chapter 23 (2) Flashcards
Underwriter
An investment banking firm that manages the offering and designs its structure
Primary and secordary offerings
At an IPO a firm offers a large block of shares for sale to the public for the first time. The shares that are sold in the IPO may either be new shares that raise new capital, known as primary offering, or existing shares that are sold by the current shareholders known as a secondary offering
For smaller IPOs the underwriter commonly accepts the deal on a best efforts IPO basis
In this case the underwriter does not guarantee that stock will be sold, but instead tries to sell the stock for the best possible price. Often such deals have an all or non clause, either all of the shares are sold in the IPO or the deal is off
lead underwriter
the primary banking firm responsible for managing the deal, The lead underwriter provides most of the advice and arranges for a group of other underwriters called the syndicate to help market and sell the issue
SEC filings
The >SEC requires that companies prepare a registration statement, a legal document that provides financial and other information about the company to investors
Preliminary prospectus or red herring
circulates to investors before the stock is offered. The SEC reviews the registration statement to make sure that the company has disclosed all the information necessarry for investors to decide whether to purchase the stock. Once the company has satisfied the >SEC disclosure requirements, the SEC approves the stock for sale to the general public
Final prospectus
contains all the details of the IPO including the number of shares offered and the final price
road show
in which a senior management and the lead underwriters travel around the country and sometimes the world promoting the company and explaining their rationale for the offer price to the underwriters largest customers
book building
the process of coming up with the offer price based on customer expression of interest
underwriter spread
underwriter fee, fee you pay for the underwriter doing their job
THe IPO puzzle: four characteristics of the IPO puzzle are relevant for financial managers
1) on average IPOs appear to be underpriced: the price at the end of trading on the first day is often substantially higher than the IPO price
2) The number of issues is highly cyclical: when times are good, the market is flooded with new issues; when times are bad, the number of issues dries up
3) The costs of an IPO are very high, and it is unclear why firms willingly incur them
4) The long run performance of a newly public company (three to five years from the date of issue) is poor. That is, on average, a three to five year buy and hold strategy appears to be a bad investment
costs of an IPO
underwriter takes 7% of the issue price
seasoned equity offering
A firms need for outside capital rarely ends at the IPO thus, more often than not, firms return to the equity markets and offer new shares for sale, a type of offering called a seasoned equity offering
Mechanisms of an SEO
When a firm issues stock using an SEO it follows many of the same steps as for an IPO the main difference is that a market price for the stock already exists, so the price setting process is not necessary
Tombstones
Advertising the sale of stock in advertisements/newspaper
