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This chapter delves into the intricacies of floating a company, covering positioning, investor relations, methods of going public, and the factors affecting the decision to list or delist shares. Learn about cash-in and cash-out floats, regulatory requirements, and key considerations for choosing where to list. Explore statistics on major stock exchanges and depository receipts. Discover the advantages and disadvantages of initial public offerings (IPOs), and understand the reasons behind delisting shares.
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Corporate Financial Strategy4th edition Dr Ruth Bender Chapter 15Floating a company
Floating a company: contents Positioning Investor relations List of people involved in an IPO Methods of going public Indicative timetable for a placing Illustrative contents of listing particulars Is it worth it? Reasons for delisting • Learning objectives • A cash-in float grows the company • A cash-out float gives money to exiting shareholders • Reasons for floating a company • An IPO is a marketing exercise • Possible regulatory requirements for listing • Where to list? • Worldwide exchanges, some statistics • Depository receipts • Price: leave some money on the table
Learning objectives • Explain why a company might want to float its shares, and differentiate cash-in and cash-out floats. • Analyse the different stages of an IPO in relation to a marketing model of ‘7 Ps’ • Understand the process for a listed company to issue further equity. • Set out the reasons why a company might delist its shares, and the potential conflicts of interest this entails.
A cash-in float grows the company Pre-float Post-float Shareholders are A, B, C, D, E … and many others Shareholders are A, B, C
A cash-out float gives money to exiting shareholders Pre-float Post-float Shareholders are A, D and many others Shareholders are A, B, C, D, E
Reasons for floating a company Exit for investors (cash-out) Diversification for shareholders Shares to act as currency in acquisitions Diversification of shareholders Fundraising (cash-in) Better management incentives Future financial flexibility Opportunistic Desire for prestige
Where to list? • Where are you doing business? • Where are there likely to be the most shareholders for your company? • Liquidity • Specialization • Price multiples • Regulatory and reporting requirements • Diversification of investor base • Costs
Worldwide exchanges, some statistics IPO FUNDRAISING IN MAJOR STOCK EXCHANGES IN 2011 US $ bn 1 Hong Kong 36.1 2 New York 31.4 3 Shenzhen 26.2 4 London 19.2 5 Shanghai 16.3 6 NASDAQ10.7 7 Singapore 7.6 8 Spain 5.3 9 Brazil 4.4 10 Korea 3.6 Includes REITs. Source: Dealogic data from http://www.hkex.com.hk/eng/newsconsul/newsltr/2012/Documents/2012-01-02-E.pdf MARKET CAPITALIZATIONS OF MAJOR STOCK EXCHANGES AT END 2011 US $ bn 1 NYSE Euronext (US) 11 796 2 NASDAQ 3 845 3 Tokyo Stock Exchange Group 3 325 4 London Stock Exchange Group 3 266 5 NYSE Euronext (Europe) 2 447 6 Shanghai Stock Exchange 2 357 7 Hong Kong Exchanges 2 258 8 TMX Group (Toronto) 1 912 9 BM&FBOVESPA (Brazil) 1 229 10 Australian Securities Exch 1 198 Source: http://www.world-exchanges.org/files/file/stats%20and%20charts/2011%20WFE%20Market%20Highlights.pdf
Depository receipts • GDR – global depository receipt – traded outside the USA • ADR – American depository receipt – traded inside the USA and denominated in US$ • Different levels issued, depending on whether they represent new shares (effectively an IPO) or existing shares, and where the shares are traded, and the level of disclosure required. Company outside USA Bank in USA Investors in USA Issues certificate denoting multiple underlying shares to Issues certificates to
Price: leave some money on the table Graph taken (with permission) from: Initial Public Offerings: Updated Statistics Jay R. Ritter, 2013 http://bear.warrington.ufl.edu/ritter/ipodata.htm
Positioning IPOs are commonly valued using market multiples, so price will be higher if comparators are highly priced • Chose a time to float when markets are trading at high multiples • Choose an exchange that values your sector • Try to be allocated into a highly rated sector
List of people involved in an IPO • Company and its directors • Sponsor • Broker / bookrunner • Underwriters • Reporting accountants • Lawyers • Financial public relations • Registrar • Receiving bankers • Security printers
Indicative timetable for a placing Sourced from London Stock Exchange publications
Is it worth it? Disadvantages of IPO • Lose control of the co. • Hassle factor (incl. governance regs) • Time consuming – who runs the business? • Unwelcome public accountability • Short-term emphasis? • Susceptible to market conditions • Threat of takeover • Cost Advantages of IPO • Marketability of shares • Source of cash • Increased profile – company and directors • Exit for institutions • Chance to make acquisitions for paper • Management incentives
Reasons for delisting • Directors feel the market is under-valuing the company • Little liquidity • No need to raise more funds • Fear of hostile takeover • Wish to restructure out of the public eye Shareholders need to be satisfied that the directors are treating them fairly, and not buying the company at an under-value