How corporations issue securities 15 How corporations issue securities

15-1 VENTURE CAPITAL Venture Capital Money invested to finance new firm Success of new firm dependent on managers Restrictions placed on management by venture capital company Funds usually dispersed in stages after certain level of success These are high-risk, unproven businesses that need financing. Funds are usually disbursed in stages after ensuring that a certain level of success is achieved at each stage. Venture capital firms also provide consulting services.

15-1 VENTURE CAPITAL Venture capital is disbursed in stages depending on the success of the firm. This is the first-stage balance sheet based on market value.

15-1 VENTURE CAPITAL Venture capital is provided in stages after ensuring the progress of the firm. Typically, firms require large amounts of capital to grow rapidly. The second-stage balance sheet is shown.

FIGURE 15.1 U.S VENTURE CAPITAL INVESTMENTS The graph shows how venture capital investment has grown over time.

15-2 THE INITIAL PUBLIC OFFERING Initial Public Offering (IPO) First offering of stock to public Underwriter Firm that buys and resells an issue of securities Spread Difference between public-offer price and price paid by underwriter From venture capital to IPO is a big step. Many firms fall by the wayside by then. A few successful firms, however, do make it to this stage. Examples: Federal Express, Compaq, Intel, Google. Terminology is important.

15-2 THE INITIAL PUBLIC OFFERING Prospectus Provides information on issue of securities Underpricing Issuing securities at price set below true value of security This slide defines prospectus and underpricing.

FIGURE 15.2 MOTIVES FOR IPO This frame shows results of a CFO survey on the motives for issuing an initial public offering. The top three reasons are: -To create public shares for use in future acquisitions -To establish a market price value for the firm -To enhance the reputation of the firm

TABLE 15.1 TOP MANAGING UNDERWRITERS, 2011 This table shows the top underwriters for IPO issues in descending order.

FIGURE 15.3 AVERAGE INITIAL IPO RETURNS Initial IPO returns for various countries are provided. Developing country issues have a much higher initial returns. China and India had the highest returns. Return, percent

15-2 THE INITIAL PUBLIC OFFERING Average Expenses on 1767 IPO's from 1990-1994 Total costs of IPOs are high for smaller issues. This shows that IPOs are generally underpriced.

FIGURE 15.4 IPO PROCEEDS AND FIRST-DAY RETURNS IPO proceeds and first-day returns are shown in graphical form. Years 1999 and 2000 had very high IPO proceeds as well as first-day returns. Since then, these values have come down substantially.

15-3 ALTERNATIVE ISSUe PROCEDURES FOR IPOs General Cash Offer Sale of securities to all investors by already public company Shelf Registration Allows firms to file one registration statement for several issues of same security Private Placement Sale of securities to limited investors with no public offering Terminology is important here. Special rules govern shelf registration and private placement. [SEC Rule 415 and SEC Rule 144A]

TABLE 15.3 UNDERWRITING SPREADS This table shows the differences in costs of IPOs, seasoned issues, and debt issues. Underwriter’s spread is the highest for IPOs.

FIGURE 15.5 COSTS OF RAISING CAPITAL Review the costs of raising money. There is a cost associated with raising capital, and students must not ignore that cost when making decisions.

15-4 SECURITY SALES BY PUBLIC COMPANIES Rights Issues Issues of securities offered only to current stockholders Example Ivanhoe Mines needs C$1.2 billion of new equity. Market price C$24.73. Ivanhoe Mines decides to raise additional funds by offering the right to buy 3 new shares for 20 at C$13.93 per share. With 100% subscription, what is value of each right? These are issues of securities offered only to current stockholders. Stockholders have a preemptive right. This is an example of a rights issue.

15-4 SECURITY SALES BY PUBLIC COMPANIES Current Market Value 1 x C$24.73 = C$24.73 Total Shares 20 + 3 = 23 Amount of new funds 3 x C$13.93 = C$41.79 Ex-Rights Price (C$41.79 + C$494.60) / 23 = C$23.32 Value of a Right C$23.32 – C$13.93 = C$9.39 This slide is the mathematical solution to the previous slide’s example.

15-4 SECURITY SALES BY PUBLIC COMPANIES Rights Issue Lafarge Corp needs to raise €1.28 billion The market price is €60/sh Lafarge decides to raise additional funds via a 4 for 17 rights offer at €41 per share If we assume 100% subscription, what is the value of each right? This is another example of rights issue.

15-4 SECURITY SALES BY PUBLIC COMPANIES Rights Issue Current market 17 x €60 = €1,020 Total shares 17 + 4 = 21 Amount of funds 1,020 + (4 x 41) = €1,184 New share price (1,184)/21 = €56.38 Value of a right 56.38 – 41 = €15.38 This slide is the mathematical solution to the previous slide’s example.