Initial Public Offerings Flashcards
IPO
A company’s first offering of shares to the general public
- previously private firm
- not a private placement
Seasoned Equity Offering (SEO)
Equity issue by a firm that is already public. As in an IPO the shares issued can be primary or secondary shares.
Primary Offer
Shares offered are new shares being issued by the company. The money raised by selling these shares is invested in the firm.
Secondary Offer
The shares are sold by current investors (e.g. founder, VC’s,…). The money raised by selling these shares goes to their previous owners.
Benefits of IPOs
- New funds
- Lower funding costs (increased liquidity)
- Transparency (disclosure requirements, higher visibility)
- Offer an exit for financiers (but lock-up period)
- Merger and Aquisitions
- Lower debt ratios
Costs of IPOs
- Costly process (direct costs approx. 7%)
- Ownership dispersion and loss of control
- Compliance
- Increased disclosure and scrutiny
- Perceptiondependency
- Stock is susceptible to all kinds of market errors and imperfections
Key “window-dressing” activity
Earnings management
Standard IPO process
1) Choose an investment bank
2) Assess value and set offer details
3) Gauge investor demand
4) Regulatory filings and prospectus
5) Allocate shares
6) Manage IPO and post-issue phase
1) Choose an investment bank
IPO process
- Should have industry experience (story line - CIM)
- Client base and reputation are key
- Agree on IB contract: firm commitment vs. best effort
- Lead IB/Underwriter then forms a banking syndicate
2) Assess value and set offer details
IPO process
- Lead IB is valuing the private business
- Price “per share” is set
- If IB guarantees the price, often 10-15% price reduction as buffer against errors (discount from lead bank)
3) Gauage investor demand
IPO process
- Building the books: sound the offering price with investors
- IB gets the anchor investor
- Road shows
- Price is adapted accordingly if demand is very strong/weak
4) Regulatory filings & prospectus
IPO process
- Prepare firm for regulatory compliance
- Prepare and publish prospectus for potential investors
5) Allocate shares
IPO process
- Investors start to request shares
- IB allocates available shares across syndicate/investors
- Deman > Supply: Rationing of shares, opportunity to “make friends”
- Deman < Supply: if IB guaranteed the deal, IB buys the remaining shares at the offering price
6) Manage IPO and post-issue phase
IPO process
- On offering date, shares open for trading
- Post-issue management = potential support for stock in case of high volatility (stabilization activities)
Red herring
Preliminary draft of the prospectus (lower information regulation, missing some key information on issue)
