Download Stock Underwriting

Stock Underwriting
Investment Banking Group #5
Market overview
• Stock Offering Market
– Initial Public Offering (IPOs)
– Secondary Offering
Underwriting fee for IPOs
$4.0
$3.5
$ (billion)
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
1991
1992
1993
1994
Year
1995
1996
1997
Market overview
1. Registration Statement
Begin the SEC registration process. This done with the company, accountant,
And counsel. Support documents such as underwriting agreement, legal
document, and financial data.
2. Fitting Date
The day IB turn in the registration statement with SEC. If there are no further
Changes, registration becomes effective.
3. Shelf Registration
If certain condition are met, the issuer may file for shelf registration.
The securities expect to sell within 2 years.
Market overview
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4. Underwriting Agreement
4.1 Firm Commitment – IB agree to purchase the entire issue and reoffer to public.
4.2 Best Offering – IB agree to sell the securities but does not guarantee the price.
5. Red berring (printed and distributioned)
The stock certificates are printed and the listing exchange and the transfer agent
are selected, form the underwriting group, promote the issue in a roadshow.
Differences between IPOs and Secondary Offering
1.
2.
3.
Motivation are often quite different.
IPOs are typical smaller but more lucrative for underwriter.
The process for a secondary offering is faster because the
management team, listing exchange, transfer agent are already
in place.
Motivation of issuers - Advantage
• Raise Capital
• Greater public exposure and the improvement of corporate image.
• Higher degree of public confidence
because of disclosures required of public companies.
• The benefits are distributed to the founder manager who have
received share.
• Attractive employment inducement.
Motivation of issuers - Disadvantage
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•
•
•
•
Lack of operation confidentiality
The management is under constant pressure to enhance S-T prformance.
Original owner could lose control of the company.
Dividend policy.
Possible change in accounting practice and reduction in management
perquisites.
• Diffusion of corporate ownership could increase the possibility of hostile
takeover.
• Process of going public is expensive and time consume.
• After going public, SEC reporting requirement add significant to the cost of
operation.
ASSEMBLING THE IPO TEAM
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Management and Company’s legal counsel
Underwriter and Underwriter’s legal counsel
Independent accountants
Financial consultants and advisors
Attorneys
Machanics and Process
1.
2.
3.
4.
5.
6.
7.
8.
Registration Statement
SEC Review and Comments
Amended Registration Statement
The Preliminary Prospectus or Red Herring
The Roadshow
Due Diligence
Price Amendment and Underwriting Agreement
Closing
Registration statement
• Used form S-1 and Form SB-2
• Form S-1 requires the most extensive disclosure. Major
items required in part I and part II are as follows:
Registration Statement
Forepart of the registration Statement and Outside Front Cover
page of Prospectus.
1. Inside Front and Outside Back Cover page of Prospectus
2. Summary information
3. Use if Proceeds.
4. Determination of offering Price
5. Dilution
6. Selling Securities Holders
7. Plan of Distribution
8. Description of Securities to be Registered
9. Interest of Name Experts and Counsel
10. Information with respect to the Registrant
11. Disclosure of Commission Position on Indemnification for Securities Act
Liabilities
Registration Statement
Part II
1.
2.
3.
4.
5.
Other Expense of Issuance of distribution
Indemnification of Directors and Officers
Recent Sales of Unregistered Securities
Exhibits and Financial Statement Schedules
Undertaking
Sample
• Form s-1
• Form 69-1
• Form 77-1
Machanics and Process
2. SEC Review and Comments
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•
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SEC Staff specialists: Attorney, accountant, financial analyst
(may include other staff experts familiar with a particular industry)
To determine full and fair disclosure
Four basic types of SEC reviews
1. Deferred review >> Poorly and advise the registrant to withdraw
2. Cursory review >> Not often used / has not found any glowing
deficiencies
3. Summary review >> Not often used / few comments based on
limited review
4. Customary review >> Most preferred review / full review
Machanics and Process
3. Amended Registration Statement
• Each comment in SEC letter of comments must be addressed and
resolved.
• Common amendments
1. Delaying amendments
>> Request a new effective date if the company has not been able
to reply the deficiencies.
2. Substantive amendments
>> Correct deficiencies in a registration statement.
3. Price amendments
>> Used when price and size of offering are not determined until
the day of or the day prior to the offering.
Mechanics and Process
4. The Preliminary Prospectus or Red Herring
• After the filing, a preliminary prospectus is distributed to brokers and
prospective purchasers.
• The purpose is to gather an indication of interest from investors.
• This is the main document the underwriting syndicate uses to sell the
stock.
• Cover page must bear the caption “Preliminary Prospectus” in red
ink.
• Once the effective date arrives, the offering price and effective date
will be added to prospectus, then the final prospectus is issued.
• Each state has its own securities laws, called blue-sky laws.
Machanics and Process
5. The Roadshow
• The key marketing event that precedes the IPO by several weeks.
