Download Venture capital, IPOs, and Seasoned Offerings

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Fundamentals
of Corporate
Finance
Sixth Edition
Chapter 15
Venture Capital, IPOs, and
Seasoned Offerings
Richard A. Brealey
Stewart C. Myers
Alan J. Marcus
Slides by
Matthew Will
McGraw
McGraw Hill/Irwin
Hill/Irwin
Copyright ©Copyright
2009 by The
McGraw-Hill
Companies, Inc.
All rights
reserved
© 2009
by The McGraw-Hill
Companies,
Inc.
All rights reserved
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Topics Covered
 Venture Capital
 The Initial Public Offering
 The Underwriters
 General Cash Offers by Public Companies
 The Private Placement
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Venture Capital
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Venture Capital
Venture Capital
Money invested to finance a new firm
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.
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Venture Capital
First Stage Market Value Balance Sheet ($mil)
Assets
Liabilitie s and Equity
Cash from new equity
0.5 New equity from venture capital
0.5
Other assets
0.5
Your original equity
0.5
Value
1.0
Value
1.0
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Venture Capital
Second Stage Market Value Balance Sheet ($mil)
Assets
Liabilities and Equity
Cash from new equity 1.0 New equity from 2nd stage 1.0
Other assets 2.0
Equity from 1st stage 1.0
Your original equity 1.0
Value 3.0
Value 3.0
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Venture Capital
Sources of Venture Capital
 Angel investors
 Corporate investors
 Private equity investing
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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

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How Securities Are Issued
 Investment Banking
 Shelf Registration
 Private Placements
 Initial Public Offerings (IPOs)
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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.
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Initial Public Offering
www.ipohome.com
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Initial Public Offerings
 Process
Road shows
 Bookbuilding

 Underpricing
Post sale returns
 Cost to the issuing firm

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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

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Expenses
IPOs
SEOs
Convertibles
Value of Issue ($mil)
500+
200-500
100-200
80-100
60-80
40-60
20-40
Bonds
-10-20
18
16
14
12
10
8
6
4
2
0
'2-10
Total Direct Costs (% of issue)
Initial Public Offering
Figure 3.1 Relationship Among a Firm
Issuing Securities, the Underwriters
and the Public
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The Underwriters
Top U.S.Underwriters in 2007
($bil of total issues Jan - Sept)
Citigroup
$511
JPMorgan
443
Deutsche Bank
405
Lerrill Lynch
364
Morgan Stanley
348
Lehman Brothers
315
Barclays Capital
297
Goldman Sachs
275
Credit Suisse
257
UBS
248
All Underwrit ers
$3,463
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Figure 3.2 A Tombstone
Advertisement
Figure 3.3 Average Initial Returns
for IPOs in Various Countries
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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.
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Shelf Registrations
 SEC Rule 415
 Introduced in 1982
 Ready to be issued – on the shelf
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Private Placements
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
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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?
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Rights Issue
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?
 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
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