Chapter 18 Flashcards
What are the advantages of IPO
- Increases liquidity and allows founders to harvest wealth
- permits founders to diversify
- facilitates raising new corporate cash (challenging to get outsiders to put money in the company when the company is private)
- establishes a value for the firm
- facilitates merger negotiations
- increases potential market (product more well known)
when startup companies raise funds how do they raise external capital
issue equity investments
what is the SEC job
protect investors from fraudulent issues and regulate public offerings
who can participate in a private placement
accredited investors
what is a private placement
first external financing for most startups
what is a venture capital fund
private placement of equity by a private limited partnership
what does it mean to go public
selling some of a companies stock to outside investors and letting the stock trade in public markets
What are the disadvantages of IPO
- cost of reporting (reporting with SEC is expensive)
- Disclosures (competitors can see company data)
- Inactive market and/or low price (not many buyers)
- control (harder for founders to maintain control)
- managing investor relations is time-consuming
what is the process of going public
interview investment banks (underwriters) and then select one to be the lead underwriter
what do investment banks do in terms of IPO
- determine the offer price/ amount of shares
- sell the shares
- have their analysts follow the stocks
what is a best efforts sale:
the bank does not guarantee that the securities will be sold or that the company will get the cash it needs
what are two ways the bank can help a company with IPO
best effort sale and underwritten issue
what is an underwritten issue
when a bank agrees to buy the entire issue of stock and then resell the stock to its customers (bank bears risk)
are IPOS through bank usually a best effort sale or an underwritten issue
underwritten
what are underwriting syndicates
when the banks get a sum o money from a company for an IPO that is large and so banks form groups to minimize the risk each bank faces
what is the banking house that sets up the IPO called
lead or managing underwriter
what are selling groups
when the sum a bank receives for an IPO is large so even more investment banks are included
What are the four primary elements of SEC regulation
- jurisdiction of IPO
- registration of new issues
- prospectus
- truth in reporting (make sure statements are correct)
What is the Road show
after registration of statements for SEC has been filed, the senior management, investment bankers, and lawyers present to potential investors
*only information on registration statement can be given
what is book building
when on the roadshow, the investment banker records the number of shares each investor is willing to buy (gage demand for issues)
Setting an offer price
when a company determines the price the bank will set for shares
What is underpricing and what does it do
when an investment bank underprices shares in order to reduce the risk to the underwriter
underpricing is a way to secure the interest from institutional investors
why do companies not object to underpricing
the company wants to create excitement and only a very small percentage is offered to public at that price
Jersey T’s is preparing to sell new shares of stock to the general public. As part of this process, the firm just filed the required paperwork with the SEC, which contains the company’s financial, legal, and technical information. What is the name associated with this paperwork?
registration statement
what does it mean for a company to go private
entire equity of the publicly held company is purchased by a small group of investors
how does going private affect the managers of the company
increase managers ownership
what are management buyouts in terms of going private
when the current management group raises financing and acquires all the equity of the company
what is a leveraged buyout (LBO) in terms of going private
when the financing to buy the equity involves substantial borrowings
what is a private equity fund (PE fund)
where outsider equity in a buyout comes from
advantages of going private
- cost savings (don’t have to file with SEC)
- increased managerial incentives
- increased managerial flexibility (don’t have to worry about what investors think)
- increased shareholder oversight and participation
- increased use of financial leverage, which reduces taxes (issuing debt lowers taxes)