• It is arranged to meet with financial analysts and brokers in order for
potential purchasers to learn more about the company, which
hopefully will improve price performance in the aftermarket.
• By the end of the roadshow, the lead manager should have a good idea
of the investor’s interest, which assists in determining the final price
and size of the IPO.
Machanics and Process
6. Due Diligence
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Before the registration statement becomes effective, the underwriter
will hold a due-diligence meeting attended by members of the IPO
team.
The purpose is to list, gather, and authenticate matters such as articles
of incorporation, bylaws, patents, completeness and correctness of
minutes, and verification of corporate existence.
Due-diligence meetings are held to reduce the risk of liability
associated with filing by ensuring that all material matters have been
fully and fairly disclosed in the registration statement.
Machanics and Process
7. Price Amendment and Underwriting Agreement
• The negotiation and final determination of offering size and price are
influenced by a number of factors, including financial performance,
stock market conditions, prices of comparable companies, market
perception, and anticipated aftermarket share value.
• The underwriting agreement is signed when the registration statement
is about to become effective. Also at this time the final amendment to
the registration statement is filed. The price amendment includes the
agreed price, underwriter discount, and the net proceeds to the
company.
Machanics and Process
7. Price Amendment and Underwriting Agreement (Continue)
There are 3 primary underwriting contracts
1. Agreement Among Underwriters
>> Establishes the relationship among the underwriters.
2. Dealer Agreement (or selling agreement)
>> The agreement in which securities dealers who are not part of
the syndicate are contracted to distribute the securities.
3. Underwriting agreement
>> Establishes the contractual relationship between the corporate
issuer and the syndicate.
>> Generally contains introductions, warranties, terms of offering,
conditions, covenants, indemnifications, and cancellation.
Machanics and Process
8. Closing
• The closing meeting includes all key players.
• The company delivers the registered securities to the underwriter and
receives payment for the issue.
• For small, best-efforts offering, the closing takes place after the selling
period has been completed. The selling period is usually 60 to 120 days
after the effective date with extension allowance of 60 to 90 days by
mutual consent.
• For larger, firm commitment, the closing is usually a week or two
after the effective date.
Machanics and Process
 Tombstones
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Tombstones ad is considered as an essential ingredient of the process.
This is more in the nature of announcement than advertisement.
A tombstone is a boxed-in ad that appears in financial sections of
newspaper and magazines that announces the particulars of the issue.
It contains the name of the company, the issuing price and size, the
lead underwriter, and other members of the underwriting group.
The tombstone ads are a good means to introduce the company to the
public and to pique the public’s interest.
Timetable Summary
1
10
Mgmt
select
counsel,
underwriter ,
printer and
sign
letter of
content
15
35
Prepare
Draft of
Underwriting
agreement
Determine
type of
structure
of statement
And also
Gathering
necessary
information
and Financial
Statement
50
70
Mgmt
send fist draft
of registration
statement to
financial
printer,
and appoint
stock agency
Draft of
Financial
Statement
Included
registration
statement are
complete
100
108
SEC
comment
letter
arrive
Broad of
director sign
registration
statement
and
prospectus
110
120
This is offer
ring date,
underwriting
agreement is
signed notify
stock
exchange
and NAS of
effective
Correct
registration
statement
before this
day
,On this day
Mgmt and
underwriter
finalize the
offering price
Closing date,
company
complete
settlement
with
underwriter,
stock is
issued and
collect
proceed
from offering
Valuation and Pricing
• Offering price should be attractive enough to encourage
purchaser to buy it.
• Valuation is estimate the value of the company, by survey of
comparable of
• Public company in area of efficiency, leverage, profit margin,
operation history etc.
• Pricing is setting an offering price. The main concern is how
much the market will bear
• Most underwriting is follow the historical tradition in pricing.
• May be use method of discount for pricing to find the fair value.
• May be use price/earning ratio for pricing. (always do in
secondary pricing)
Underwriting Risk and Compensation
Distribution Syndicate consist of :
Lead Underwriter
Underwriting Syndicate
Selling Group
Commit to
buy shares
No risk
Lead Underwriter Benefit :
Positive
Negative
• Share portion of underwriting risk • Have to share underwriting spread
• help make market
• Member may outshine the lead.
Underwriting Risks
Flotation Risk occur when market shifts after firm commitment on
price been made.
• Waiting Risk : borne by issuer
• Pricing Risk
borne by underwriter
• Marketing Risk
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Flotation Risk be reduced by
Building “book of interest” before effective date.
Aftermarket trading
Forming a syndicate
Institutional Sales
Compensation
Underwriting spread = Price to public – Price issuer receive
Lead Underwriter
• Manager’s fee
• Underwriting allowance
• Selling concession
Underwriting Syndicate
• Underwriting allowance
• Selling concession
Selling Group
• Selling concession
Manager’s fee : compensation for managing underwriter, participating in
due-diligence, putting the deal together.
