Mod 10: Exchange issues Flashcards
Two functions of the equity market
- primary function - enable comps to raise new finance by communicating with a large pool of potential shareholders
- Secondary function - enable SHs to sell their shares (listed shares are more marketable => more attractive)
What affects share prices?
ANYTHING/speculation about anything! Examples: - company performance - interest rates - industry factors - announcements to market - market forces - bid rumours - currencies
Role of analysts
Popularity of analyst ratings over years has expanded their INFLUENCE OVER THE PRICE OF EQUITIES.
Slight change in analyst’s rating can have a dramatic effect on the share price => market capitalisation of that company
Three types of analysts:
- Buy-side analysts - work for large institutional investment firms (e.g. pension funds). Offer recommendations on shares their employer already own. Focus research on specific sectors or shares of interest to investment firm. Reports mainly for internal use.
- Sell-side analysts - employed by investment banks. Their recommendations and ratings are created to sell an investment and are typically offered free of charge to clients of the investment bank
- Independent analysts - provide unbias and objective ratings; many receive compensation by selling subscription based reports
Floatation or initial public offering (IPO)
when entity obtains a listing for it shares on the equity markets (stock exchange)
Reasons for seeking a stock market listing
- access to wider pool of finance
- improved marketability of shares
- enhanced public image
- original owners realising holding
- original owners selling holding to obtain funds for other projects
- easier to seek growth by acquisition
IPO
offer to sell shares in a company to the public for the FIRST TIME
- either existing shares that founders of the business wish to realise profits from their investment OR new shares issued to raise capital. Or a combination of both
The company will be normally advised on its IPO by an investment bank
Stages of an IPO
- company appoints an investment bank as lead manager
- Larger issues - lead manager assembles a SYNDICATE of banks to help in selling and distributing the shares. Syndicate will usually UNDERWRITE the issue. There will be a FEE to pay, regardless of whether all issues are taken up
- company will be VALUED by the bank (MOD 5)
- PROSPECTUS drawn up and issued (MOD 9)
- ISSUE is PUBLICISED. OFFER FOR SALE (at a fixed price) and an allocation procedure agreed
- UNDERWRITERS provide support after shares have been issued - acting as market makers, quoting bid and offer prices to the market for the shares => efficient and liquid market
Methods of raising additional equity finance
- Public issue
- Private Placing
- Rights issue
Public issue
Direct offering to the public at a fixed price (IPO)
An expensive method appropriate for large issues.
For companies with stock exchange listing only
Public issue details
- advertisement in the newspaper
- company selling the shares itself, investment bank will administer the issue
- very risky
- lack of guarantee => normally underwritten which adds cost
- HAS to be listed (plc or listed company)
Private placing
Shares are issued at a FIXED PRICE to institutional investors
Lower cost method, appropriate for small issues
Rights issue
Offer of further shares, at a given price, to existing shareholders in proportion to their existing holding
Private placing
- no prospectus
- no advertising
- no underwriting
- control passed to SMALL number institutional investors => could have MORE INFLUENCE than offer of sale
- cheaper method of making SMALL issues
- not offered to the general public => sold privately to clients of investment bank (usually institutions) at a FIXED ISSUE PRICE
- used in small issues where less cash is being raised
Rights issue: pre-emption rights
Under stock exchange requirements, when comps want to raise more capital through issue of further shares, they are OBLIGED to OFFER NEW SHARES TO THE EXISTING SHs.
PREVENTS the SHs having their VOTING RIGHTS DILUTED by a large issue of shares to a third party
Pricing of a rights issue
- discount to the current share price to ENCOURAGE the SHs to take up their rights or sell them on so that the share issue is FULLY SUBSCRIBED
- price discount acts as a SAFEGUARD should market price fall before the issue is completed (as if market price is below rights issue price then SHs would purchase from market => rights issue = unsuccessful
Effects of a successful rights issue
- new shares issued => reduces gearing ratio
- new finance is raised for company
- total value of whole company should increase by extra money raised
- price per share (in theory) will FALL because more shares in issue and new shares were issued at a discount
Timetable for a rights issue- stages of a rights issue
Stage 1.
- Discuss possibility of a rights issue with merchant bankers, a few weeks before the issue.
- Often like to have a rights issue when the stock market is HIGH because this would raise more money for a given cost)
Stage 2.
- Publish rights offer documentation.
- publish a RIGHTS OFFER DOC explaining WHY the rights issue is being made.
- SHs sent provisional ALLOTMENT LETTERS, showing no. of shares eligible to receive
- the shares start to trade EX-RIGHTS.
- the rights themselves can be traded to a third party on the same basis as the seller
Stage 3
- ACCEPT or SELL rights.
