Topic 9: Capital Management & Equity Strategy Flashcards
Under Ch 7 of Corps Law, shares can’t be issued except:
- disclosure document (prospectus, info statement, profile statement)
- one of specific exceptions from prohibition (small scale ie <20 offers in 12 mths; offers to professional/sophisticated investors; offers relating to takeovers (governed by Ch 6 of Corps Law)
ASX Listing Rules
- co prohibited from issuing new shares > 15% of capital in 12 mth period w/out prior approval from S/H (ie making a placement of >15% of cap).
- prohibition does not apply to pro rata issue to existing S/H
Major categories of new equity issues: (2) describe / give examples
- public: seasoned vs IPO. Seasoned: rights, placements, DRPs Options Staff plans, general issue
- private: angel investors, venture cap, MBOs/LBOs
Why go public / do IPO
- mobility of capital (liquidity for minority shareholders, realise capital gains, diversify family holdings, employee incentives)
- access new funding sources - future equity raising, convertibles
- raise profile of company
Sources of generating an IPO
- entrepreneur floating business
- listed companies exiting a particular business (float or spin off)
- private equity investors seeking return on investment
- privatisation - public entities sold
Costs of IPO
- Direct
- underpricing
- Indirect
- Direct: underwriting fees, can be substantial
- underpricing: sale of eq < mkt p; measured as 1st day return for IPO
- Indirect: senior mgmt time in info prep
Placements:
- definition
- advantages
- Disadvantages
- definition : issue of shares to a selected group of investors
- advantages: speed (more quick than pro rata); price (closer to mkt p than rights); control (company can direct placement to friendly institution)
- Disadvantages: regulatory limits; dilution; signalling
Public Issues
Reasons against
- cost (prospectus, accounting/legal; underwriting/brokerage; listing/govt charges
- dilution of ownership of existing S/H
Rights issues & entitlement issues
- definition
- advantages
- disadvantages
- definition: right to buy n ofn new shares at price S on or before expiry date. Call option. Renounceable (can be sold) or non renounceable (right lapses)
- advantages: lower cost; if renounceable does not affect wealth of existing S/H; no regulatory limits on size of issue; can be fast track timetable
- disadvantages:n slower to implement
Share Purchase Plan
1. definition
SPP: allow each subscriber to purchase new shares up to max dollar amt regardless of size of existing S/H
retail friendly
Dividend Reinvestment Plans
- definition
- advantages
DRP: allow S/H to reinvest dividends into shares in the company
These are essentially non renounceable rights - investors have to subscribe to avoid being diluted
2. Advantages to S/H: avoid high transaction costs assoc w/ small trades; enable shares to be acquired at a discount (normally 0 - 5%)
Takeover consideration
- definition
- advantages
- disadvantages
- definition: share for share exchanges sometimes used to effect change of control of company
- advantages: shares issued are valued at mkt p; avoids restrictions of placements away from existing S/H; avoids loss of debt capacity arising from debt funded cash
- disadvantages: dilution of control, documentation required
Spin offs
1. definition
- definition: usually issue shares in satellite co usually a subset of parent. Funds develop new co without affecting parent’s funding capacity
- enables S/H to participate in new co w/out affecting old
Dividend policy overview
- definition
- forms of payment
- definition: any direct payment by corp to shareholders
2. forms of payment: cash, stock, share repurchase
Capital Mgmt transactions
- special dividends
- pro rata return of capital
- on market buy back
- off market, equal access buy back
- off mkt selective buyback
Capital Mgmt transactions: Under Ch 14 of Corps Law: 1. buybacks are permitted if: 2. 5 types of share buybacks 3. capital reductions can be made if:
ASX Listing Rules also state
- buybacks are permitted if: co can still pay creditors; and the required procedures are followed
- 5 types of share buybacks: min holding; employee share schemes; on market; equal access; selective buy back
- capital reductions can be made if: fair & reasonable; can still pay creditors; approved by S/H
- ASX Listing rules: orderly market must be maintained; buybacks only allowed if there is at least 5 trading days in shares in preceding 3 mths and price is not >5% above av mkt p
Ordinary Divs:
Special Divs:
Ordinary Divs: regular payour of portion of net inc to S/H. received by all pro rata & franking
Special Divs: once-off to all S/H; pro rata and franking attached
Pro Rata Cap return
Specified amt per share returned to all shareholders. # shares remains same, but Paid capital is reduced.
On mkt Share Buybacks
Co repurchases shares. Programme states # shares, but timing & final quantity is at discretion
Off market buyback
- equal access style
- Selective
- equal access style: identical offer to all S/H to acquire % of their shares. May be tender basis
- Selective: offer made to select S/H to acquire certain % of shares
Pricing new equity issue
- analysis (PV of future CFs, P/E or Value / EBITDA multiple)
- Market Based pricing
IPO Underpricing
what is it
Explanation
Vendor
what is it: sale of equity below mkt price
Explanation: reimbursement to investment banks and investors for liquidity, capital provision and information processing.
Vendor: compensation to investors & banks as above
Costs are significant
Dilution to ownership vs dilution to value
Dilution to ownership - ownership reduced, but your value may be higher if ‘pie’ is bigger (wealth transfer)
Dilution to value -
Choices for rights
- do nothing
- pay (take up full or partial rights)
- if renounceable, could sell (sell a)n cum shares b) ex shares c) rights )
- sell the lot
When deciding on rights issue consider:
- size of discount
- is issue fully, partially or not underwritten
- how should shortfall facility operate
- should you use accelerated institutional offering
Alternative means of raising equity: consider
- issue pricing (ie discount)
- tranaaction costs
- dilution
- speed and certainty of execution
- amount that can be raised
- regulatory requirements
- strategic objectives
- assessment of likely takeup by existing shareholders
Dividend policy:
How to decide how much to pay
- wise to retain cash to fund NPV positive projects
- cash is needed to fund operations and service debt
- typically pay an interim and total dividend
- sometimes use a ratio, sometimes use target
What effect does dividen policy have on a company
- OFCF cannot be impacted by anything non operational.
OFCF is not impacted by capital structure or financing decisions
Lintner model:
- companies prefer stable dividends.
- Managers focus on change in div payout not the amount.
- Managers avoid making changes now that might have to be reversed later on.
- Earnings changes are main determinant of div change and investment requirements have little effect on div policy.
Dividend observations
- Divs are substantial (US; 2/3 of earnings paid in divs)
- a lot of co’s don’t pay divs
- corps like paying stable divs
- share repurchase are economically significant (buybacks. In Aus - note that cap gains impact decision. Is US, no tax advantage to share buyback - they have no franking credits)
M&M Dividend policy - factors determining
1 Not wanting to send signal to market,
2 not disappointing investor base (clientele effect),
3. maintain cash reserve for flexibility,
4. not paying out spare cash an agency cost and tax systems (after tax costs).
M&M: Corps should follow residual div policy
- business’ should review available cash,
- retain whats needed for future positive NPV projects and
- distribute residual as dividends.
Tax policy
Australian tax policy favours higher dividend payout. (income tax vs cap gains; consider franking credits)
