Chapter 15

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Chapter 15

  1. 1. Chapter 15 Investment Banking: Public and Private Placement
  2. 2. PPT 15-1 FIGURE 15-1 Distribution process in investment banking
  3. 3. PPT 15-2 FIGURE 15-2 Allocation of underwriting spread
  4. 4. PPT 15-4 FIGURE 15-4 Internet Capital Group common stock price (as of May 6, 2003)
  5. 5. Chapter 15 - Outline LT 15-1 <ul><li>What is Investment Banking? </li></ul><ul><li>Functions of the Investment Banker </li></ul><ul><li>Underwriting Spread </li></ul><ul><li>Public vs. Private Companies </li></ul><ul><li>Advantages and Disadvantages of a Public Company </li></ul><ul><li>Initial Public Offering and Leveraged Buyout </li></ul>
  6. 6. What is Investment Banking? LT 15-2 <ul><li>Investment Banking deals with primary offerings of new securities </li></ul><ul><li>The Investment Banker serves as the intermediary or link between the corporation and the investor </li></ul><ul><li>Brings the two parties together by channeling money from one to the other </li></ul>
  7. 7. Functions of the Investment Banker LT 15-3 <ul><li>Underwriter: </li></ul><ul><ul><li>– buying the security and reselling it to the public </li></ul></ul><ul><ul><li>– the risk-taking function </li></ul></ul><ul><li>Market Maker: </li></ul><ul><ul><li>– ensuring an available market by buying and selling the security </li></ul></ul><ul><li>Advisor: </li></ul><ul><ul><li>– providing advice on the issue </li></ul></ul><ul><li>Agency Functions : </li></ul><ul><ul><li>– negotiating the best possible deal for the corporation </li></ul></ul>
  8. 8. Underwriting Spread LT 15-4 <ul><li>Spread represents the compensation for those participating in the distribution </li></ul><ul><ul><li>Spread = Public Price - Issue Price </li></ul></ul><ul><li>It is shared by all the participants </li></ul><ul><li>Spread on common stocks is greater than the spread on bonds </li></ul>
  9. 9. Public vs. Private Companies LT 15-5 <ul><li>Public company: </li></ul><ul><ul><li>– when shares of a company are offered to the public </li></ul></ul><ul><ul><li>– anyone can buy shares of the stock </li></ul></ul><ul><li>Private company: </li></ul><ul><ul><li>– privately owned or held by an individual or family </li></ul></ul><ul><ul><li>– not available to the general public </li></ul></ul>
  10. 10. Advantages and Disadvantages of a Public Company LT 15-6 <ul><li>Advantages of being public: </li></ul><ul><ul><li>– greater availability of funds (easier to grow and raise money) </li></ul></ul><ul><ul><li>– prestige </li></ul></ul><ul><li>Disadvantages of being public: </li></ul><ul><ul><li>– company information must be made available to the public (opening the company up to public scrutiny and criticism) </li></ul></ul><ul><ul><li>– high costs of going public (expensive) </li></ul></ul>
  11. 11. Initial Public Offering and Leveraged Buyout LT 15-7 <ul><li>Initial Public Offering (IPO): </li></ul><ul><ul><li>– when a company sells its stock to the public for the first time </li></ul></ul><ul><ul><li>– the company becomes publicly traded </li></ul></ul><ul><li>Leveraged Buyout (LBO): </li></ul><ul><ul><li>– money is borrowed to repurchase all the shares of the company resulting in a great deal of debt </li></ul></ul><ul><ul><li>– when a company “goes private” </li></ul></ul>

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