Ch 5 - Issue of shares Flashcards
Listed securities
If a co. successfully obtains a quotation on the stock exchange, the price its securities will be included on the exchanges official list.
Reasons for obtaining a stock exchange quotation
1) to raise extra capital
2) make it easier for future issues of capital
3) provide an exit route for existing SH’s
4) make its shares more easily values & marketable
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explanation of the above:
1) sell new shares to a wide market & raise large sums of money as cheaply as possible
2) providers of debt finance will be happier to lend money to a quoted co. because they feel safer knowing that co has to meet S.E’s ongoing requirements
3) venture capitalists want to realise their investments after a few years (or family run business)
4) assists with inheritance & CGT, more effective for takeover bids as companies use their own shares to target SH’s, some co’s offer employee share schemes to motivate their staff and may be more attractive if shares are quoted
Disadvantages of remaining a pvt company
1) restricted access to funds (cannot sell shares to the public & lenders cannot reply on company satisfying the requirements of a S.E)
2) limited markets for shares & limited exit route for SH’s (low liquidity & high transaction costs)
3) shares not easy to value
Advantages of remaining/becoming a pvt company
-a small group of SH’s are likely to retain control of the company
-principal-agent problems are reduced
- less onerous disclosure & reporting requirements so lower costs
-non-financial benefits such as continuity of a family tradition
Explain ‘Private Equity’
private equity: where shares are not
quoted on an exchange
How can insurers, banks & pension funds invest in private equity?
1) Provide loans or buy equity interests directly
2) Invest in bespoke private equity funds (invest in a range of private equity interests, the returns being passed to the investors in the funds»_space; normally require substantial minimum investments & also have some mutual or exchange-traded funds) – can be an NB! source of MT finance
Give 5 methods of obtaining a quotation
1) offer for sale (@ a fixed price)
2) offer for sale by tender
3) offer for subscription
4) placing
5) introduction
******* offers for sale are underwritten by an issuing house
Offer for sale (@ a fixed price)
> could be new or old shares
most common method used to obtain a listing
underwritten via an issuing house (rather than directly to the public, issuing house is responsible for selling shares to the public)
> if the public doesn’t buy all of the shares, the issuing house will hold the shares
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issue house may charge an explicit fee or may have that securities sold a little below public amount (difference is theirs)
Explain the timetable for an offer for sale
1 YEAR BEFORE THE OFFER
>issuing house will try ensure that pre-launch comments appearing in press are favourable & the company will need to prepare itself by changing documentation to make it a public limited co.
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WEEKS LEADING UP TO THE ISSUE
>issuing house will advice on the price which should be set. (tradition is to be cautious in pricing new issues) - as a conseq, it’s normal for new issue to be oversubscribed
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ISSUING THE PROSPECTUS - ‘IMPACT DAY’
> once the offer price is set, the prospectus is made available to the public. A prospectus or offer notice will be made in at least one national newspaper & through other distribution channels
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prospectus contains info about the co. such as it’s activities, financial position, reasons for issue & people involved in the issue > duty on professional advisors to disclose all relevant information
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APPLICATIONS
>prospectus includes an application form where public want to buy issues
>oversubscribed issues need to determine the basis of allocation (rejection/down-scaling) = aim= widely held securities & reduced admin costs
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LOA (letter of acceptance)
>sent to successful applicants & refund cheques to those who were rejected or scaled down. Takes time for share certificates to be issued & LOA can be used in place of share certificates for trading. (official trading on the S.E starts the day after acceptance letters are posted)
Offer for sale by tender
def: issuing house invites members of the public to submit a tender stating the # of shares which they’re prepared to buy & the price which they are prepared to pay.
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After the offer closes, the issuing house will determine a single strike price. This may be the highest price at which all the stock can be allocated. A lower strike price will be chosen if necessary to ensure a sufficient spread of SH’s. All applicants who bid as much as the strike price will have their applications accepted. Those who bid less than the strike price will have their applications rejected.
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Co. can raise more capital through tender than fixed price because investors can state the max amount. However the process is more complex.
Offer for subscription
-similar to offer for sale (normally at a fixed price but can be by tender)
-whole issue is not underwritten
-company sells shares directly to the public. issuing house bears the risk of undersubscription (issuing house still employed as an advisor to the issue)
Placings (or ‘selective marketings’)
def: issuing house first buys the securities from the company and then individually approach institutional investors such as PF or life-offices directly. The institutions will be offered securities but no public applications will be invited
-making small issues (hence cheaper > advertising & admin costs minimised, no sub-underwriting needed)
Introductions
don’t involve the sale of any shares - simply mean that existing shares in future will be quoted on the LSE.
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for a full listing, 25% of the shares must be in public hands (‘free float’ of shares available for purchasing excluding strategic holdings in subsidiaries or a cross-holdings must be at least 25% of issues shares.
When can introductions be used?
1) where an OVERSEAS company already listed on JSE for instance wants to be listed on LSE
2) where already listed company wants to ‘DE-MERGE’ into 2/> separate companies; the new co. will obtain a quotation by way of an introduction
3) where an unquoted co already has shares in wide ownership & sufficient capital but wants to become quoted
Explain the underwriting process
1) Co. wants to raise equity capital by issuing shares & instead of running the risk of not managing to sell all the shares & raise sufficient capital, the co. will arranges to sell the shares at an agreed price to the issuing house with a fee attached. (if an offer for sale - the feel can be the difference between the public & that sold to the issuing house)
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2) issuing house accept the risk that not all the shares may be bought. However, the issuing house will not want to retain the entire risk, they’ll arrange sub-underwriting. Sub-underwriters will agree to take a proportion of shares not bought by the public in return for a commission.
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3) issues are priced so they are successful (aim to not over-price as they may not be bought, which is a large risk between accepting underwriting & closing date)
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4a) FULLY SUBSCRIBED ISSUE: issuing house & sub-underwriters will have made an underwriting profit = underwriting commission - any admin expenses
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4b) PARTLY SUBSCRIBED ISSUE: underwriter & sub-underwriter get their fee/commission but need to pay for all the shares which haven’t been purchased
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underwriting is a form of insurance against the risk of an unsuccessful issue- used to ensure that the issuing company raises the required amount of money
