IPO's

Question 1

tell me about the auction mechanism

Answer 1

shares offered to competing buyers. single price auction and discriminatory auction. uncommon nowadays

Question 2

Single price auction

Answer 2

winning bidders pay lowest price regardless of bid. most common

Question 3

discriminatory auction

Answer 3

winning bidders pay amount they bid. common for govt bonds

Question 4

IPO mechanisms (3)

Answer 4

auction, fixed price offering, book building

Question 5

tell me about fixed price offerings

Answer 5

shares offered at set price, often underpriced. firm indicates how many they want. if oversubscribed, pro-rate.

Question 6

tell me about book building

Answer 6

price discovery system for new shares. direct contact between IB and investors, gives IB idea of price range. flexible. investors specify how many shares.

Question 7

pro’s of book building

Answer 7

in bought deal, underwriter guarantees proceeds if unsold. allows control of info. less uncertainty on number of bidders, less flipping. fastest way to sell

Question 8

Periods of US book building

Answer 8

Prefiling period, waiting period, post effective period.

Question 9

what is the prefiling period

Answer 9

period before registration statement submitted to SEC.

Question 10

filing date

Answer 10

date when registration statement is submitted

Question 11

What banks are often involved?

Answer 11

syndicate, where one is lead manager and key underwriters

Question 12

what does the lead manager do?

Answer 12

chooses the market for listing, drafts registration statement, legal due diligence, designs marketing campaign, drafts underwriter agreement

Question 13

What is the pitchbook in an IPO

Answer 13

presentation to promote bank and its services.

Question 14

what is the waiting period

Answer 14

period between filing of resgistration statement and when it is declared effective by the SEC. Underwriters do due diligence, prepare roadshow, preliminary prospectus

Question 15

What is a road show

Answer 15

promotes issuer, build order book, prepare placement of shares

Question 16

what is the post effective period

Answer 16

offer price is set, final prospectus, underwriting agreement signed. bookrunner decides who gets shares. next morning, sales start.

Question 17

Benefits of IPO’s

Answer 17

access to funding, marketing, enhances company profile, liquidity for shareholders

Question 18

Costs of IPO

Answer 18

Indirect costs, direct costs, more disclosure, short termism

Question 19

What are indirect costs of an IPO

Answer 19

price after issuance - offer price. money left on the table

Question 20

what are direct costs of an IPO

Answer 20

services offered by IB. spread reduces final amount received. also lawyer fees, accounting costs, listing costs.

Question 21

what is the offer price

Answer 21

final price at which investors by shares

Question 22

what is underpricing

Answer 22

where the offer price is below the close price

Question 23

different views on underpricing (3)

Answer 23

pitchbook view, academic view, profit sharing view

Question 24

pitchbook view of underpricing

Answer 24

liquidity discount explains underpricing

Question 25

profit sharing view of underpricing

Answer 25

underwriters underprice IPO’s, investors receive undervalued shares in exchange for favour.

Question 26

Academic view of undepricing: Winners Curse

Answer 26

IPO’s are good or bad. informed investors bid for good, not enough of them to buy full issuance. uninformed investors buy both good and bad randomly. if IPO good, oversubscribed, uninformed get less than they want. if IPO bad, uninformed get what they want. uninformed get less in good deal, more in bad deal. needs to be underpriced to attract uninformed investors.

Question 27

Academic view of undepricing: Dynamic strategy

Answer 27

underpricing is a dynamic strategy so that investors collect information and establish company value on secondary market. good firms can exploit this on secondary market, bad firms should fix price as high as possible.

Question 28

Academic view of underpricing: Trading volume explanation without information assymetry

Answer 28

larger underpricing leads to larger trading volumes so higher revenues for underwriters. no clear benefits for issuer.

Question 29

Case Study: google. what happened

Answer 29

single price auction to favour individual investors, not just institutions. avoid leaving money on the table. Bought deal but in chunks to reduce risk, lower spread/cost. Google changed the filing range from $108-135m to $85-95m day before IPO. Also reduced amount of shares, due to insufficient bids to meet number and prices. Prices hit $200 2 months later, lots of money left on table. Lots of flipping, auction is not best way to find long term investors.