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Corporate Financial Policy IPO - SOE

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Presentation on theme: "Corporate Financial Policy IPO - SOE"— Presentation transcript:

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

2 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 IPO SOE

3 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 IPO SOE

4 IPO - Belgium Number Average age of company Average proceed €m Average return day % % Source: KBC “Introductions en Bourse” Courrier Economique et Financier 14 janvier 2000 21/09/2018 Cofipo IPO SOE

5 IPO-US 21/09/2018 Cofipo IPO SOE

6 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 IPO SOE

7 21/09/2018 Cofipo IPO SOE

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

9 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 IPO SOE

10 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: m Value of shares: € 280 m Price per share: (Pex) Value of a right: € 1.33 21/09/2018 Cofipo IPO SOE

11 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 IPO SOE

12 Does the subscription price matter?
Back to example: Proceed of issue = 80m Subscription price Number new shares 5 m 10 m # rights / share Value of right Price per share after issue Total cost of 1 new share = * = * 6 Old shareholder Before After = = 21/09/2018 Cofipo IPO SOE

13 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 IPO SOE

14 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 IPO SOE

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


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