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Prof. Ian Giddy New York University Global Equity Financing

Global Equity Financing

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Global Equity Financing. Prof. Ian Giddy New York University. Corporate Finance. CORPORATE FINANCE DECISONS. INVESTMENT. FINANCING. RISK MGT. PORTFOLIO. MEASUREMENT. CAPITAL. DEBT. EQUITY. TOOLS. M&A. Corporate Finance. CORPORATE FINANCE DECISONS. INVESTMENT. FINANCING. - PowerPoint PPT Presentation

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Page 1: Global Equity Financing

Prof. Ian GiddyNew York University

Global EquityFinancing

Page 2: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 2

Corporate Finance

CORPORATE FINANCEDECISONS

INVESTMENT RISK MGTFINANCING

CAPITAL

PORTFOLIO

M&ADEBT EQUITY

TOOLS

MEASUREMENT

Page 3: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 3

Corporate Finance

CORPORATE FINANCEDECISONS

INVESTMENT RISK MGTFINANCING

CAPITAL

PORTFOLIO

M&ADEBT EQUITY

TOOLS

MEASUREMENT

Page 4: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 4

Corporate Finance

CORPORATE FINANCEDECISONS

INVESTMENT RISK MGTFINANCING

CAPITAL

PORTFOLIO

M&ADEBT EQUITY

TOOLS

MEASUREMENT

INVESTMENT

FINANCING RISKMANAGEMENT

Page 5: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 5

Primary Market for Equities

Initial Public Offering (IPO)

Subsequent Offering

Private Equity Placement

Stock Buyback?

Management Buyout?

Page 6: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 6

EquityBanking Fixed Income

Investment Banking: Organizarion

“Coverage”

•Corporate Finance•Mergers & Acquisitions•Investment Banking

Debt Capital Markets (DCM)

•Syndicate•Marketing

Sales•Institutional•Retail

Trading (proprietary)•Risk •Profits

Structured FinanceCredit ResearchPrivate PlacementLoan Syndication

Equity Capital Markets (ECM)

•Sales•Trading•Research

Page 7: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 7

Investment Banking: Organization

New Deal Pitch Team Coverage/

Investment banking Product (DCM or

ECM)

Commitment Committee Investment banking ECM/DCM Senior sales/trading Research

Page 8: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 8

Underwriting Sequence

Engagement: Mandate signed by issuer engaging lead manager

Due Diligence: Conducted by Lead manager

Documentation: Loan agreement, Prospectus

Signing: Underwriting agreement signed and issue priced

Closing: Settlement of the offering

Engagement

Due Diligence andDocumentation

Signing and Pricing

Closing

Page 9: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 9

The Beauty Contest

Criteria for Selecting a Lead Manager 1 Experience with similar transactions (sector,

market, currency, maturity, high or low-quality issuers)

Ranking in League Tables Placement power with institutional and/or

retail investors Standing in secondary market as “market

maker” and commitment to secondary market trading

Page 10: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 10

The Beauty Contest (Cont.)

Criteria for Selecting a Lead Manager 2 Quality/reputation of research Proposed marketing strategy (pricing,

timing, issue size, etc.) Proposals for “Roadshow” Relationships with potential co-

managers Senior management commitment to

backing issue with people and capital

Page 11: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 11

The Roadshow

Organized by global coordinator and lead managers

Informal presentation by management to potential investors

Attendance limited to professional intermediaries and investing institutions

Content must be consistent with information in draft version of prospectus or offering circular.

Page 12: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 12

Syndication: The Structure

Lead ManagerBook-Runner

“International Coordinator

Joint Co-LeadManagerJoint Co-Lead

ManagerJoint Co-LeadManagers

LeadManagerLead

ManagerLeadManagers

ManagerManagerManagers Selling Agent

Co-Lead Manager

Page 13: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 13

Securities Underwriting: Relationships

Issuer

Agents Investment Bankers

Debt: Fiscal agent

Equity: Depositary institution

Lead manager/BookrunnerRegistered offering: Underwriting AgreementUnregistered: Purchase Agreement

Co-managersAgreement Among Underwriters

Prospectus/Offering Circular

Institutional Buyers Retail Buyers

Page 14: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 14

Subscription or Underwriting Agreement Between issuer, global coordinator and all managers Signed after pricing when “book-building” completed Firm commitment to underwrite, subject to delivery of

certain confirmatory certificates and no “material adverse change” or “force majeure”

Indemnity: By the issuer in favor of Global Coordinator and Managers against liability arising as a breach of warranty, material inaccuracy or omission

Lock up: Issuer will not offer other securities for a period of time (eg six months)

Page 15: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 15

Debt

Equity

Domestic market

Foreign market(Depositary Receipts)

BNY ADR Index

-7.47%-13.54%-19.28%

MSCI Index

-28.23%-25.64%-36.53%

AsiaLat AmerEmerging Markets

(1996-98)

What Form of Issue?

