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- 1. Raising Capital http://www.bloomberg.com/news/videos/2015-04-14/watch-out- xiaomi-here-comes-oneplus- Venture Capital Many VC firms are formed from a group of investors that pool capital and then have partners in the firm decide which companies will receive financing Some large corporations have a VC division Venture Capital Fund (Limited Partnerships) Limited Partners (Pension Funds, Educational Endowments, Foundations, Insurance Companies, Wealthy Individuals) General Partners (“Venture Capitalists”) raise a fund of a given size from the Limited Partners by convincing them that the GPs have a unique strategy or expertise in a particular sector or sectors of the market.
- 2. 3 How Venture Capital Works? Look for deals: Private financing for relatively new businesses in exchange for equity Management investment: Usually entails some hands-on guidance Harvest: The company should have an “exit” strategy Sell the company – VC benefits from proceeds from sale Facebook: $19 billion acquisition of WhatsApp Google: $3.2 billion on Nest Labs Apple: $3 billion for Beats Take the company public – VC benefits from IPO http://www.bloomberg.com/news/articles/2015-04-15/xiaomi- backed-ninebot-targets-u-s-ipo-after-segway-acquisition 4 http://www.bloomberg.com/news/videos/2015-02-18/venture- capital-boom-highest-since-2000-tech-bust In 2014: about 50% increase over 2013 Top industries:
- 3. Software media entertainment biotechnology consumer products and services medical devices and equipment IT services VCs in Maryland Abell Venture Fund ABS Capital Partners Anthem Capital, L.P. Gabriel Venture Partners Highland Capital Partners Inflection Point Ventures Key Principal Partners Kinetic Ventures, L.L.C. MMG Ventures, L.P. Montagu Newhall Associates, Inc New Enterprise Associates Novak Biddle Venture Partners Sterling Venture Partners and many more...
- 4. Top VC investments in Maryland Woodbrook Capital Inc., Towson, Md., 2013 Md. investments: $27.82 million J. H. Whitney & Co. LLC, New Canaan, Conn., 2013 Md. investments: $$50 million Third Security LLC, Radford, Va, 2013 Md. investments: $51.4 million Sandbox Industries LLC, Chicago, Ill., 2013 Md. investments: $55.81 million Oak Investment Partners, Greenwich, Conn., 2013 Md. investments: $75 million Kinetic Ventures : An example http://www.kineticventures.com/about.html Prior Investment: 4/03/2012: Aztek Networks (Acquired by GENBAND) Genband : IP infrastructure and application provider Aztek Networks: a leading supplier of switch consolidation and network migration solutions. Prior to the acquisition, privately held Aztek Networks was backed by a number of notable VC investors, including Verizon Investments LLC.. The Company was founded in 1982 as Aztek Engineering and is based in Boulder, Colo.
- 5. State support Angel / Venture Financing in Maryland state supported investment programs http://business.maryland.gov/mvf http://www.bio.maryland.gov/funding/pages/angel-vc.aspx Choosing a Venture Capitalist Look for financial strength Choose a VC that has a management style that is compatible with your own Obtain and check references What contacts does the VC have? What is the exit strategy? 11 https://www.youtube.com/watch?v=OkdOEPucfGs http://hunterwalk.com/2014/01/05/how-vcs-spend-their-time- err-how-this-vc-spends-his-time/ 50% Evaluate New Opportunities 35% Work With Existing Investments 10% General Relationship Building 5% Fund Operations
- 6. Selling Securities to the Public https://www.youtube.com/watch?v=GnJCOof2HJk 13 Should The Company Go Public? Advantages: Reach out to investors at large when cost of privately held capital is too high Gain higher profiles Allow founders to cash out Disadvantages: High costs one-time IPO cost ongoing cost related to being a publicly traded company Selling Securities to the Public 1. Management must obtain permission from the Board of Directors 2. Firm must file a registration statement with the SEC 3. The SEC examines the registration during a 20-day waiting period A preliminary prospectus, also called a red herring, is
- 7. distributed during the waiting period If there are problems, the company is allowed to amend the registration and the waiting period starts over. 4. Securities may not be sold during the waiting period. 5. The price is determined on the effective date of the registration What advisors should the firm hire ? Consultants Auditors Lawyers Underwriters: Formulate method used to issue securities Price the securities Sell the securities Price stabilization by lead underwriter 16 Underwriters Syndicate – group of investment bankers that market the securities and share the risk associated with selling the issue Spread – difference between what the syndicate pays the company and what the security sells for initially in the market Recent years, 7% spread http://www.washingtonpost.com/business/goldman-sachs-says-
