IPO's Flashcards
tell me about the auction mechanism
shares offered to competing buyers. single price auction and discriminatory auction. uncommon nowadays
Single price auction
winning bidders pay lowest price regardless of bid. most common
discriminatory auction
winning bidders pay amount they bid. common for govt bonds
IPO mechanisms (3)
auction, fixed price offering, book building
tell me about fixed price offerings
shares offered at set price, often underpriced. firm indicates how many they want. if oversubscribed, pro-rate.
tell me about book building
price discovery system for new shares. direct contact between IB and investors, gives IB idea of price range. flexible. investors specify how many shares.
pro’s of book building
in bought deal, underwriter guarantees proceeds if unsold. allows control of info. less uncertainty on number of bidders, less flipping. fastest way to sell
Periods of US book building
Prefiling period, waiting period, post effective period.
what is the prefiling period
period before registration statement submitted to SEC.
filing date
date when registration statement is submitted
What banks are often involved?
syndicate, where one is lead manager and key underwriters
what does the lead manager do?
chooses the market for listing, drafts registration statement, legal due diligence, designs marketing campaign, drafts underwriter agreement
What is the pitchbook in an IPO
presentation to promote bank and its services.
what is the waiting period
period between filing of resgistration statement and when it is declared effective by the SEC. Underwriters do due diligence, prepare roadshow, preliminary prospectus
What is a road show
promotes issuer, build order book, prepare placement of shares
what is the post effective period
offer price is set, final prospectus, underwriting agreement signed. bookrunner decides who gets shares. next morning, sales start.
Benefits of IPO’s
access to funding, marketing, enhances company profile, liquidity for shareholders
Costs of IPO
Indirect costs, direct costs, more disclosure, short termism
What are indirect costs of an IPO
price after issuance - offer price. money left on the table
what are direct costs of an IPO
services offered by IB. spread reduces final amount received. also lawyer fees, accounting costs, listing costs.
what is the offer price
final price at which investors by shares
what is underpricing
where the offer price is below the close price
different views on underpricing (3)
pitchbook view, academic view, profit sharing view
pitchbook view of underpricing
liquidity discount explains underpricing
