Chapter 15 HOW CORPORATIONS ISSUE SECURITIES Brealey Myers

Chapter 15 HOW CORPORATIONS ISSUE SECURITIES Brealey, Myers, and Allen Principles of Corporate Finance 11 th Edition Mc. Graw-Hill/Irwin Copyright © 2014 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

15 -1 VENTURE CAPITAL • Venture Capital • Money invested to finance new firm • Success of new firm dependent on managers • Restrictions placed on management by venture capital company • Funds usually dispersed in stages after certain level of success 15 -2

15 -1 VENTURE CAPITAL 15 -3

15 -1 VENTURE CAPITAL 15 -4

FIGURE 15. 1 U. S VENTURE CAPITAL INVESTMENTS 15 -5

15 -2 THE INITIAL PUBLIC OFFERING • Initial Public Offering (IPO) • First offering of stock to public • Underwriter • Firm that buys and resells an issue of securities • Spread • Difference between public-offer price and price paid by underwriter 15 -6

15 -2 THE INITIAL PUBLIC OFFERING • Prospectus • Provides information on issue of securities • Underpricing • Issuing securities at price set below true value of security 15 -7

FIGURE 15. 2 MOTIVES FOR IPO 15 -8

TABLE 15. 1 TOP MANAGING UNDERWRITERS, 2011 15 -9

FIGURE 15. 3 AVERAGE INITIAL IPO RETURNS Russia Argentina Austria Canada Denmark Chile Norway Netherlands France Turkey Spain Portugal Nigeria Belgium Israel Hong Kong Mexico UK Italy USA Finland S. Africa New Zealand Philippines Iran Australia Poland Cyprus Ireland Germany Indonesia Sweden Singapore Switzerland Sri Lanka Brazil Bulgaria Thailand Taiwan Japan Greece Korea Malaysia India China 0 20 40 60 80 Return, percent 100 120 140 15 -10

15 -2 THE INITIAL PUBLIC OFFERING Average Expenses on 1767 IPO's from 1990 -1994 15 -11

FIGURE 15. 4 IPO PROCEEDS AND FIRST-DAY RETURNS 15 -12

15 -3 ALTERNATIVE ISSUE PROCEDURES FOR IPOS • General Cash Offer • Sale of securities to all investors by already public company • Shelf Registration • Allows firms to file one registration statement for several issues of same security • Private Placement • Sale of securities to limited investors with no public offering 15 -13

TABLE 15. 3 UNDERWRITING SPREADS 15 -14

FIGURE 15. 5 COSTS OF RAISING CAPITAL 15 -15

15 -4 SECURITY SALES BY PUBLIC COMPANIES • Rights Issues • Issues of securities offered only to current stockholders • Example • Ivanhoe Mines needs C$1. 2 billion of new equity. Market price C$24. 73. Ivanhoe Mines decides to raise additional funds by offering the right to buy 3 new shares for 20 at C$13. 93 per share. With 100% subscription, what is value of each right? 15 -16

15 -4 SECURITY SALES BY PUBLIC COMPANIES • Current Market Value • 20 x C$24. 73 = C$494. 60 • Total Shares • 20 + 3 = 23 • Amount of new funds • 3 x C$13. 93 = C$41. 79 • Ex-Rights Price • (C$41. 79 + C$494. 60) / 23 = C$23. 32 • Value of a Right • C$23. 32 – C$13. 93 = C$9. 39 15 -17

15 -4 SECURITY SALES BY PUBLIC COMPANIES • Rights Issue • Lafarge Corp needs to raise € 1. 28 billion • The market price is € 60/sh • Lafarge decides to raise additional funds via a 4 for 17 rights offer at € 41 per share • If we assume 100% subscription, what is the value of each right? 15 -18

15 -4 SECURITY SALES BY PUBLIC COMPANIES • Rights Issue • Current market • 17 x € 60 = € 1, 020 • Total shares • 17 + 4 = 21 • Amount of funds • 1, 020 + (4 x 41) = € 1, 184 • New share price • (1, 184)/21 = € 56. 38 • Value of a right • 56. 38 – 41 = € 15. 38 15 -19