Underwriting allowance : advertising, legal expense, other expense.
Selling concession : compensate base on amount of securities sell.
The Price of Going Public
Total cost depend on size of offering and the company’s
ability to market offering smoothly and efficiently.
• Direct Cost
• Under Pricing Cost
• Hidden and Future Cost
Direct Costs
• Direct Expense
• Underwriting Spread
* Gross Spread : negotiable, depend on factor (size, type of
commitment, type of securities,…) and additional compensation
(warrant, stocks)
* Legal fee : depend on complexity of company,…
* Accounting fee
* Printing costs
* Other : registration fee, registrar and transfer agent fee,
miscellaneous fee.
Under Pricing Costs
Normally IPO be underpricing at average about 16%. The
underpricing helps the underwriter by reduce the risk of
under-writing and gains them the gratitude of in-vestors
who buy the IPO issues.
Hidden and Future Costs
Occur during process of preparing the first listing of the company.
• Extra transportation cost
• Meal and Entertainment
• Postage, phone calls, faxes, messenger deliveries.
• Promotion : the important item
• Directors’ and officers’ liability insurance
• Management time take to complete the offering
• Further expense of being public company : significant cost and
executive time in preparing and filing annual and quarterly reports.
SEC REGULATION AND EXCHANGE LISTING
•The invsetment bank cannot provide reseach
reports,recommendations,sales literature, or anything from any other
firm about company during the quiet period.
•Communications only proceed before the preparations for the offering
•After IPO ,SEC prohibit distribution of any written sales literature
about the offering
•After quiet period , SEC prohibit the company or the under writer
distribution news stories on the pending offering
•The trading practices rules are aimed at preventing manipulative
trading in securities during an offering
•The rules prohibit persons in connection with offering include
underwritter,issuer bid or purchase any securities during restricted
period
NYSE LISTING REQUIREMENTS
Round-lot holders
2,000 U.S.
or
Total shareholders and
average monthly trading volume for most recent 6 month
2,200 U.S.
100,000 share
or
Total shareholders and
500
average monthly trading volume for most recent 12 month
1,000,000
public share
1,100,000 U.S.
Market value of public shares
$4000000
Net tangible assets
$4000000
Pretax income
Most recent year
$2500000
Each of 2 preceding years
$2000000
or
Aggregate for the 3 years
$6500000
Minimum in most recent year
$4500000
or
For companies with not less than $ 500 M. market
capitalizationand $ 200 m. in revenues in the most recent year
Aggregate for the 3 years
$25000000
Aftermarket Trading
• The underwriters typically want to stabilize the stock
• The underwriters will support the market price of new issue
to keep it from becoming a broken deal or falling below the
initial offering price.
• The SEC requires detailed reports if stabilization is used.
• Underwriter will make every attempt to place stock in strong
hands among the syndicate member to avoid the necessity
for stabilization.
• On the other hand , a hot new issue will require underwriter
to exercise the over-allotment or green shoe option.
Direct Offering, Shells, and Equity takedown
• Direct Offering
• Shells
• Equity takedowns
Direct Offerings
- Now Internet offering (or direct offering) is available ,through
which the issuing company bypasses the underwriter and
brokerage.
- However , the web’s uses will be limited until the legal and
regulatory issues are resolved.
- Major Wall Street firm think that most corporation still need
investment bank to do the bulk of there financing.
Shells
A shell is an inactive public company with securities traded in the marketplace. It can be
used as a backdoor way of becoming a public company.
The easiest way to become a public company is to merge into the public shell.
– One big advantage is the time and money saved. The entrepreneurs pay little to
“acquire” the shell. The entrepreneurs essentially purchase control of the shell by
buying stocks from the existing controlling shareholders.
– After completing the acquisition, the company could meet the objective of raising
money in the capital markets by issuing stock.
– Shells have been around for a long time. Shell brokers have negotiable fees and often
retain some of the stock. This approach is legal.
– The next step is to dress up the company by pumping in money and in some cases
also acquiring other ventures. Meanwhile, the scheme operators take control of the
board. The purpose is to authorize issuing millions of shares and to register them
through SEC loopholes.
Equity Takedowns (Super block trader)
• The aggressive tactic take by invester
• The investment banker commits to buy stock at discount from the
issuing
• The investment to redistribute share to client
• The investment banking use primary in the secondary offering
“spot secondary offerings”
• The markets remain robust ,spot secondary likely to grow in
frequency
• The approach is unlike stock underwriting;No roadshow ,Nor a
lengthy
• This method under cut the old line invesment banking relationship
• The wall street firm have cultivated there are significant advantage
for the issuing
Members
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Butsaya
Napalai
Pumin
Panitsada
Pantira
Harit
Mongkon
Sawitee
Kansarn
Kedwan
Limamornrat
Wiriyateerakij
Laobssarakul
Limpasirisuwan
Piyawisutkul
Sritakul
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