5) Equity Capital Markets Flashcards
Why would a business want to go public
(4 reasons)
1) requires financing for expansion
2) stakeholders get better understanding of company valuation
3) share price is better defined, and thus can be more effectively used as currency to acquire another firm
4) exit opportunity for investors
Why do companies give stocks to senior leaders
Unify goals and use stocks as incentives for performance
What are the three kind of investors in an IPO
Retail investors, institutional investors, hedge funds
what are retail investors
private individuals with low disposable income
what are institutional funds
specialized knowledges, solid reputation (like blackrock)
what are hedge funds
looking to profit from underpriced or overpriced securities. Very high risk profile
what do investors look for in IPOS
growth potential, competitive position, stable financing position, visibility and liquidity and discounted valuation
who do investment bankers prefer for IPOS
retail investors and institutional investors
what is a DCF model
calculating the present value of all cash flows the company is expected to produce in the future (uses historical results and business plan)
which kind of investor holds stock the longest
retail investors
what is multiples valuation
finding similar companies based on industry, size, geography and strategy, find ratio of the prices of these companies and operating results, and multiply it by own companies operation results to find price
what is book building
asking other investors how many shares they want to purchase and how much they’d purchase it for
What is the difference between pricing offerings for retail investors and institutional investors
retail investors offer a maximum price, not a range
institutional investors offer a price range
what is the roadshow
group of 1 on 1 and group presentations to pitch stock pre IPO
what goes into share allocation criteria (5)
1) quantity of shares purchases
2) timing of submission (early or late)
3) involvement during process
4) chemistry and vibe with organization
5) IPO track record
why would a company not nescerarily pick the highest share price that would still result in all shares being sold before an IPO
because they want investors to feel happy with their purchase, the price should be set at a discount to allow the price of the stock to rise within the first few hours
share allocation pecking order
1) retail investors
2) institutional investors
3) investors who placed orders early
4) investors who understand the business
5) investors with solid IPO track record
What are the pre launch steps for the IPO
process starts 6 months pre IPO
1) Hire advisors
2) define key issues prior to IPO
3) Pre-IPO research report
4) issuance of IPO prospectus
5) roadshow
6) bookbuilding
7) listing and allocation
what kind of advisors are hired pre IPO launch
legal advisors, financial advisors, tax advisors and commercial advisors
what goes into pre-IPO research report (3)
1) announces IPO to public
2) preliminary assessment of company’s business
3) begin of pre-marketing efforts
what goes into IPO prospectus
1) cumbersome and exhaustive
2) describes all aspects of companies business
3) aims to protect investors who may not have the resources to fully audit an organization
why do companies work with multiple banks prior to IPO
higher chance of attracting investors
what is the syndicate hierarchy
1) one or two banks (global coordinators)
2) 2 or 3 banks (book runners - run marketing)
3) co lead managers (help w marketing and sales)
what are the average IPO fees
3%
what is underwriting
what is stock price stabilization
keeping stock price stabilized after IPO
explain shorting a stock
borrow stock, sell it, buy it back later and return it.
profit is made if stock price decreases during this span.
what is overallotment/greenshoe option
what is the difference between SEO and IPO
SEO, shares are already listed, but company needs to list more shares for fresh capital
what are private placements
sale of security directly to a private investor as opposed to a pubic investor
what is the quickest way to raise capital
private placement
