15 1 Fundamentals of Corporate Finance Sixth Edition

15 - 1 Fundamentals of Corporate Finance Sixth Edition Chapter 15 Venture Capital, IPOs, and Seasoned Offerings Richard A. Brealey Stewart C. Myers Alan J. Marcus Slides by Matthew Will Mc. Graw Hill/Irwin Copyright ©Copyright 2009 by The Mc. Graw-Hill Companies, Inc. All rights reserved © 2009 by The Mc. Graw-Hill Companies, Inc. All rights reserved

15 - 2 Topics Covered w Venture Capital w The Initial Public Offering w The Underwriters w General Cash Offers by Public Companies w The Private Placement

15 - 3 Venture Capital

15 - 4 Venture Capital Money invested to finance a new firm 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.

15 - 5 Venture Capital

15 - 6 Venture Capital

15 - 7 Venture Capital Sources of Venture Capital w Angel investors w Corporate investors w Private equity investing

Primary Versus Secondary Markets 15 - 8 w Primary New issue è Key factor: issuer receives the proceeds from the sale è w Secondary Existing owner sells to another party è Issuing firm doesn’t receive proceeds and is not directly involved è

15 - 9 How Securities Are Issued w Investment Banking w Shelf Registration w Private Placements w Initial Public Offerings (IPOs)

15 - 10 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.

15 - 11 Initial Public Offering www. ipohome. com

Initial Public Offerings 15 - 12 w Process Road shows è Bookbuilding è w Underpricing Post sale returns è Cost to the issuing firm è

Investment Banking Arrangements 15 - 13 w Underwritten vs. “Best Efforts” è Underwritten: firm commitment on proceeds to the issuing firm w Negotiated vs. Competitive Bid Negotiated: issuing firm negotiates terms with investment banker è Competitive bid: issuer structures the offering and secures bids è

15 - 14 Initial Public Offering Expenses

Figure 3. 1 Relationship Among a Firm Issuing Securities, the Underwriters and the Public 15 - 15

15 - 16 The Underwriters

15 - 17 Figure 3. 2 A Tombstone Advertisement

Figure 3. 3 Average Initial Returns for IPOs in Various Countries 15 - 18

15 - 19 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.

15 - 20 Shelf Registrations w SEC Rule 415 w Introduced in 1982 w Ready to be issued – on the shelf

15 - 21 Private Placements Private placement: sale to a limited number of sophisticated investors not requiring the protection of registration w Allowed under Rule 144 A w Dominated by institutions w Very active market for debt securities w Not active for stock offerings

15 - 22 Rights Issue - Issue of securities offered only to current stockholders. Example – Royal Bank of Scotland currently has 10 billion shares outstanding. The market price is £ 3. 725/sh. RBS decides to raise additional funds via a 11 for 18 rights offer at £ 2. 00/sh. If we assume 100% subscription, what is the value of each right?

15 - 23 Rights Issue Example – Royal Bank of Scotland currently has 10 billion shares outstanding. The market price is £ 3. 725/sh. RBS decides to raise additional funds via a 11 for 18 rights offer at £ 2. 00/sh. If we assume 100% subscription, what is the value of each right? Þ Current Market Value = 10 bil x £ 3. 725/sh = £ 37. 25 bil Þ Total Shares = 10 bil + 6. 11 bil = 16. 11 bil Þ Amount of new funds = 6. 11 bil x £ 2. 00/sh = £ 12. 22 bil Þ New Share Price = (37. 25 + 12. 22) / 16. 11 = £ 3. 071/sh

15 - 24 Web Resources www. vnpartners. com www. nvca. org biz. yahoo. com/ipo www. ipohome. com www. hoovers. com http: //cbsmarketwatch. com http: //bear. cba. ufl. edu/ritter/ www. edgar-online. com