1. Chapter 15 Investment Banking: Public and Private Placement

2. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 15-1 FIGURE 15-1 Distribution process in investment banking

3. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 15-2 FIGURE 15-2 Allocation of underwriting spread

4. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 15-4 FIGURE 15-4 Internet Capital Group common stock price (as of May 6, 2003)

5. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 15 - Outline LT 15-1 What is Investment Banking? Functions of the Investment Banker Underwriting Spread Public vs. Private Companies Advantages and Disadvantages of a Public Company Initial Public Offering and Leveraged Buyout

6. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. What is Investment Banking? LT 15-2 Investment Banking deals with primary offerings of new securities The Investment Banker serves as the intermediary or link between the corporation and the investor Brings the two parties together by channeling money from one to the other

7. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Functions of the Investment Banker LT 15-3 Underwriter: –buying the security and reselling it to the public – the risk-taking function Market Maker: – ensuring an available market by buying and selling the security Advisor: – providing advice on the issue Agency Functions : – negotiating the best possible deal for the corporation

8. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Underwriting Spread LT 15-4 Spread represents the compensation for those participating in the distribution Spread = Public Price - Issue Price It is shared by all the participants Spread on common stocks is greater than the spread on bonds

9. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Public vs. Private Companies LT 15-5 Public company: – when shares of a company are offered to the public – anyone can buy shares of the stock Private company: – privately owned or held by an individual or family – not available to the general public

10. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Advantages and Disadvantages of a Public Company LT 15-6 Advantages of being public: – greater availability of funds (easier to grow and raise money) – prestige Disadvantages of being public: – company information must be made available to the public (opening the company up to public scrutiny and criticism) – high costs of going public (expensive)

11. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Initial Public Offering and Leveraged Buyout LT 15-7 Initial Public Offering (IPO): – when a company sells its stock to the public for the first time – the company becomes publicly traded Leveraged Buyout (LBO): – money is borrowed to repurchase all the shares of the company resulting in a great deal of debt – when a company “goes private”