1. Chapter 15 Principles PrinciplesofCorporateFinance Tenth Edition How Corporations Issue Securities Slides by Matthew Will Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin

2. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 2 McGraw Hill/Irwin Topics Covered  Venture Capital  The Initial Public Offering  Other New-Issue Procedures  Security Sales by Public Companies –Rights Issue  Private Placements and Public Issues

3. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 3 McGraw Hill/Irwin 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

4. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 4 McGraw Hill/Irwin Venture Capital

5. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 5 McGraw Hill/Irwin Venture Capital

6. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 6 McGraw Hill/Irwin U.S. Venture Capital Investments

7. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 7 McGraw Hill/Irwin 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.

8. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 8 McGraw Hill/Irwin Motives For An IPO Percent of CFOs who strongly agree with the reason for an IPO

9. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 9 McGraw Hill/Irwin The Top Managing Underwriters

10. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 10 McGraw Hill/Irwin Average Initial IPO Returns

11. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 11 McGraw Hill/Irwin Initial Offering Average Expenses on 1767 IPOs from 1990-1994

12. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 12 McGraw Hill/Irwin IPO Proceeds  IPO Proceeds and First Day Returns

13. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 13 McGraw Hill/Irwin 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.

14. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 14 McGraw Hill/Irwin Underwriting Spreads (2006)

15. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 15 McGraw Hill/Irwin Rights Issue Rights Issue - Issue of securities offered only to current stockholders. Example – BNP Paribas Bank needs to raise €5.50 billion of new equity. The market price is € 77.40/sh. Lafarge decides to raise additional funds via a 1 for 10 rights offer at €65.40 per share. If we assume 100% subscription, what is the value of each right?

16. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 16 McGraw Hill/Irwin Rights Issue  Current Market Value = 10 x €77.40 = €774.00  Total Shares = 10 + 1 = 11  Amount of funds = 774 + 65.40 = €839.40  New Share Price = (839.40) / 11 = €76.31  Value of a Right = 76.31 – 65.40 = €10.91 Example - BNP Paribas Bank needs to raise €5.50 billion of new equity. The market price is €77.40/sh. Lafarge decides to raise additional funds via a 1 for 10 rights offer at €65.40 per share. If we assume 100% subscription, what is the value of each right?

17. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 17 McGraw Hill/Irwin 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?

18. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 18 McGraw Hill/Irwin Rights Issue  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 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?

19. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved 16- 19 McGraw Hill/Irwin Web Resources www.redherring.com www.nvca.org www.evca.com www.asianfn.com www.ventureeconomics.com www.pwcmoneytree.com www.v1.com www.vnpartners.com/primer.htm Click to access web sites Internet connection required