Capital Markets IPOs Flashcards
Explain the process of going public?
Firms provide information about operations and financial conditions
Issuing firm develops prospectus
Prospectus contains financial statements and discussion of risks
SEC assess prospectus and approves to provide investors correct information
Explain the process of going public? - Pricing and Book building PART 1
Firm determines offer price
Valuation of firm = PV of future CFs
Can use forecasted CF based on recent earnings
Pricing and Book building PART 2
Selling shares at high prices depends on
- Expected revenue growth
- Earnings
- Market conditions
If market price rises = Low price
Low price ensures all shares sold
IPO investors benefit from investment
Issuing firm engages in another offering as there is trust
Explain the process of going public Allocation of shares
Lead underwriter relies on syndicate
Syndicate contacts investor and informs of them of offering
Syndicate participates in underwriting process and shares fees
Explain the process of going public
Transaction Costs
TC = 7% of funds
Cost of assessing whether to go public
Compiling data for prospectus
Ensuring prospectus correctly written
Incur costs of legal and financial advisors
How to underwriters ensure price stability?
Over allotment Option
Lead underwriter allocates 15% of firm shares
Shares issued to investors at offer price
If market price falls below offer price
- Underwriter purchases extra shares at lower price
Counters sale of shares
Stabilises stock price
How do underwriters ensure price stability?
Lockups
Prevents owners of firm from selling shares
Prevents downward pressure on stock price
Stock price declines when lookup expires
Explain the flipping of shares
Investors purchase stock at offer price and sell immediately
Capitalise on initial returns
Flipping causes downward pressure on stock price
Securities firms sell to investors who retain shares or prevent selling shares to flip investors
Describe Google’s IPO?
Generated $1.6bn from IPO
To determine price of Google stock
- Google EPS * Yahoo P/E ratio
Google has more growth potential and different accounting methods
Describe Google’s IPO?
Part 2
Google used dutch auction process
- Relies on institutional investors
Bid prices ranked and minimum price determined
Lowered cost as Google saved $20m
Attracted diversified investor base
Price of Google shares = $85
Generated proceeds of $1.67bn
Describe Facebook’s IPO Process?
Part 1
IPO generated $16bn
Opening stock price = $38 per share
Price fluctuated
- Disagreement about FB valuation
FB revised revenue earnings estimate
Describe Facebook’s IPO Process?
Part 2
Traders experienced losses of $100m due to price fluctuations
Share price fell to $20 per share
Market val declined by $50bn
FB valuable but overpriced
What are the abuses in IPO Market?
Spinning
Underwriter allocates shares from IPO to executives or other businesses
Requiring help from securities firms
Executives remember favour and hires security firm in the future
What are the abuses in IPO Market?
Laddering
Brokers encourage investor to place bids above offer price
Builds upwards price momentum
Broker ensures shares from next IPO will be reserved for investor
What are the abuses in IPO Market?
Excessive Commission
Brokers charge high commission when demand for IPO is high
Investors willing to pay price
- Can recover costs from returns on 1st day
Underwriter sets offer price below market price to attract investors
Gain to brokers = Loss to issuing firm
