Going Public – IPO Going Public – IPO Lecture Lecture
Dec 31, 2015
Going Public – IPO LectureGoing Public – IPO Lecture
Venture Capital Process
SeedMoney
1st RoundFinancing
2nd RoundFinancing
Clean-upFinancing
Year 1 Year 3 Year 5
Private InvestmentVenture Capital Firms
Going Public - Details Forms (audited
financials) S-1 (large offerings) SB-1 (<$10m) SCOR (<$1m)
Direct Public Offering (DPO)
Usually issue 20-40% Primary v. Secondary
issue (unseasoned v. seasoned)
Investment Bankers)
Due Diligence File with SEC Market securities
Preliminary Prospectus (“red-herring”)
File S-1 documents “Road Show” to potential
purchasers (mutual funds)
Costs (7% spread, underpricing IPO)
The benefits of IPO
Enhance the corporate’s reputation Increase the game capability with the financi
al institutions Establishing a new raising funds method by
capital market Received the capital advantage in more che
aper funds
IPO process On the Road
Underwriters and management team put together road show for prospective big investors, no media, last about 2 weeks; major cities.
Can discuss business prospects, but only orally; can expand the prospectus but not differ from prospectus
Lead underwriter gets indication of interest Final prospectus is printed, distributed for investors Investors subscribe to stock at an offering price
After market closes, day before public trading (IPO declared effective)
List of buy/sell orders called the book Difference between offering price and syndicate price about 7 to 8
% (gross spread) – split between broker and underwriter
IPO process 6 to 8 weeks before SEC registration
Issue Red Herring to see interest (filed with SEC) –no price or size Called Red Herring because of statements outlined in “RED”
Hold All-hands meeting, for IPO team and lead underwriter to decide responsibilities
Start developing final prospectus SEC Registration
Filing of S-1 documents and prospectus SEC imposes quiet period (until 25 days after IPO) SEC reviews documents
Form syndicate Lead underwrite forms group of underwriters to help sell deal,
syndicate members are allocated shares to sell (best-effort or bought deal/firm commitment)
IPO process Market opens, stock trades
Lead underwriter responsible for smooth trading Can support stock, become market maker (SEC rules)
Research: Over 50% of trading volume for first couple months Research: Buy back stock after trading (4% to 22%) – Why?
Impose penalty bids on brokers for flipping IPO declared final (completion) 5 to 7 days after market debut.
Quiet Period Ends (25 days after trading) Press and brokers can start covering stock New information can be issued by firm
Lock-up Period Ends (180 days after trading) Insiders can start selling stock Piggyback registration
Some issues of IPO
IPO underpring Scale of IPO and stock structure Mechanism selecting of selling
IPO underpring信息不对称与 IPO 折价
投资者之间的信息不对称
投资者与发行公司的信息
不对称认购风潮
投资者的信息优势
发行公司的信息优势赢家的诅咒
基本框架
现金流量价值 IPO 折价的目的 私人控制利益
规避外部股权介入
吸引外部股权介入监督提升公司价值
优先分配给中小投资者
优先分配给机构投资者
Biais and Faugerson-Crouzet
Biais, Bosscarts and Rochet
信息结构
外部人中的机构投资者有私人信息
承销商与机构投资者有私人信息
承销机制
公开申购
单一价格竞拍
Mise en Vente
单一价格竞拍
Mise en Vente
价格发现功能
弱 中 好 好 弱
The Winner’s Curse Problem and IPO Underpricing
Firm A is planning to go public by selling 2,000 shares. The true value of Firm A shares is either $8 or $12 with equal probabilit
ies. Therefore, the expected price of the shares is $8 * (1/2) + $12 * (1/2) =
$10. Let’s suppose that the IPO offer price is set at the $10 expected price
… There are two groups of investors planning to subscribe for the IPO:
Informed investors: Learn the true value of the shares before the IPO and subscribe accordingly:
If they learn that the true price is $12, informed investors subscribe 2,000 shares.
If they learn that the true price is $8, informed investors subscribe ZERO shares.
Uninformed investors: Don’t know the true price but know the expected price. Subscribe 2,000 shares.
The Winner’s Curse Problem and IPO Underpricing
Now, let’s see the contingent payoff diagram with $10 offer price and 2,000 shares sold.
There is obviously a wealth transfer from uninformed investors to informed investors. Uninformed investors who are aware of this problem will be unwilling to subscribe to the IPO unless the IPO is underpriced (the price is set somewhere below $10 where the expected profits to uninformed will be $0.)
