1. 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

2. 15- 2 Topics Covered  Venture Capital  The Initial Public Offering  The Underwriters  General Cash Offers by Public Companies  The Private Placement

3. 15- 3 Venture Capital

4. 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

5. 15- 5 Venture Capital

6. 15- 6 Venture Capital

7. 15- 7 Venture Capital Sources of Venture Capital  Angel investors  Corporate investors  Private equity investing

8. 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

9. 15- 9 How Securities Are Issued  Investment Banking  Shelf Registration  Private Placements  Initial Public Offerings (IPOs)

10. 15- 10 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.

11. 15- 11 Initial Public Offering www.ipohome.com

12. 15- 12 Initial Public Offerings  Process  Road shows  Bookbuilding  Underpricing  Post sale returns  Cost to the issuing firm

13. 15- 13 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

14. 15- 14 Initial Public Offering Expenses

15. 15- 15 Figure 3.1 Relationship Among a Firm Issuing Securities, the Underwriters and the Public

16. 15- 16 The Underwriters

17. 15- 17 Figure 3.2 A Tombstone Advertisement

18. 15- 18 Figure 3.3 Average Initial Returns for IPOs in Various Countries

19. 15- 19 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.

20. 15- 20 Shelf Registrations  SEC Rule 415  Introduced in 1982  Ready to be issued – on the shelf

21. 15- 21 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

22. 15- 22 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?

23. 15- 23 Rights Issue  Current Market Value = 10 bil x £3.725/sh = £37.25 bil  Total Shares = 10 bil + 6.11 bil = 16.11 bil  Amount of new funds = 6.11 bil x £2.00/sh = £12.22 bil  New Share Price = (37.25 + 12.22) / 16.11 = £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?

24. 15- 24 Web Resources