- 8. 1q-net-income-rises/2015/04/16/de07b59c-e42f-11e4-ae0f- f8c46aa8c3a4_story.html https://www.youtube.com/watch?v=gRSJG6QB03I 17 Firm Commitment Underwriting Issuer sells entire issue to underwriting syndicate The syndicate then resells the issue to the public The syndicate bears the risk of not being able to sell the entire issue for more than the cost This is the most common type of underwriting in the United States The underwriter makes money on the spread between the price paid to the issuer and the price received from investors when the stock is sold 18 Green Shoe Provision Allows the syndicate to purchase an additional 15% of the issue
- 9. from the issuer Allows the issue to be oversubscribed Provides some protection for the underwriters as they perform their price stabilization function Lockup Agreements Restriction on insiders that prevents them from selling their shares of an IPO for a specified time period The lockup period is commonly 180 days The stock price tends to drop when the lockup period expires due to market anticipation of additional shares hitting the street Conflicts Between the company and the investment bank Pricing is just simple in theory, but there exit big conflicts: company wants the offer price to be high to generate more cash investment banks is afraid of being stuck with over-valued stock Best Efforts Underwriting More common in volatile markets
- 10. Underwriter must make their “best effort” to sell the securities at an agreed-upon offering price The company bears the risk of the issue not being sold The offer may be pulled if there is not enough interest at the offer price. In this case, the company does not get the capital, and they have still incurred substantial flotation costs 22 Dutch Auction Underwriting Underwriter accepts a series of bids that include number of shares and price per share The price that everyone pays is the highest price that will result in all shares being sold There is an incentive to bid high to make sure you get in on the auction but knowing that you will probably pay a lower price than you bid (The US Treasury has used Dutch auctions for years!) 23 Dutch Auction Underwriting: Rial CompanyBidderQuantityPriceA100 shares$16B100 shares 14
- 11. C200 shares 12D100 shares 12E200 shares 10 Rial Company wants to sell 400 shares to the public. The company receives five bids as follows: What is the final offer price in the IPO? Who will receive shares? How much? After the auction…BidderQuantityPriceA80 shares$12B80 shares 12 C160 shares 12D80 shares 12 Google Background Dutch Auction: consistent with its auction-based business model (was supposed to avoid a POP) Aug 14, 2004: completed the auction at $85 for 19.6 million shares Aug 15, 2004: the stock closed at $100.34 on the first day, a run-up of 18% Was it a good IPO?
- 12. How does the market react to IPO’s? The short-run IPO underpricing The long-run IPO underperformance Underpricing from 1975-2012, the average 1st day return is 21.7% to issuing company, these returns “leave money on the table” IPOs on average provide large first-day returns, their long-term returns over the following 3 years are below average. In sum, the offering price appears to be too low, but the 1st day run-up is generally too high. Highest 1st day IPO returns in 2013Rank CompanyOffering Price ($)1st-day Price($)Gain1Sprouts Farmers Market Inc.18.0040.11123%2Noodles & Company18.0036.75104%3Benefitfocus Inc.26.5053.55102%4The Container Store Group Inc.18.0036.20101%5Foundation Medicine Inc.18.0035.3596%6Rocket Fuel Inc.29.0056.1093%7China Commercial Credit Inc.6.5012.4592%8Qunar Cayman Islands
- 13. Limited15.0028.4089%9FireEye Inc.20.0036.0080%10Marketo Inc.13.0023.1078% Average 1st day return: 21.2% in 2013 The 1st day of Trading: Facebook Facebook: broke even on its 1st day, May 18,2012: offering price at $38, opened at $42.05, and closed at $38.23 (would have fallen if the underwriters had not created artificial demand by purchasing the falling shares) on the 2nd day, fell by 11% What happened? Facebook’s amended filings in the week before its IPO may have contributed to its weak first-day performance Facebook’s amended filings May 15, 2012: Facebook increased the range of price from $28- $35 to $34-$38. May 16, 2012: Facebook increased 84 million shares to be sold by insiders May 16, 2012: offer price $38 Supply vs demand: Increases in the offer price and the number of shares to be sold, especially 57% of total shares to be sold are from insiders (Google had about 28%, 0% for Amazon) potentially drove down demand for the stock