Page 16: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 16

ADR (American Depository Receipts)

INVESTORS

LOCALDEPOSITARYINSTITUTION

U.S. BANK U.S. investor buys certificate which represents a foreign market security. It receives the same treatment as a U.S. security and trades freely in the U.S.

Holds shares of non-U.S. issuer on behalf of investors

NON-U.S.ISSUER

Non-U.S. issuer gains better access to U.S. market and may provide superior disclosure

Page 17: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 17

Debt

Equity

Domestic market

Foreign market(Depositary Receipts)

Unsponsored Private placement

Exchange traded

Exchange traded IPO

Private placement IPO

Global issue or GDR

Depositary Receipts: Alternatives

Page 18: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 18

Equity-Linked Eurobonds

Eurobonds with warrantsMarui

Convertible EurobondsBattle Mountaingold

Index-linked EurobondsBank of Montreal

Page 19: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 19

Equity Financing Choices

Equity

Warrants Conver-tibles

ADRs Common

Page 20: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 20

Pricing

Debt Instruments Bonds priced according

to yield over benchmark (spread)

Yield too low – issue does not sell

Yield too high – too much given away

Generally syndicate holds price for a day; in a successful issue yields gradually tighten

Equity Mature issue: based on

current market price and market conditions, small premium for dilution; comparables

IPO: comparables and discounted cash flow analysis

Page 21: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 21

Pricing and Fees

The Business Telecoms Dot-Coms Avons(How much volatility?)

Debt

Equity

Fees0.15%to1.5%

5% to7%

PricingT+SpreadL+Spread

Comparables/RatiosThe marketFuture cash flow

valuation

The Issuer

Page 22: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 22

Relative Valuation

Do valuation ratios make sense?• Price/Earnings (P/E) ratios

and variants (EBIT multiples, EBITDA multiples, Cash Flow multiples)

• Price/Book (P/BV) ratios and variants (Tobin's Q)

• Price/Sales ratios It depends on how they are used -- and

what’s behind them!

Page 23: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 23

Valuing a Firm with DCF: An IllustrationHistorical financial results

Adjust for nonrecurring aspects

Gauge future growth

Adjust for noncash items

Projected sales and operating profits

Projected free cash flows to the firm (FCFF)

Year 1 FCFF

Year 2 FCFF

Year 3 FCFF

Year 4 FCFF

Terminal year FCFF

Stable growth model or P/E comparable

Present value of free cash flows

+ cash, securities & excess assets

- Market value of debt

Value of shareholders equity

Discount to present using weighted average cost of capital (WACC)

Page 24: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 24

Dividend Discount Models:General Model

V Dk

ot

tt

( )11

V0 = Value of Stock Dt = Dividend k = required return

Page 25: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 25

Constant Growth Model

Vo D gk go

( )1

g = constant perpetual growth rate

Page 26: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 26

Constant Growth Model: Example

Vo D gk go

( )1

E1 = $5.00b = 40% k = 15%

(1-b) = 60% D1 = $3.00 g = 8%

V0 = 3.00 / (.15 - .08) = $42.86

Motel 6 has earnings of $5 per share. It reinvests 40% and pays out 60%dividend

The required return that shareholders expect is 15%

The earnings are expected to grow at 8% per annum

What’s an M6 share worth?

Plowback rate

Page 27: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 27

Shifting Growth Rate Model

V D gk

D gk g k

o o

t

tt

TT

T

( )

( )( )

( )( )11

11

1

1

2

2

g1 = first growth rate g2 = second growth rate T = number of periods of growth at g1

Page 28: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 28

The Investors’ Viewpoint:Equity Risk and Return

Investors diversify, because you get a better return for a given risk.

There is a fully-diversified “market portfolio” that we should all choose

The risk of an individual asset can be measured by how much risk it adds to the “market portfolio.”

But does this apply to the global capital market?

