# $n #ebt'ithin ast three -ears

5ar"et vaue $% st$c" !ust be&reater than 17< !ii$n

N$ vi$ati$ns $% the Securities Act $%1946 in the prece#in& three -ears


30/31

19-%0

+ICK +I

1, hat is venture capita an#'hat t-pes $% %ir!s receive it

, hat are s$!e $% the i!p$rtant

services pr$vi#e# b-un#er'riters

4, hat t-pe $% un#er'ritin& is the

!$st c$!!$n in the +nite#States an# h$' #$es it '$r"


31/31

+ICK +I

6, hat is IPO un#erpricin& an#'h- !i&ht it persist

7, hat are s$!e $% the c$sts

ass$ciate# 'ith issuin&securities

8, hat are s$!e $% the

characteristics $% privatepace!ent #ebt

:, hat is she% re&istrati$n

Documents

Corporate Finance chapter 19