15- 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Fundamentals of Corporate Finance Sixth Edition Richard A. Brealey Stewart C. Myers Alan J. Marcus Slides by Matthew Will Chapter 15 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Venture Capital, IPOs, and Seasoned Offerings
15- 2 Topics Covered Venture Capital The Initial Public Offering The Underwriters General Cash Offers by Public Companies The Private Placement
15- 3 Venture Capital
15- 4 Venture Capital 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. Venture Capital Money invested to finance a new firm
15- 5 Venture Capital
15- 6 Venture Capital
15- 7 Venture Capital Sources of Venture Capital Angel investors Corporate investors Private equity investing
15- 8 Primary Versus Secondary Markets Primary New issue Key factor: issuer receives the proceeds from the sale Secondary Existing owner sells to another party Issuing firm doesn’t receive proceeds and is not directly involved
15- 9 How Securities Are Issued Investment Banking Shelf Registration Private Placements Initial Public Offerings (IPOs)
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.
Initial Public Offering
Initial Public Offerings Process Road shows Bookbuilding Underpricing Post sale returns Cost to the issuing firm
Investment Banking Arrangements Underwritten vs. “Best Efforts” Underwritten: firm commitment on proceeds to the issuing firm Negotiated vs. Competitive Bid Negotiated: issuing firm negotiates terms with investment banker Competitive bid: issuer structures the offering and secures bids
Initial Public Offering Expenses
Figure 3.1 Relationship Among a Firm Issuing Securities, the Underwriters and the Public
The Underwriters
Figure 3.2 A Tombstone Advertisement
Figure 3.3 Average Initial Returns for IPOs in Various Countries
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.
Shelf Registrations SEC Rule 415 Introduced in 1982 Ready to be issued – on the shelf
Private placement: sale to a limited number of sophisticated investors not requiring the protection of registration Allowed under Rule 144A Dominated by institutions Very active market for debt securities Not active for stock offerings Private Placements
Rights Issue Rights Issue - Issue of securities offered only to current stockholders. Example – Royal Bank of Scotland currently has 10 billion shares outstanding. The market price is £3.725/sh. RBS decides to raise additional funds via a 11 for 18 rights offer at £2.00/sh. If we assume 100% subscription, what is the value of each right?
Rights Issue Current Market Value = 10 bil x £3.725/sh = £37.25 bil Total Shares = 10 bil bil = bil Amount of new funds = 6.11 bil x £2.00/sh = £12.22 bil New Share Price = ( ) / = £3.071/sh Example – Royal Bank of Scotland currently has 10 billion shares outstanding. The market price is £3.725/sh. RBS decides to raise additional funds via a 11 for 18 rights offer at £2.00/sh. If we assume 100% subscription, what is the value of each right?
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