Investment Banking Flashcards
A Primer on Investment Banking
Investment Banking Division
Overview
Investment Banking Division Positions
2.1 Definition IPOs
Equity offerings: IPOs structure and process
1.2 Why do companies go public? (1)
1.2 Why do companies go public? (3)
2.3 The Offering Structure
2.3 The Offering Structure
2.4 IPO Process
- Key steps in the open-price approach involve three main stages: Preparation, Approaching the Market and Going Public.
Seasoned Equity and Right Offerings (SEOs)
Seasoned Equity Offerings:
Seasoned Equity and Right Offerings (SEOs)
Right Offerings:
Seasoned Equity and Right Offerings (SEOs)
Exercise 1
Equity Offerings: Syndicate Structure and Functions
Introduction
The Syndicate- Structure
- Issuers select a book-runner (or lead manager) of their equity offering and the book-runner (in consultation with the issuer) forms a syndicate of banks to assist in the pricing, underwriting, and distribution of the offering.
- The syndicate is bound by a set of formal contracts (“inter-syndicate agreement”): upon thecompletion of the offering, the syndicate is dissolved.
- While the functions of the syndicate members are the same in every country, the title given to each role might change.
- In a multi-tranche offering, each tranche has usually a syndicate. An overall manager is appointed, called global coordinator. The global coordinator is normally part of the syndicate in every tranche (not necessarily as book-runner).
The Syndicate- Functions
The Syndicate- Participate in a Syndicate
Stabilization–Overallotment超额拨款 and the Green Shoe Option
Worked Example- Stabilization
To clarify, consider the following fictional IPO:
- # of shares: 1.000.000 (these shares are underwritten by the investment bank)
- Green Shoe: 100.000 (these shares are borrowed to the investment bank)
- IPO price: €10
- Fee: 5% (of the total proceeds)
Now you!
- Scenario 1: Price drops to €9
- Scenario 2: Price rises to €11
Two Other IPO Features: Lock Up and Bonus Share–
Stabilization
Fees Distribution
In equity offerings the syndicate is paid a fee (or “gross spread”).
- varies across countries and depends on the issue characteristics
- general, the riskier the securities being offered, the higher the spread charged by the
underwriter (equity vs. debt, IPO vs. SEO)
- Banks charge significantly lower spreads on fixed-price offerings than on book-building
offerings
- in fixed price offerings, banks set the price in advance
- this imposes more risk on the bank, which must either charge higher spreads or price
the shares far below the expected post-offer price
- bookbuilding offerings are less underpriced
Fees- Designation
- top-tier banks not accept an ex post designation
- an alternative to limit the book-runner “power”: cap the fee to a given level
- the acceptance of this kind of provision will depend on the relative bargaining power of syndicate members
Equity Offerings: Syndicate Structure and Functions
Conclusion
Price Setting Mechanisms–Introduction
- Main price-setting mechanisms in security offerings, focusing on the most common practice, i.e., the open-price approach, better known as book-building
- The way the price is set is crucial, being the price the key variable of any offerings, both for debt and equity.
- The role of the investment bank tends to be even more crucial in IPOs, where the price is more“uncertain”
- The IPO process, the role of the investment banks involved in the transaction, the fee they get paid and many other aspects of an IPO depend on the kind of price-setting mechanism used.
- IPO underpricing has a negative effect on the wealth of pre-issue shareholders, so the first questionshould be why issuers are willing to leave “money on the table”.
Price-setting Mechanism – Open Price (book-building)
Price-setting Mechanism – Fixed Price
Price-setting Mechanism – Auction
The Book-Building Approach
- There are three price-setting mechanisms:
- (a) open-price (book-building),
- (b) fixed price, and
- (c) auctions
- Bookbuilding approach is the best approach, because it allows the investment bank to extract private information from investors
- As a matter of fact the book-building approach is currently the most common way to take companies public
Price Setting Mechanisms–Auctions
Price Setting Mechanisms–Auction–The Winner’s Curse
- The problem can be described in the following way: “I won, but I wish I hadn’t”.
- Winning bidders by definition bid higher than non-winning bidders. However, they might bid too high
- A solution to this problem is just a downward revision in the bidding strategy, which takes into account the number of other bidders and the information they have
Price Setting Mechanisms–Auction–The Free Rider Problem
- This is a typical problem of uniform price auctions
- Since highest bidders receive shares at a single market-clearing price, there is an incentive to submit high bids without actually valuing the issue.
- This free riding behavior reduces the incentive of other bidders to collect information
- The only cost a free rider might incur is overpricing. In other words, if many free riders participate in auction there will be an upward bias, because they will bid high in order to get shares
- Now, if free riders are able to coordinate, they will participate in an auction in a number that minimize the risk of overpricing
Price Setting Mechanisms–The Dark Side of Book-Building
Example: Investment Banking
Equity Offerings
Example of fictional rights issue:
04Debt Offerings
4.1 Introduction
4.2 Bond Offerings
Bond Offerings
Process
4.3 Credit Ratings
Definition
Are Ratings Important to Bond Pricing?
4.4 Syndicated Loans
Definitions
4.4 Syndication Strategies
4.4 Numerical Example —Syndicated Loans
4.5 Debt Offerings—Conclusion
05, Mergers & Acquisitions (M&A)
Overview of Sell-Side
Valuation Paradigm
Sell Side Processes
Mergers & Acquisitions (M&A)— Auctions
05-Mergers & Acquisitions (M&A)
Organization and Preparation
05 Mergers & Acquisitions (M&A)
Organization and Preparation 2
05 Mergers & Acquisitions (M&A) –First Round
05–Mergers & Acquisitions (M&A)– Second Round
05–Mergers & Acquisitions (M&A)– Second Round 2
Valuation method
05 Mergers & Acquisitions (M&A)–Negotiations
05 Mergers & Acquisitions (M&A) –Closing
05 Mergers & Acquisitions (M&A) –Closing 2
06 dLeveraged Buy Out
06 Leveraged Buy Out– Key Participants
06-Leveraged Buy Out -Characteristics of a Strong LBO Candidate
06-Leveraged Buy Out -Characteristics of a Strong LBO Candidate 2
06
Economics of LBOs
Profit calculation at PEs
06 Leveraged Buy Out -2
Primary Exit / Monetization Strategies
Primary Exit / Monetization Strategies
06-Leveraged Buy Out
LBO Financing: Structure
2.6.1. The Financing Structure (1/2)
06，LBO Financing: Primary Sources
06.LBO Financing: Determining Financing Structure
06-LBO Valuation
06 Leveraged Buy-Out (LBO) Debt Capacity (1/3)
example
06 Leveraged Buy-Out (LBO) Debt Capacity
example 2
