Corporate Financial Policy IPO SOE Professor Andr Farber

Corporate Financial Policy IPO - SOE Professor André Farber Solvay Business School 2003 -2004 10/7/2020 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 1

IPO Initial Public Offering • • Why go public? – Mobility of capital • Realize capital gain • Liquidity for minority shareholders • Tranfer of control • Stock options – Access new sources of funds • Future equity offering • Equity linked – Increase visibility 10/7/2020 • Costs of going public – Direct costs • spread (investment bank) • direct expenses • underpricing – Loss of confidentiality Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 2

How to proceed? • Choose investment bank (competitive offer or negotiated offer) – Advice (key role of reputation) – Underwrite – Placement • Choose market • Prepare prospectus • Approval by market authorities • Placement – book building vs fixed price – greenshoe: option to place additional shares 10/7/2020 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 3

IPO - Belgium • • • Number Average of company Average proceed €m Average return day 1 • Source: KBC “Introductions en Bourse” Courrier Economique et Financier 14 janvier 2000 10/7/2020 1984 -1995 39 41. 5 108 9. 38% Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 1996 -1999 70 17. 6 60 15. 25% 4

IPO-US 10/7/2020 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 5

Setting the Offering Price • Very difficult: – if price too high: unsuccessful – if price too low: loss for existing shareholders • In general: underpricing 10/7/2020 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 6

10/7/2020 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 7

Average initial returns for 37 countries Source: Loughran Ritter and Rydqvist "Initial Public Offerings: International Insights" Update January 23, 2001 10/7/2020 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 8

SOE Seasoned Equity Offering • General Cash Offering – Firm commitment: investment bank underwrites securities – Best efforts: investment bank acts as placing agent • Right issue (Europe) – Example: Lafarge launches rights issue to fund UK buy • Lafarge, the French building materials group, will today launch a € 1. 1 bn one-for-eight rights issue to part-finance the acquisition of Blue Circle Industries, the UK cement manufacturer. • The new shares will be priced at € 80 each, a discount of 18 per cent to the Lafarge share price, which fell € 1. 60 to € 98. 05 yesterday. The issue is being lead managed by BNP Paribas, joint financial advisers to Lafarge on the bid. • Financial Time 12 January 2001 10/7/2020 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 9

Valuing a right: example • Initial position – Number of shares outstanding: – Price per share: • Terms of offer – Number of new shares issued: – Subscription price: – Number of rights for a share: • After offer – Number of shares: – Value of shares: – Price per share: • Value of a right: 10/7/2020 10 m (nold) € 20 (Pcum) 5 m (nnew) € 16 (Psub) 2 15 m € 280 m 18. 67 (Pex) € 1. 33 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 10

Valuing a right: formula • Value of a right = Pcum - Pex • Mkt value of equity after SEO: V = nold Pcum + nnew. Psub • = (nold+nnew) Pex • Combine these to equations to get: • In example: value of right = 5/15 * (20 -16) = 1. 33 10/7/2020 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 11

Does the subscription price matter? • • Back to example: Proceed of issue = 80 m Subscription price 16 Number new shares 5 m # rights / share 2 Value of right 1. 33 Price per share after issue 18. 67 Total cost of 1 new share 18. 67 8 10 m 1 6 14 14 • = 16 + 2 * 1. 33 =8+1*6 • Old shareholder – Before – After 20 20 • = 18. 67 + 1. 33 = 14 + 6 10/7/2020 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 12

In practice • Subscription price set before start of offering • Offering valid for a few days (2 weeks) • Rights similar to American warrants – right to buy new share at fixed price – if exercised, number of share outstanding vary • From option pricing theory: – value of right = function of volatility – exercise as late as possible 10/7/2020 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 13

Event studies • How to measure the impact of some piece of information on the stock price? Event studies • Part of Efficient Market Hypothesis • Methodology: (1) Sample of announcements of same type (2) Calculate « abnormal returns » around announcement date Abnormal return = Realized return - Expect Return (3) Statistical test 10/7/2020 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 14

Stock Market Response to SEO • • Security sold: • Common Stocks • Preferred stock Sample size 2 -Day Announcement Return 262 102 -1. 6% 0. 1% • Source: Smith, C. W. Raising Capital: Theory and Evidence 10/7/2020 Cofipo 2003 -2004 IPO SOE Solvay Business School – Université Libre de Bruxelles 15