Page 29: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 29

The Weighted Average Cost of Capital

Choice Cost1. Equity Cost of equity- Retained earnings - depends upon riskiness of the stock- New stock issues - will be affected by level of interest rates- Warrants

Cost of equity = riskless rate + beta * risk premium

2. Debt Cost of debt- Bank borrowing - depends upon default risk of the firm- Bond issues - will be affected by level of interest rates

- provides a tax advantage because interest is tax-deductible

Cost of debt = Borrowing rate (1 - tax rate)

Debt + equity = Cost of capital = Weighted average of cost of equity andCapital cost of debt; weights based upon market value.

Cost of capital = kd [D/(D+E)] + ke [E/(D+E)]

Page 30: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 30

International Equity Markets and Portfolio Diversification

No well-accepted international version of the capital asset pricing model.

The benefits of diversification globally are empirical issues.

The empirical case for international diversification has two components. Establish the riskiness of foreign investment, and the extent

to which combining a foreign with a domestic portfolio reduces risk.

Even if it reduces risk, does foreign investment also reduce expected return?

Then what we have to do is make sure we understand how international diversification is best achieved.

Page 31: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 31

International Diversification Pays More

PortfolioRisk

kp

Number of Securities (Assets) in Portfolio1 5 10 15 20 25

TOTAL RISK

NONDIVERSIFIABLE RISK

DIVERSIFIABLE RISK

Page 32: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 32

The Global Efficient Frontier

10 15 20 25 30 5 5

10

15

20

25

30

STOCKSANDBONDS

STOCKSONLY

EAFESTOCKS& BONDS

EAFE STOCKS

WORLD STOCKS & BONDSWORLD STOCKS

US STOCKS & BONDSUS STOCKS

US BONDS

AVERAGE RETURN% PA

RISK, % PA

Page 33: Global Equity Financing

Prof. Ian GiddyNew York University

Raising and PricingEquity

Page 34: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 34

Raising Equity: The Investment Banker’s Job

Market conditions Corporate needs Valuation Information Distribution

Telekom

Page 35: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 35

Deutsche Telekom: The Sequence

See case Exhibit 2

Page 36: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 36

What’s a Company Worthto Investors?

Required Returns Types of Models

Balance sheet modelsDividend discount & corporate cash flow

modelsPrice/Earnings ratiosOption models

Estimating Growth Rates

Telekom

Page 37: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 37

Equity Valuation: From the Balance Sheet

Value of Assets Book Liquidation Replacement

Value of Liabilities

Book Market

Value of Equity

Page 38: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 38

Deutsche Telekom: Book Value

See case Exhibit 3

Page 39: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 39

Relative Valuation

Do valuation ratios make sense?• Price/Earnings (P/E) ratios

and variants (EBIT multiples, EBITDA multiples, Cash Flow multiples)

• Price/Book (P/BV) ratios and variants (Tobin's Q)

• Price/Sales ratios It depends on how they are used -- and

what’s behind them!

Page 40: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 40

Deutsche Telekom:Ratios and Comparables

See case page 9

Page 41: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 41

Discounted Cashflow Valuation: Basis for Approach

where n = Life of the asset CFt = Cashflow in period t r = Discount rate reflecting the

riskiness of the estimated cashflows

Value = CFt

(1+ r)tt =1

t = n

Page 42: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 42

Deutsche Telekom: Earnings

See case page 8

Page 43: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 43

Valuing a Firm with DCF: An IllustrationHistorical financial results

Adjust for nonrecurring aspects

Gauge future growth

Adjust for noncash items

Projected sales and operating profits

Projected free cash flows to the firm (FCFF)

Year 1 FCFF

Year 2 FCFF

Year 3 FCFF

Year 4 FCFF

Terminal year FCFF

Stable growth model or P/E comparable

Present value of free cash flows

+ cash, securities & excess assets

- Market value of debt

Value of shareholders equity

Discount to present using weighted average cost of capital (WACC)

Page 44: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 44

What’s a Company Worth?Alternative Models

The options approachOption to expandOption to abandon

Creation of key resources that another company would pay forPatents or trademarksTeams of employeesCustomers

Examples?

Lycos

Messageclick.com

Page 45: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 45

Raising Equity: The Investment Banker’s Job

Market conditions Corporate needs Valuation Information Distribution

TelekomT-

Online

Page 46: Global Equity Financing

Copyright ©2002 Ian H. Giddy Global Equity 50

Contact

Ian H. GiddyNYU Stern School of Business44 West 4th Street, New York, NY 10024, USATel [email protected]://giddy.org