1. 1 Chapter 16 Equity and the Investment Banking Process Adapted from Emery and Finnerty: Corporate Financial Management by Dr. Del Hawley

2. 2 Public Offerings è General cash offers èSecurities are offered to investors at large. èUnderwriters are often used. è Rights offering èNew common stock is sold to existing stockholders.

3. 3 Primary and Secondary Offerings è In a primary offering, the firm sells newly issued shares to investors. è In a secondary offering, insiders and large institutional shareholders sell shares they hold in a registered public offering.

4. 4 Role of the Underwriters è Investment bankers èAn intermediary between the issuer and the purchaser. èProvides advice regarding type of security, terms, and price. èHelps prepare documentation. è Underwriting èA form of insurance. èRisk bearing è Syndicated offering process

5. 5 Flotation Costs è Include both the gross underwriting spread and the out-of-pocket expenses. è Economies of scale è Vary by security type: Holding issue size constant, èCommon stock has highest flotation cost èBonds have the lowest flotation costs èFlotation costs of preferred stock are in between.

6. 6 Main Features of Common Stock è Perpetual security è Not redeemable è May or may not have a par value è Charter specifies the number of authorized shares: èOutstanding shares èTreasury shares èMultiple classes of common stock èOther

7. 7 Rights and Privileges of Common Stock è Dividend rights è Voting rights è Liquidation rights è Preemptive rights

8. 8 Going Public è A firm “goes public” when it offers common stock to the public for the first time in its life. èInitial Public Offering (IPO) è Subsequent issues of common stock are called “seasoned” issues. è Underwriters try to price the IPO issue at 10% to 15% below the expected trading price.

9. 9 Going Private è A small group of investors purchase the entire common equity of a publicly traded firm. è Firm is no longer subject to reporting requirements. è Substantial transaction cost involved in going public and private.

10. 10 Advantages of Going Public è Raise new capital è Achieve liquidity and diversification for current shareholders è Establish a clear value for holdings è Create a negotiable instrument è Increase the firm’s equity financing flexibility è Enhance the firm’s image

11. 11 Disadvantages of Going Public è Disclosure requirements èSEC regulations èSarbanes-Oxley requirements è Accountability to public shareholders èMarket pressure to perform short-term èPressure to pay dividends è Dilution of ownership interest è Expense of going public

12. 12 SEC Filings for IPOs by Quarter QuarterNumber of FilingsTotal Capital to be Raised 200317$3.6B Q1 200472$10 B Q2 200424$4.8 B Q3 200412$1.8 B Q4 200422$3.7 B Q1 200548$8.9 B Q2 200521$7.5 B Q3 200548$9.8 B Q4 200563$9.8 B Q1 200694$15.5B Q2 200614$4.6B Q3 200612$2.0B Q4 200625$5.3B Q1 200754$12.7 B Source: Hoover’s IPO Central