Prob. OFFER Uninformed Informed
1/2
True price = $12
Offer price = $10
Receives 1,000 shares
Profits = $2,000
Receives 1,000 shares
Profits = $2,000
1/2
True price = $8
Offer price = $10
Receives 2,000 shares
Profits = - $4,000
Receives 0 shares
Profits = $0
Exp. E(profit) = -$1,000 =
0.5*2000 + 0.5*-4000
E(profit) = $1,000 =
0.5*2000 + 0.5*0
The Winner’s Curse Problem and IPO Underpricing
So, the question is what offer price do issuing firms set to make sure that the expected payoff to the uninformed will be $0 ?
The offer price that will induce the uninformed to subscribe is calculated as follows:
(1/2) * (1,000) * ($12 – OP) + (1/2) * (2,000) * ($8 – OP) = $0
$6,000 – 500 * OP + $8,000 – 1,000 * OP = $0
$14,000 = 1,500 * OP
OP = $9.33
Why do issuers like to attract uninformed investors to subscribe?
Because the existence of uninformed investors reduce the likelihood that a fixed price offer fails.
A case analysis: Google’s IPO Strategy
Outline Google’s Background & Financials Traditional IPOs Google’s IPO Strategy Dutch Auction Conclusion
A case analysis: Google’s IPO Strategy
Google’s Background Founded in 1998 by Stanford University students Larry
Page (31) and Sergey Brin (30) Started in a garage, 3 people Now employs more than 2,200 Its search algorithm out-powers all rivals Its name has become synonymous with Internet search 2 Main sources of revenue:
Giving advertisers the chance to display links to their sites Providing Google search capability on other Web sites
Main competition: Yahoo and Microsoft Factoid: the original name of Google was BackRub
A case analysis: Google’s IPO Strategy
Google Financials: Pre-IPO Estimated Value before going public: $15M -
$20M Estimated Annual Revenue - $500M - $1B
Generates 95 percent of its revenue from advertising. Estimated Profits - $150M - $300M IPO could generate $4B
Had an audience of 60 million unique visitors, or 40 percent of all U.S. Internet users.
Income Statement of Goole
A case analysis: Google’s IPO Strategy
Traditional IPO Company chooses an array of investment banks – led b
y one or two lead managers Investment bank sets price Bank sells to investors (Fidelity, wealthy individuals) Prices are usually set low to ensure a big first day run fo
r investment banks and their clients Investors resell to public (typically at a higher price)
A case analysis: Google’s IPO Strategy
Technical Industry Background of IPOs During the boom years of the 1990s, 400 comp
anies went public each year In 2003, only 69 companies completed IPOs(4 o
f which were dot-coms). This is the fewest since the 1970s
Weak market in 2004
A case analysis: Google’s IPO Strategy
Google’s IPO Strategy In April 2004, Google announced plans to make
its stock available via Dutch Auction Underwriters
Morgan Stanley and Credit Suisse First Boston Eighth largest IPO in history
E-mailed the selected bidders their price range Defied conventional wisdom by choosing to go
public in August, when the IPO market typically slows
A case analysis: Google’s IPO Strategy
Google estimated the price of its shares at well above $100 at a time average IPOs commanded far less
Predicted share price Between $108 and $135 each
Class A and Class B common stock Class A will have 10 votes per share; Class B wi
ll have 1 vote per share Founders did not want to lose control
A case analysis: Google’s IPO Strategy
Google’s Decision: The Dutch Auction Online auction Investors bid on an IPO before it goes public Benefits: in theory a fair market price is set and the com
pany reaps more cash Sets price on demand Investment bankers do not set the price Bankers do not control which investors get in. Equal opp
ortunity for every level of investor. Get sold directly to the public – cuts out the middle man
A case analysis: Google’s IPO Strategy
Aug 13, 2004 No IPO Delayed a week because of logistics details. Couldn’t e
nter everybody in the auction system. Morgan Stanley - “This is all new to us, but we just hit a
speedbump” August 18, 2004
Google stock (GOOG) opens at $100.01, after being priced at $85.00 , lower than original ($108 - $135)
shares offered: 19.6 million , Much less than original (25.7 million)
A case analysis: Google’s IPO Strategy
Was Google’s IPO strategy successful? Concerns leading up to the IPO
Google to issue 2.7 million shares to Yahoo! Due to settlement over a patent issue
Management may have broken securities laws in 18 states by neglecting to register stock previously distributed to its employees
No explicit growth plans outlined to SEC Overpriced stock in a weak market
A case analysis: Google’s IPO Strategy Success
Pricing did in fact become transparent Google remained a Good IPO in a Bad Market Opened the door for similar-sized companies to consider using t
he Dutch Auction Method
Failure Google left money on the table It scared off retail investors with a high price tag and annoyed
Wall Street Final auction price fell well below the initial price range Lower-than-expected price for shares raised fresh doubts about
the auction process