1 / 10

ipos and seos

Definitions. Initial Public Offerings (IPOs)For firms with no publicly-traded stock, such as Affymax or NetscapeSeasoned Equity Offerings (SEOs)For firms with publicly-traded stock, such as Ameritrade or Netscape (1998). Underwriters. Investment Banks are specialist at bringing security issues to the publicHelp determine the best type of securityStock vs bond vs convertible bond, etc.Determine issue priceSell securities (through syndicate) .

salena
Download Presentation

ipos and seos

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

    1. IPOs and SEOs Initial Public Offerings And Seasoned (Secondary) Equity Offerings

    3. Underwriters Investment Banks are specialist at bringing security issues to the public Help determine the best type of security Stock vs bond vs convertible bond, etc. Determine issue price Sell securities (through syndicate)

    4. The Process of IPO Steps in Public Offering Pre-underwriting conferences Registration statements Pricing the issue Public offering and sale Market stabilization Time Several Months 20-day waiting period Usually on the 20th day After the 20th day For about 30 days after the offering

    5. The Cost of Issuing Securities The spread = offer price – proceeds to the firm Averages about 7% for IPOs Averages less than 5% for SEOs Decreases with the size of the issue

    6. The Cost of Issuing Securities Underpricing = First day closing price – Issue price (IPOs only) Leaving “money on the table” for the issuing firm Average varies over time (8% to 70% in recent years) Hot Issue Market (1998 and 1999)

    7. Why are IPOs Underpriced The “Lemons” Problem Uniformed investors will be allocated less of the best issues, they will require a higher expected return to participate in all new IPOs. Legal Liability and Risk Reduces the chances of an overpricing that increases the underwriters risk of loss and lawsuits. “Sweet Taste” Firms want to leave a sweet taste in the investors’ mouth so that they will find ready buyer for additional equity issues (SEOs).

    8. The Cost of Issuing Securities The overpricing of SEOs At the announcement of a new equity offering (the “event”), the issuer’s stock falls about 3% on average.

    9. Why the Negative Return for SEOs? Overpriced Equity If managers (who have more information than the public) are acting on behalf of the existing shareholders (and themselves), when would they choose to sell new shares? Answer: When it is overpriced. The market realizes this incentive and bids down the market price when the firm announces a stock issue.

    10. Why the Negative Return for SEOs? Financial Distress If managers know more about the financial health of the firm than the investing public, when are they likely to raise new capital with equity (as opposed to debt)? Answer: When the probability of financial distress has risen. The market realizes this incentive and bids down the market price when the firm announces a stock issue.

More Related