Chapter 14 - Initial Public Offerings, Investment Banking, and Financial Risk Flashcards
Private Placements
are securities offerings to a limited number of investors and are exempt form many rules governing general offerings
Accredited investors
include financial instituitions, pension plans, high wealth individuals, and institutional investors. These investors are eligible to buy securities in private placement.
An “Angel”
is a wealthy individual who makes an equity investment in a start-up company.
The managers of a “venture capital fund”
are called venture capitalists, of VC’s. They raise money from investors and make equity investments in start-up companies, called portfolio companies
Going public in and IPO
facilitates shareholder diversification, increases liquidity of the firms stock, makes it easier for the firm to raise capital, establishes a value for the firm, and makes it easier for a firm to sell its products.
However, reporting costs are high, operating data must be disclosed, management self-dealings are harder to arrange, the price may sink t a low level if the stock is not traded actively, and public ownership may make it harder for management to maintain control.
Investment banks
assist in issuing securiities by helping the firm determine the size of the issue and type of securtities to be used, by establishing the selling price, by selling the issue, an, in some cases, by maintaining an after market for the stock.
An investment bank may sell a security issue on a
best efforts basis, or may guarantee the sale by underwriting the issue.
Before an IPO, the investment bank and management team go on a
roadshow and make presentations to potential institutional investors.
An IPO is oversubscribed
if investors are willing to purchase more shares than are being offered at the IPO price.
The spread%
is the difference between the price at which an underwritier sells a security and the proceeds that the underwriter gives to the issuing company.
In recent years the spread for almost all IPO’s has been around 5.5%
An equity carve-out (also called a partial public offering or spin out)
is a special IPO in which a public traded company converts a subsidiary into a separately traded public company by selling shares of stock in the subsidiary.
The parent typically retains a controlling interest.
A shelf registration
allows a company to prepare a general prospectus and then sell the issue in pieces over time rather all at once.
Bought Deals
involve the underwriters buying the shares before the prospectus has been filed. Bought deals are typically sold to a smaller number of institutional investors.
A seasoned equity offering
occurs when a public company issues additional shares.
A company goes private when
a small group of investors, including the firm’s senior management, purchases all of the equity in the company.
Such deals usually involve high levels of debt and are commonly called “Leveraged Buyouts” LOB’s
