Your SlideShare is downloading. ×
Chapter 14
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Saving this for later?

Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime - even offline.

Text the download link to your phone

Standard text messaging rates apply

Chapter 14

1,318
views

Published on

Published in: Economy & Finance, Business

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
1,318
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
37
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Chapter 14 Venture Capital, IPOs and Seasoned Offerings Prepared by Shahriar Hasan Thompson Rivers University
  • 2. Chapter Outline
    • Venture Capital
    • The Initial Public Offering
    • The Underwriters
    • Listing on the Stock Market
    • Rights Issues and General Cash Offers by Public Companies
    • The Private Placement
  • 3. 14.1 Venture Capital
    • Venture capital is money invested to finance a new firm.
    • ● Venture capitalists are investors who are prepared to back an untried company in return for a share of the profits.
    • ● An angel investor is a wealthy individual who invests in early-stage ventures.
    • ● Venture capitalists know that the success of a business depends on the efforts its owner-managers put in.
    • ● Typically, restrictions are placed on the management and venture capitalists advance the funding to the firm in stages, rather than all upfront.
  • 4. 14.2 The Initial Public Offering (IPO)
    • Terminology
    • Initial Public Offering (IPO ): First offering of stock to the general public.
    • Prospectus : Formal summary that provides information on an issue of securities.
    • 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.
    • Underpricing : Issuing securities at an offering price set below the true value of the security.
  • 5. The Initial Public Offering
    • Prospectus Requirement
      • In Canada, a firm going public must provide potential investors with a prospectus .
      • A prospectus is a formal summary that provides information on an issue of securities.
      • One of the key functions of a prospectus is to warn investors about the risks involved in investment in the firm.
    • Flotation Costs : The costs incurred when a firm issues new securities to the public.
    • It includes commissions, legal, accounting and other administrative costs.
  • 6. The Initial Public Offering
    • Pricing the Issue
      • The issuing company and the underwriters must set a price for the new securities they are about to offer.
      • This is done using:
        • Discounted cash flow calculations.
        • An analysis of the price-earnings ratios of the shares of the firm’s principal competitors.
      • The issuing company wants to get the highest possible price for its shares.
      • The underwriter is more cautious since they might be left with unsold securities if the issue is perceived to be expensive.
      • As a result, underwriters typically try to underprice the IPO
  • 7. The Initial Public Offering
    • Top 10 IPO issues of Canada in 2007.
  • 8. 14.3 The Underwriters
      • Underwriters provide advice to the issuing firm.
        • They help price and market the new issue.
      • For large issues, a group of underwriters called a syndicate is formed with the principal underwriter being called the lead manager .
      • Underwriters buy new shares from the issuer and then resell them to the public at a higher price, thereby making a spread. This is called a firm commitment .
      • In risky cases, an underwriter may prefer a best efforts deal.
        • Here the underwriter agrees, for a commission, to sell as much of the issue as possible, but does not guarantee to sell the entire issue.
  • 9. The Underwriters
    • Canada’s top underwriters for equity and debt in 2007.
  • 10. 14.4 Listing on the Stock Market
      • When a firm decides on an IPO of its shares, it must also decide where its newly issued shares should be traded .
        • Stock exchanges are organized facilities with a centralized physical location. For example, TSX, NYSE and so on.
        • OTC markets exist in cyber-space and consist of a network of dealers who trade with each other electronically. NASDAQ is an example.
  • 11. 14.5 Rights Issues and General Cash Offers by Public Companies.
    • Terminology
      • Seasoned Offering : Sale of securities by a firm that is already publicly traded.
      • Rights Issues : Issue of securities offered only to current shareholders.
      • Oversubscription Privilege : Given to shareholders in a rights issue enabling them to purchase any unsold shares at the subscription price.
      • Standby Underwriting Agreement : The underwriter stands ready to purchase any unsold shares.
  • 12. Rights Issues and General Cash Offers by Public Companies.
      • 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.
      • General Cash Offer : Sale of securities open to all investors by an already public company.
  • 13. Rights Issues and General Cash Offers by Public Companies.
    • Raising Funds After the IPO
      • Public companies can issue securities by making a general cash offer to investors at large or by making a rights issue.
      • A rights issue is an issue of securities which is offered only to existing shareholders.
      • In a rights issue, the company offers its shareholders the right to buy additional shares at a subscription price, which is significantly below the market value of the shares.
  • 14. Rights Issues and General Cash Offers by Public Companies.
    • Example
      • ABC Corp currently has 9 million shares outstanding. The market price is $15 per share. ABC decides to raise additional funds via a 1 for 3 rights offer at $12 per share. If we assume 100% subscription, what is the value of each right?
    • Current Market Value = 9 mil  $15 = $135 mil
    • Total Shares = 9 mil + 3 mil = 12 mil
    • Amount of new funds = 3 mil  $12 = $36 mil
    • New Share Price = (136 + 36) / 12 = $14.25 per share
    • Value of a Right = Rights-on price – Ex-rights price
    • = 15 - 14.25 = $0.75
  • 15. 14.6 The Private Placement
      • A private placement is the sale of securities to a limited number of investors without a public offering.
      • Private placements avoid many of the costs associated with a public offering and are less expensive to arrange.
      • Advantages:
        • The issue can be custom tailored.
        • It is much easier to change the terms of the contract when only a few investors are involved.
      • Disadvantage:
        • Investors cannot easily resell the security.
  • 16. Summary of Chapter 14
      • Venture capitalists specialize in providing new equity capital to help firms grow from start-up until they are ready to “go public”.
      • Most venture capital financing is done in stages to keep the firm on a short leash and force it to prove, at several crucial points, that it is worthy of additional investment.
      • An IPO is the first sale of shares to the public.
        • This sale is usually managed by an underwriting firm, which purchases the issue for resale to investors.
        • Underwriters also provide procedural and financial advice to the issuing firm.
  • 17. Summary of Chapter 14
      • An IPO is the first sale of shares to the public.
        • This sale is usually managed by an underwriting firm, which purchases the issue for resale to investors.
        • Underwriters also provide procedural and financial advice to the issuing firm.
      • The costs of an issue can be significant:
        • Direct costs include the preparation of a prospectus, legal and administrative fees and the underwriter’s fees.
        • The indirect cost is the under-pricing of the issue.
      • A firm can use a rights issue to sell its shares to existing shareholders.
      • It can use a general cash offer to sell its shares to the public.
      • Or, the firm can use a private placement and sell its securities to a small group of institutional investors.