- SHs given approx 3 weeks to ACCEPT the offer or SELL their nil paid rights
Share price before rights issue formula
Market capitalisation/No of share
Share price AFTER the rights issue formula
(Market cap + extra value)/Total new number of shares
Estimated ex-rights share price incorporates
- amount of new money raised
- the expenses of the issue
- change in value based on market’s revised perception of the company and the use to which the money is being paid out
NOTE/ TERP only considers the first two
Rights value (nil-paid rights) - the selling price of the rights if they choose not to take it up
= TERP - RIGHTS PRICE
Rights price
The price that must be paid by whoever buys the new shares
TERP
Theoretical ex-rights price
= the price (in theory) after the rights issue
4 possible courses of action for SHs
- take up all the rights - buy at rights price
- sell on the rights - sell on rights at rights value (nil paid rights)
- take up a portion and sell on remaining - buy some rights and sell remainder
- do nothing - let rights lapse (foolish as you aren’t getting any money and SHing falls)
Underwriting rights issue
- don’t have to
- most rights issues are NOT underwritten
Ads to underwriting rights issue:
- certain to raise the desired amount of extra money FOR A FEE
Can be avoided if they set the offer price that is very low compared to the market price
7 steps to answer a rights issue Q
- How much money to be raised (incl. expenses)
- Existing share price
- Revised FME
- Calculate no. of shares to issue
- Design a scheme (no golden rules but below maximum new shares to issue)
- Price the rights issue
- Calculate TERP/nil paid rights
Bonus issue
= scrip issue = capitalisation issue
- gives FREE shares to all OS in proportion to their existing holding
- no payment required - SHs can keep a hold of them or sell them on in the market
- occurs when the share price becomes too high
- purpose is to make shares more attractive to investors => increase number of shares traded
Impact of a bonus issue
- New shares are created
- no money is raised
- fundamental value of whole company is unchanged
- price per share falls in proportion to the increase in the number of shares
- total value of each investor’s holding should be unchanged
- reserves in the SFP are converted to share capital => advantage to creditors as reduces levels of dividends that can be distributed
Ads of bonus issue
- marketability improved as more lower priced shares
- Something for nothing
- SHs like the idea of being given extra shares for free - Past profitability
- can only take place if sufficient reserves to be capitalised => associated with successful companies which have built up large retained earnings - Future confidence
- bonus issue may reduce ability to make future rights issue (as you have to sell at a discount to par) => directors must be confident about the company’s future prospects - Increased dividends
- may lead to increase in higher dividends as you hold more shares - More reasonable rate of dividend
- if div expressed as a % of nominal value, the figure may seem excessive => problems with employees who feel dividends are too high avoided by a bonus issue
Disads to bonus issue
- cost to the company
- administrative costs of issuing new shares - cost to everyone else
- whenever records of div and share prices are needed, care must be taken to eliminate the artificial effect of a bonus issue
Bonus issue: impact on share price
P x m/(m+n)
Theoretical
- market psychological factors may affect this e.g. down if market decides cost outweighs the benefit
Share split
- increases no. of shares in a comp without raising any new funds
- splits the shares of a company into a larger number with a LOWER PAR VALUE => increases MARKETABILITY and future confidence
- cutting a whole cake into slices. Amount of cake you have is the same before and after the split
e. g. big apple into 7 smaller apples
Employee shares
- most comps now offer share option schemes to some of their employees
- right to buy a company share at a pre-determined price within a specified period of time
- price, usually close to MV a the time option was issued
Offer for subscription
- Similar to offer for sale, but not all of the issues are underwritten
- used by new companies and allows them to abort the issue if not enough shares are taken up
- this is stated upfront in the offer documentation
Factors to consider in pricing the issue
- if price set too low, comp may not raise enough money => increasing cost of capital.
Unduly low price may be interpreted as board is pessimistic - price set too high, not all shares will be taken up => failing to raise required finance
NEED TO MAINTAIN THE MARKET’S CONFIDENCE.
If price is misjudged then the board will appear incompetent
Factors to consider when pricing the issue
- CQC PE ratio
- PE ratio of a comparable quoted company - current market conditions
- do market conditions favour the issue of shares? - forecasts
- can the company’s future trading prospects be forecasted accurately? - Premium
- set a price which gives an immediate premium when the launch takes place = encourages investors to take up the issue - Growth
- steady growth in share price each year should be achievable
Other types of listing:
- Introductions
2. Dual listings
Other types of listing: introductions
- move from one market to another
e. g. AIM listed companies to the Main Market - Main Market full listing = 25% of shares must be in public hands
Other types of listings: dual listings
obtain a listing on both a foreign and their domestic market
Reasons for companies seeking dual listings:
- Reduced costs
- cost of raising finance is cheaper on foreign markets - Increases access to finance
- access to a larger pool of funds and liquidity - Reduced risk
- perceived elimination of country risk (not entirely in one market only)
