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IPOs

IPOs. IPO. An IPO is the first time that the general public is able to invest in the firm An IPO generally happens when a firm needs more money than it can raise from VC’s VC’s come in after credit cards, friends, and family. Venture Capital.

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IPOs

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  1. IPOs

  2. IPO • An IPO is the first time that the general public is able to invest in the firm • An IPO generally happens when a firm needs more money than it can raise from VC’s • VC’s come in after credit cards, friends, and family

  3. Venture Capital • These are typically limited partnerships, where investment managers raise money from qualified investors • Four main suppliers of venture capital: • Old Money • Large firm with established venture-capital subsidiaries. • Qualified Individuals • Individuals worth over $1,000,000 and incomes above $100,000

  4. The Basic Process • Management gets Board approval to go public • The firm files a registration statement with the SEC • The SEC studies the registration statement • This is the waiting period • The firm prepares and files an amended registration statement with the SEC • Once the firm gets SEC approval, starts selling and sets a share price

  5. An Example of a Tombstone

  6. Types of IPO’s • Firm Commitment • Best Efforts • Dutch Auction

  7. Firm Commitment • The firm sells the shares to the underwriting syndicate (Primary Sale) • The Syndicate resells to the public (Secondary Sale) • Spread: difference between what the syndicate buys the shares for and sells them for • In the US the spread is typically about 7% • Syndicate bears the risk of not selling all the shares • Most common type of IPO in the US

  8. Best Effort • Underwriter makes a “best effort” to sell the securities at an agreed-upon price • The firm bears the risk of not selling all shares • If there is not enough demand the firm can pull the offer • Firm still pays the underwriter, but keeps all the shares • Not very common

  9. Dutch Auction • The underwriter simply records investors bids • Number of shares and price per share • Greatly reduces the importance of the underwriter • The price is the highest bid that clears the market • Investors have an incentive to bid high • Higher bids are more likely to win, while you are unlikely to pay the price you bid • Google was the first large Dutch Auction IPO

  10. Dutch Auction Example Firm TUM is offering 1,000 shares through a Dutch Auction. What is the price of each share?

  11. IPO Underpricing • IPOs are generally offered at a prices below their true market value • This implies that the firm is “leaving money on the table” • IPOs are potentially underpriced because: • Of the difficulty in setting an accurate price • Private companies are very hard to value • Underwriter wants to ensure a large day one return • Managers want to ensure their ability to go back to the market

  12. SEOs A Seasoned (Secondary) Equity Offering is when a public company offers additional equity to the public This is generally the result of the firm needing cash for investments

  13. SEO Announcement and Firm Value • The market value of existing equity drops on the announcement of a SEO • The price may drop because: • Managers are likely to issue stock when they think it is overpriced • May be issuing equity to repurchase debt, because of a fear of financial distress • A share now entitles you to less of the company than it did before the SEO

  14. The Costs of Equity Public Offerings Proceeds Direct Costs Underpricing (in millions) SEOs IPOs IPOs 2 - 9.99 2.88% 15.36% 18.18% 10 - 19.99 8.81% 11.63% 10.02% 20 - 39.99 7.24% 9.81% 17.91% 40 - 59.99 6.20% 9.21% 29.57% 60 - 79.99 5.81% 8.65% 39.20% 80 - 99.99 5.56% 8.34% 45.36% 100 - 199.99 5.00% 7.67% 37.10% 200 - 499.99 4.26% 6.72% 17.72% 500 and up 3.64% 5.15% 12.19%

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