Corporate Financial Policy IPO - SOE Professor André Farber Solvay Business School 2003-2004 21/09/2018 Cofipo 2003-2004 IPO SOE

IPO Initial Public Offering Why go public? Mobility of capital Realize capital gain Liquidity for minority shareholders Tranfer of control Stock options Access new sources of funds Future equity offering Equity linked – Increase visibility Costs of going public Direct costs spread (investment bank) direct expenses underpricing Loss of confidentiality 21/09/2018 Cofipo 2003-2004 IPO SOE

How to proceed? Choose investment bank (competitive offer or negotiated offer) Advice (key role of reputation) Underwrite Placement Choose market Prepare prospectus Approval by market authorities book building vs fixed price greenshoe: option to place additional shares 21/09/2018 Cofipo 2003-2004 IPO SOE

IPO - Belgium 1984-1995 1996-1999 Number 39 70 Average age of company 41.5 17.6 Average proceed €m 108 60 Average return day 1 9.38% 15.25% Source: KBC “Introductions en Bourse” Courrier Economique et Financier 14 janvier 2000 21/09/2018 Cofipo 2003-2004 IPO SOE

IPO-US 21/09/2018 Cofipo 2003-2004 IPO SOE

Setting the Offering Price Very difficult: if price too high: unsuccessful if price too low: loss for existing shareholders In general: underpricing 21/09/2018 Cofipo 2003-2004 IPO SOE

21/09/2018 Cofipo 2003-2004 IPO SOE

Average initial returns for 37 countries Source: Loughran Ritter and Rydqvist "Initial Public Offerings: International Insights" Update January 23, 2001 21/09/2018 Cofipo 2003-2004 IPO SOE

SOE Seasoned Equity Offering General Cash Offering Firm commitment: investment bank underwrites securities Best efforts: investment bank acts as placing agent Right issue (Europe) Example: Lafarge launches rights issue to fund UK buy Lafarge, the French building materials group, will today launch a € 1.1 bn one-for-eight rights issue to part-finance the acquisition of Blue Circle Industries, the UK cement manufacturer. The new shares will be priced at €80 each, a discount of 18 per cent to the Lafarge share price, which fell €1.60 to €98.05 yesterday. The issue is being lead managed by BNP Paribas, joint financial advisers to Lafarge on the bid. Financial Time 12 January 2001 21/09/2018 Cofipo 2003-2004 IPO SOE

Valuing a right: example Initial position Number of shares outstanding: 10 m (nold) Price per share: € 20 (Pcum) Terms of offer Number of new shares issued: 5 m (nnew) Subscription price: € 16 (Psub) Number of rights for a share: 2 After offer Number of shares: 15 m Value of shares: € 280 m Price per share: 18.67 (Pex) Value of a right: € 1.33 21/09/2018 Cofipo 2003-2004 IPO SOE

Valuing a right: formula Value of a right = Pcum - Pex Mkt value of equity after SEO: V = nold Pcum + nnewPsub = (nold+nnew) Pex Combine these to equations to get: In example: value of right = 5/15 * (20-16) = 1.33 21/09/2018 Cofipo 2003-2004 IPO SOE

Does the subscription price matter? Back to example: Proceed of issue = 80m Subscription price 16 8 Number new shares 5 m 10 m # rights / share 2 1 Value of right 1.33 6 Price per share after issue 18.67 14 Total cost of 1 new share 18.67 14 = 16 + 2 * 1.33 = 8 + 1 * 6 Old shareholder Before 20 20 After 20 20 = 18.67 + 1.33 = 14 + 6 21/09/2018 Cofipo 2003-2004 IPO SOE

In practice Subscription price set before start of offering Offering valid for a few days (2 weeks) Rights similar to American warrants right to buy new share at fixed price if exercised, number of share outstanding vary From option pricing theory: value of right = function of volatility exercise as late as possible 21/09/2018 Cofipo 2003-2004 IPO SOE

Event studies How to measure the impact of some piece of information on the stock price? Event studies Part of Efficient Market Hypothesis Methodology: (1) Sample of announcements of same type (2) Calculate « abnormal returns » around announcement date Abnormal return = Realized return - Expect Return (3) Statistical test 21/09/2018 Cofipo 2003-2004 IPO SOE

Stock Market Response to SEO Sample size 2-Day Announcement Return Security sold: Common Stocks 262 -1.6% Preferred stock 102 0.1% Source: Smith, C.W. Raising Capital: Theory and Evidence 21/09/2018 Cofipo 2003-2004 IPO SOE