Chapter 15 Principles Principles of of Corporate Corporate Finance Finance Tenth Edition How Corporations Issue Securities Slides by Matthew Will Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin
Chapter 15 PrinciplesPrinciples
ofof
CorporateCorporate
FinanceFinance
Tenth Edition
How Corporations Issue Securities
Slides by
Matthew Will
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved
McGraw Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
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Topics Covered
Venture CapitalThe Initial Public OfferingOther New-Issue ProceduresSecurity Sales by Public Companies
– Rights Issue
Private Placements and Public Issues
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Venture Capital
Since success of a new firm is highly dependent on the effort of the managers, restrictions are placed on management by the venture capital company and funds are usually dispersed in stages, after a certain level of success is achieved.
Venture Capital
Money invested to finance a new firm
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Venture Capital
2.0Value2.0Value
1.0equity originalYour 1.0assetsOther
1.0capital venturefromequity New 1.0equitynew from Cash
Equityand sLiabilitieAssets
($mil)Sheet BalanceValue Market StageFirst
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Venture Capital
14.0Value14.0Value
5.0equity originalYour 9.0assetsOther
5.0stage1st fromEquity 1.0assets Fixed
4.0stage 2nd fromequity New 4.0equitynew from Cash
Equityand sLiabilitieAssets
($mil)Sheet BalanceValue Market Stage Second
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U.S. Venture Capital Investments
7.910.8
14.620.7
53.5
104.4
40.5
21.7 19.6 21.8 22.4
0
20
40
60
80
100
120$
Mil
lion
s
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
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Initial Offering
Initial Public Offering (IPO) - First offering of stock to the general public.
Underwriter - Firm that buys an issue of securities from a company and resells it to the public.
Spread - Difference between public offer price and price paid by underwriter.
Prospectus - Formal summary that provides information on an issue of securities.
Underpricing - Issuing securities at an offering price set below the true value of the security.
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Motives For An IPO
Percent of CFOs who strongly agree with the reason for an IPO
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The Top Managing Underwriters
UnderwriterValue of Issues
($billion) Number of issues
Citigroup 667 1966J.P. Morgan 506 1738Deutsche Bank 475 1444Morgan Stanley 455 1419Lehman Brothers 477 1306
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Average Initial IPO Returns
0 20 40 60 80 100
return (percent)
DenmarkCanadaNetherlandsSpainTurkeyFranceAustraliaNorwayHong KongUKUSAItalyJapanSingaporeSwedenTaiwanGermanySwitzerlandKoreaBrazilIndiaChina
256 %
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Initial Offering
Average Expenses on 1767 IPOs from 1990-1994Value of Issues
($mil)
Direct
Costs (%)
Avg First Day
Return (%)
Total
Costs (%)
2 - 9.99 16.96 16.36
10 - 19.99 11.63 9.65
20 - 39.99 9.7 12.48
40 - 59.99 8.72 13.65
60 - 79.99 8.2 11.31
80 - 99.99 7.91 8.91
100 - 199.99 7.06 7.16
200 - 499.99 6.53 5.70
500 and up 5.72 7.53
All Issues 11.00 12.05
25 16
18 15
18 18
17 95
16 35
14 14
12 78
11 10
10 36
18 69
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.
.
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IPO Proceeds
IPO Proceeds and First Day Returns
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General Cash Offers
Seasoned Offering - Sale of securities by a firm that is already publicly traded.
General Cash Offer - Sale of securities open to all investors by an already public company.
Shelf Registration - A procedure that allows firms to file one registration statement for several issues of the same security.
Private Placement - Sale of securities to a limited number of investors without a public offering.
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Underwriting Spreads (2006)
Type CompanyIssue Amount ($ millions)
Underwriter's spread
Common Stock:
IPO Mastercard 2,399 4.70%
IPO Golfsmith International 29 7.00%
IPO Luna Innovators 21 7.00%
IPO Verigy 128 7.00%
Seasoned Nasdaq Stock Market 556 4.00%
Seasoned Parker Drilling 101 1.06%
Seasoned KFX, Inc. 131 4.00%
Seasoned Walter Industries 149 1.28%
Seasoned Natural Gas Services Group 50 5.77%
Debt (cupon rate, type, maturity) :5.37% floating rate notes, 2009 Honeywell International 300 0.25%5.75% debentures, 2036 Boston Edison 200 0.88%
5.2% senior global notes, 2011 Home Depot 1,000 0.35%7% senior notes, 2016 Navigators Group 125 0.65%5% senior convertible notes, 2013 BioMartin Pharma 125 3.00%
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Rights Issue
Rights Issue - Issue of securities offered only to current stockholders.
Example – BNP Paribas Bank needs to raise €5.50 billion of new equity. The market price is €77.40/sh. Lafarge decides to raise additional funds via a 1 for 10 rights offer at €65.40 per share. If we assume 100% subscription, what is the value of each right?
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Rights Issue
Current Market Value = 10 x €77.40 = €774.00 Total Shares = 10 + 1 = 11 Amount of funds = 774 + 65.40 = €839.40 New Share Price = (839.40) / 11 = €76.31 Value of a Right = 76.31 – 65.40 = €10.91
Example - BNP Paribas Bank needs to raise €5.50 billion of new equity. The market price is €77.40/sh. Lafarge decides to raise additional funds via a 1 for 10 rights offer at €65.40 per share. If we assume 100% subscription, what is the value of each right?
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Rights Issue
Slightly More Difficult Example
Lafarge Corp needs to raise €1.28billion of new equity. The market price is €60/sh. Lafarge decides to raise additional funds via a 4 for 17 rights offer at €41 per share. If we assume 100% subscription, what is the value of each right?
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Rights Issue
Current Market Value = 17 x €60 = €1,020 Total Shares = 17 + 4 = 21 Amount of funds = 1,020 + (4x41) = €1,184 New Share Price = (1,184) / 21 = €56.38 Value of a Right = 56.38 – 41 = €15.38
Example - Lafarge Corp needs to raise €1.28billion of new equity. The market price is €60/sh. Lafarge decides to raise additional funds via a 4 for 17 rights offer at €41 per share. If we assume 100% subscription, what is the value of each right?
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Web Resources
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