Week 10

Question 1

5 Reasons to have an IPO

Answer 1

1. Raise capital
2. Results in better rates when issuing debt
3. Provides means to value a company through its stock market price
4. Prestige
5. Liquidity

Question 2

Raise Capital, allowing a company to… (5 reasons to have an IPO)

Answer 2

• Reduce indebtedness
• Increase funds it can use for investment, ex. development and growth

Question 3

Primary shares

Answer 3

shares issued by the company for the IPO, i.e. said shares did not exist before and the resulting equity from their sale goes to company

Question 4

Secondary shares

Answer 4

already exist before IPO, ex. previously held by the shareholders, but now sold from their owner to the public

Question 5

Lock-up period

Answer 5

a requirement made by contract for a period of time (e.g. 90 days) during which the company’s insiders or majority shareholders are forbidden from selling their existing shares (secondary shares) in order to prevent that too much of company’s stocks being available for purchase and cause a devaluation of the stock.

Question 6

Results in better rates when issuing debt (why go public?)

Answer 6

since public companies are subject to so many regulations of the stock market they are listed on and the jurisdiction in which they are incorporated, they can normally get more favorable interest rates than non-listed companies.

Question 7

Provides means to value a company through its stock market price (why go public?)

Answer 7

This is really the perceived value of the company. It can change greatly based on public perception or rumors. Future M&A transactions may be easier since stock, as valued by the market, can be used as part of the deal.

Question 8

Prestige (why go public?)

Answer 8

an IPO enhances a company’s reputation, raises its profile in a particular market and creates brand awareness. Historically it was only the strongest companies that went public. Now there’s perhaps less prestige attached to going public since there are more markets and a much higher frequency of IPOs.

Question 9

Underwriting Process

Answer 9

–a company could technically sell its own shares, but the practice is to have an investment bank as an underwriter or middle man, e.g. Goldman Sachs or Morgan Stanley.

–Underwriters make commitments to buy their client’s shares, and then, sell them in the IPO.

–The underwriter can signal to future investors the strength of the offering - brokerages will want to be sure they can sell the stock they buy. Having a major investment bank as underwriter can reflect well on a company by showing that the bank thinks the endeavor will be profitable.

Question 10

Multilateral trading facility (MTF)

Answer 10

a European term for a trading system that facilitates the exchange of financial instruments between multiple parties. Multilateral trading facilities allow eligible contract participants to gather and transfer a variety of securities, especially instruments that may not have an official market. These facilities are often electronic systems controlled by approved market operators or larger investment banks. Traders will usually submit orders electronically, where a matching software engine is used to pair buyers with sellers.

Question 11

Road show

Answer 11

a presentation by an issuer of securities to potential buyers. The management of a company issuing securities or doing an initial public offering (IPO) travels around the country to give presentations to analysts, fund managers and potential investors. The road show is intended to generate excitement and interest in the issue or IPO, and is often critical to the success of the offering.

Question 12

Flipping

Answer 12

refers to purchasing an asset with the intent of selling it for a quick profit rather than holding on for long-term appreciation. Flipping is used to describe short-term real estate transactions as well as the activities of some investors in initial public offerings (IPO). Although these are the most common uses in finance, flipping can be used to describe the purchase of any asset that is meant to be sold in the near term for a profit, including cars, cryptocurrencies, concert tickets and so on.

Question 13

Once public, some important consequences:

Answer 13

1. Continued costs
2. Risk of hostile takoever
3. Trasparency/loss of privacy
4. Risk of intervention from activist stakeholders
   5.

Question 14

Alternatives to going public:

Answer 14

• Bank loan
• Private equity
• Private placement
• Divestment
• Governemtn fianancial support

Question 15

Bank loan (alternatives to going public)

Answer 15

• Can be used to pay for a major investment in the business or an acquisition.
• Allows the business to benefit from a leverage effect derived from the difference between the IRR of the investment and the interest rate of the loan.
• Banks are lenders, not investors. Need to show a good financial track record à problem for new businesses.
• Requires collateral.

Question 16

Private equity (alternatives to going public)

Answer 16

• Private equity is finance provided by institutional investors such as pension funds, insurance companies, and high net worth individuals in return for an equity stake in potentially high growth companies.
• Long-term investment (from 3 to 10 years).
• Business also benefits from the experience of investors in terms of strategic positioning, cash flow optimisation…
• High risk investment: investors often require substantial financial and political rights.

Question 17

Private placement (alternatives to going public)

Answer 17

a capital raising event that involves the sale of securities to a relatively small number of select investors. Investors involved in private placements can include large banks, mutual funds, insurance companies and pension funds. A private placement is different from a public issue in which securities are made available for sale on the open market to any type of investor.

Question 18

Divestment (alternatives to going public)

Answer 18

also known as divestiture, is the opposite of an investment, and it is the process of selling an asset for either financial, social or political goals. Assets that can be divested include a subsidiary, business department, real estate, equipment and other property. Divestment can be part of following either a corporate optimization strategy or political agenda, when investments are reduced and firms withdraw from a particular geographic region or industry due to political or social pressure.

Question 19

Goverment financial support (alternatives to going public)

Answer 19

• Business loans/grants, microfinance or venture capital support on the local, national or supra-national level are available.
• In France, the Public Investment Bank (BPI) is a public financing and investment group which finances the growth and development of micro-businesses and SME’s through equity funding. Aims to supplement potential funding in market segments where private financing is typically lacking.
• Subject to strict criteria (business operating in industry critical to national economy, innovative business, very small business…)