IPOs & SEOs Flashcards
What is an IPO?
Initial Public Offering
- firms sell shares to the public for the first time and list on a stock exchange
-biggest financing event for firm
What are the benefits of an IPO?
1) cash raised used for capital budgeting, debt reduction etc
2) access to public equity markets (easier to raise equity)
3) exit opportunity for shareholders
4) increased liquidity of shares
5) finance future acquisition (‘use paper’)
6) increased transparency, analyst coverage/engagement
What direct costs are incurred during IPO process?
10% if IPO proceeds and compliance costs post-IPO
1) Risk of IB committing in underwriting (not selling all shares, loss, cost & reg.cap. requirement)
2) Cost of analysing and administrating (legal fees and retail distribution)
3) increased public scrutiny
4) regulator approval (fin. reports filed)
What indirect costs are incurred during IPO process?
Opportunity cost of time, money left on the table etc..,
1) analyst coverage (aftermarket to ensure liquidity, often included in contract; indirect???)
2) underwriter prestige (certification effect)
3) syndicate formation (compensation to increase effort)
4) price support (aftermarket support to prevent price slump when investors sell and ensure liquidity)
5) signaling (high fee = signal of quality)
6) roadshows
7) investor education
On what exchange are IPOs typically listed
domestic
Why would firms go public abroad?
e.g. weibo 2014 to increase awareness abroad (marketing and broader audience)
prada and samsonite in Hong Kong (boom luxury goods market Asia, early entry)
Can firms go public in more than 1 market?
yes:
- Agricultural Bank of China listed on Shanghai and HK
- Rio Tinto listed in Sydney, HK, Johannesburg, London and NYC
What is needed for foreign firms to list on markets (don’t have to go through IPO process)?
Depository receipts = financial instrument that represent a # shares in foreign company. Typically issued by bank. Can buy/sell just like regular shares.
Who was the lead underwriter in VISAs IPO and how many were there in total?
JP Morgan, 40 others including (GS, BoA, Citigroup, HSBC, UBS, Merrill Lynch, etc)
What are the steps in the IPO process?
1) Hire an underwriter
2) Decide structure/type of IPO
3) Conduct due diligence
4) File registration statement
5) SEC review
6) Marketing and roadshow
7) Price setting
8) Allocation of shares
9) Trading begins
What are different structures/types of IPO?
1) Firm commitment/best effort (most common):
Underwriters agree to purchase all shares for offer at set price
2) Back building:
Company sells small number of shares to group of investors before IPO to build demand before going public (test the market)
3) Auction IPO:
example: Google Dutch Auction IPO (fair and transparent process)
4) Hybrid:
listing company takes lead with help of its underwriter in selecting the share allocation among eligible bidders
What are the 2 type of IPO shares?
1) Primary shares sold at primary offering:
NEW SHARES sold by firm to public and the proceeds go to firm
2) Secondary shares sold at secondary offering:
EXISTING SHARES sold by pre-IPO shareholders to public and the proceeds go to the shareholders
SkullCandy sold 9.4m (56%) secondary shares. The firm raised $77.5m while the shareholders secured $98m
What are tranches?
A portion of shares that is offered for sale to different categories of investors at different times, prices, or conditions.
Often used in larger IPOs (raise significant amount of capital)
What are the different types of tranches?
1) Institutional tranche (china cap 20%)
2) Retail tranche (reserved for retail investors)
3) International tranche (offered to foreign investors)
(4) Greenshoe)?
What is a clawback mechanism?
a contractual agreement between the issuer and underwriter that allows the underwriter to reclaim some of their compensation if the IPO shares drop in price shortly after the offering.
Incentive for underwriters to accurately price shares.
What is a dividend clawback?
Arrangement whereby equity owners commit to use dividends they have recovered in past to finance the cash needs of the project in future.
What is the IPO timeline?
30 weeks: organisational meeting
20 weeks: registration statement
14 weeks: SEC review
3 weeks: Prelimary prospectus
2 weeks: Roadshow (beauty contest)
then: FLOTATION
why do lead underwriters set a minimum fee?
To limit the potential number of co-managers
What is a bookrunner?
Smaller firms, part of the syndicate, but not “front line”. They are tasked with selling shares to a specific group of investors, such as high net worth individuals or institutional investors.
Important to broaden base of potential investors and built relationships with own clients.
What is the registration statement?
Legal document filed with SEC.
Full & fair disclosure of material information enabling investors to make informed decisions.
Details about:
-financial condition
-business operations
- management
-risks
2 PARTS; Prospectus and additional information
What is the IPO prospectus?
Form S-1 (Red-herring)
=primary disclosure document as part of Reg. Stat.
- takes 4-6 weeks to draft
- contains initial price range
When does the price meeting occur?
After the market closes on last day of roadshow.
Via telephone.
What is the quiet period?
Period with restrictions on info a company and related parties can release to public in IPO.
The info should be communicated via Prospectus.
To prevent management and affiliated analysts from hyping
Failure to comply: GUN-JUMPING (severe consequences)
- typically 25 days following IPO’s pricing date
What are market stabilisation measures?
1) Lock-up period for pre-flotation shareholders:
Prevents mass dumping of shares if price goes up higher than anticipated.
2) Over-allotment (greenshoe option):
allows bank to stabilise price as they can issue shares to quell demand and ramping of price. Normally 10% of #shares.
Only measures allowed by SEC
