How Corporations Issue Securities Principles of Corporate Finance Tenth Edition Chapter 15 How Corporations Issue Securities Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 1 1 1 1 1 2

Topics Covered Venture Capital The Initial Public Offering Alternative Issue Procedures for IPOs Security Sales by Public Companies Rights Issue Private Placements and Public Issues 2 2 2 2 3 2

Money invested to finance a new firm Venture Capital Venture Capital Money invested to finance a new firm Since success of a new firm is highly dependent on the effort of the managers, restrictions are placed on management by the venture capital company and funds are usually dispersed in stages, after a certain level of success is achieved. 4

Venture Capital 5

Venture Capital 6

U.S. Venture Capital Investments

Initial Offering Initial Public Offering (IPO) - First offering of stock to the general public. Underwriter - Firm that buys an issue of securities from a company and resells it to the public. Spread - Difference between public offer price and price paid by underwriter. Prospectus - Formal summary that provides information on an issue of securities. Underpricing - Issuing securities at an offering price set below the true value of the security. 7

Percent of CFOs who strongly agree with the reason for an IPO Motives For An IPO Percent of CFOs who strongly agree with the reason for an IPO

The Top Managing Underwriters January – December 2008

Average Initial IPO Returns 9

Initial Offering Average Expenses on 1767 IPOs from 1990-1994 8

IPO Proceeds IPO Proceeds and First Day Returns

General Cash Offers Seasoned Offering - Sale of securities by a firm that is already publicly traded. General Cash Offer - Sale of securities open to all investors by an already public company. Shelf Registration - A procedure that allows firms to file one registration statement for several issues of the same security. Private Placement - Sale of securities to a limited number of investors without a public offering. 11

Underwriting Spreads (2008)

Total Direct Costs of Raising Capital

Rights Issue Rights Issue - Issue of securities offered only to current stockholders. Example – Xstrata needs to raise £4.1 billion of new equity. The market price is £6.23/sh. Xstrata decides to raise additional funds via a 2 for 1 rights offer at £2.10per share. If we assume 100% subscription, what is the value of each right? 13

Rights Issue Current Market Value = 1 x £6.23 = £6.23 Example - Xstrata needs to raise £4.1 billion of new equity. The market price is £6.23/sh. Xstrata decides to raise additional funds via a 2 for 1 rights offer at £2.10per share. If we assume 100% subscription, what is the value of each right? Current Market Value = 1 x £6.23 = £6.23 Total Shares = 2+ 1 = 3 Amount of new funds = 2 x £2.10 = £4.20 New Share Price = (6.23+4.20) / 3 = £3.48 Value of a Right = 3.48 – 2.10 = £1.38 14

Rights Issue Slightly More Difficult Example Lafarge Corp needs to raise €1.28billion of new equity. 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? 13

Rights Issue Current Market Value = 17 x €60 = €1,020 Example - Lafarge Corp needs to raise €1.28billion of new equity. 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? Current Market Value = 17 x €60 = €1,020 Total Shares = 17 + 4 = 21 Amount of funds = 1,020 + (4x41) = €1,184 New Share Price = (1,184) / 21 = €56.38 Value of a Right = 56.38 – 41 = €15.38 14

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