- 14. Twitter IPO Offer price: $26 Opened on Nov 7 at $45.10 Closed at $44.90 Issuance Costs Spread Other direct expenses – legal fees, filing fees, etc. Indirect expenses – opportunity costs, i.e., management time spent working on issue Issuance Costs: More Abnormal returns – price drop on existing stock Underpricing – below market issue price on IPOs (money left on the table) Green Shoe option – cost of additional shares that the syndicate can purchase after the issue has gone to market
- 15. Malibu Boats (MBUU) A manufacturer of watersport boats, went public in 2014 sold 7.142 million shares at an offering price of $14.00 founders and other shareholders sold an additional 571,289 of their own shares the underwriters’ direct charge was $0.98 per share thus the stock was sold at a price of $14, but MBUU received only $14-$0.98=$13.02 per share So the total cost for the 7.142 million shares =$0.98(7.142)=$7.0 million, and $559,000 for the shares sold by the founders and other existing shareholders. Malibu Boats (MBUU) (Cont’d) Other direct costs (lawyers’ fees, accountants’ fees, pricing, engraving...): ≈ $800,000 Indirect costs: a 1st-day run-up from offering price $14 to $17.50, so money left on the table ≈ 7.142($17.5-$14)=$25 million time spent on IPO rather than managing the business IPO is quite expensive! Long-Run IPO Underperformance In the long-run, IPO shares have significantly underperformed to the turn of the 30%-50% below comparable companies over 3-5 years.
- 16. Is IPO for everyone? It is difficult for retail investors to get the chance to buy an IPO at its offering price, especially a “hot” one. Virtually all sales go to institutional investors and preferred retail customers. OpenIPO (a modified Dutch auction) may allows shares to be allocated in an impartial way, but it is still difficult for small investors to get in on the first day for hot IPOs. Presentation: Your reports should include your name, and the IPO Company that you have investigated. Also include numeric analysis (or printouts of your Excel worksheet) and your interpretation listed in the outline. Analytical outline: The purpose of this study is to gain more insights into the mechanisms of IPO markets and the principal issues that IPO market participants commonly face, based on publicly accessible data. 1. Selection of an IPO From the mater list of IPOs between 1997 and 2008 (shared via One Drive), select a company that is of interest to you and enter your name into the master file (you will supply other
- 17. information about the company later on). Based on the Ticker of the company, find the Form S-1 (or Form SB-1 if for a small firm) IPO prospectus from EDGAR’s website: http://www.sec.gov/edgar/searchedgar/companysearch.html Note: Form S-1 requires companies to provide information on the planned use of capital proceeds, detail the current business model and competition, as well provide a a brief prospectus of the planned security itself, offering price methodology, and any dilution that will occur to other listed securities. As an example, you may find Alibaba’s IPO prospectus online at http://www.sec.gov/Archives/edgar/data/1577552/00011931251 4184994/d709111df1.htm#toc 2. Why would the company go public? Was the time right to do an IPO? Read through the IPO prospectus, in particular, look into the “Management Discussion and Analysis (MD&A)” section to examine the business plan. Discuss why such an IPO was deemed to be necessary by the firm. Any insights about the company’s view of market opportunities, industry environment (products, competitors), risk and uncertainty (business, legal, financial)? 3. What advisors the firm hired? Record information about consultants, auditors, layers, underwriters, and printers if any. What are the costs/fees for them? Which one you believe placed the most important role during the preparation of the IPO? Since we are examining retrospectively, was there any seasoned equity offering after this IPO? If so, did the company use the same underwriter? 4. What was the Offering Price and number of shares offering? Was there any changes before the actual listing? 5. How did the market react to the IPO? 1) The short-run IPO return
- 18. Find the beginning price and ending price when the market started trading, and calculate the one-day return from the offering price to the ending price on the first trading day. What was the 1st day return of your IPO Company? Were there money left on the table? 2) The long-run performance From Yahoo!Finance, find the Adjusted Ending price three years and five years after the IPO listing day, and calculate the holding period return (HPR) from the offering price to 3-year and 5-year post-IPO trading price. What was the holding HPR of your IPO company over these time periods? Record your short-run and long-run IPO returns in the shared Master file on One Drive (we will be using this pool of IPOs to find the mean value of the IPO market returns). H&E Equipment Services Inc. IPO date is 1/30/2006. PERMNO is 91080.