Chapter 15
Principles of
Corporate Finance
Tenth Edition
How Corporations
Issue Securities
Slides by
Matthew Will
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Topics Covered
Venture Capital
The Initial Public Offering
Alternative Issue Procedures for IPOs
Security Sales by Public Companies
– Rights Issue
Private Placements and Public Issues
15-2
Venture Capital
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.
15-3
15-4
Venture Capital
First Stage Market Value Balance Sheet ($mil)
Assets
Liabilitie s and Equity
Cash from new equity
1.0 New equity from venture capital
1.0
Other assets
1.0
Your original equity
1.0
Value
2.0
Value
2.0
15-5
Venture Capital
Second Stage Market Value Balance Sheet ($mil)
Assets
Liabilitie s and Equity
Cash from new equity
4.0 New equity from 2nd stage
4.0
Fixed assets
1.0
Equity from 1st stage
5.0
Other assets
9.0
Your original equity
5.0
Value
14.0
Value
14.0
U.S. Venture Capital Investments
120
104.4
80
53.5
60
30.9 28.3
2008
2005
2004
2003
2002
2001
2000
1999
1998
14.6
1997
0
7.9
10.8
1996
20
22.4
21.7 19.6 21.8
20.7
26.7
2007
40
2006
40.5
1995
$ Millions
100
15-6
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.
15-7
15-8
Motives For An IPO
Percent of CFOs who strongly agree with the reason for an IPO
To create public shares for use in future acquisitions
59.4
To establish a market price/value for our firm
51.2
To enhance the reputation of our company
49.1
To broaden the base of ownership
45.9
To allow one or more principals to diversify personal holdings
44.1
To minimize our cost of capital
42.5
To allow venture capitalists to cash out
32.2
To attract analysts' attention
29.8
Our company has run out of private equity
27.6
Debt is becoming too expensive
14.3
0
10
20
30
40
50
60
70
The Top Managing Underwriters
January – December 2008
Underwriter
J.P.Morgan
Barclays Capital
Citi
Deutsche Bank
Merrill Lynch
Goldman Sachs
Morgan Stanley
RBS
Credit Suisse
UBS
Value of Issues
($billion)
Number of issues
$455
401
309
309
241
228
220
214
205
204
1210
1041
986
807
852
584
661
712
682
867
15-9
Average Initial IPO Returns
Russia
Argentina
Austria
Canada
Denmark
Chile
Norway
Netherlands
France
T urkey
Spain
Portugal
Nigeria
Belgium
Israel
Hong Kong
Nexico
UK
USA
Finland
Italy
Australia
New Zealand
Indonesia
Philippines
Iran
Poland
Cyprus
Ireland
Greece
Germany
Sweden
Singapore
Switzerland
S. Africa
Bulgaria
T hailand
T aiwan
Japan
Brazil
Sri Lanka
Korea
Malaysia
India
China
165 %
0
20
40
60
return (percent)
80
100
15-10
15-11
Initial Offering
Average Expenses on 1767 IPOs from 1990-1994
Value of Issues
($mil)
Direct Avg First Day
Costs (%)
Total
Return (%) Costs (%)
2 - 9.99
16.96
16.36
25.16
10 - 19.99
11.63
9.65
18.15
20 - 39.99
9.7
12.48
18.18
40 - 59.99
8.72
13.65
17.95
60 - 79.99
8.2
11.31
16.35
80 - 99.99
7.91
8.91
14.14
100 - 199.99
7.06
7.16
12.78
200 - 499.99
6.53
5.70
11.10
500 and up
5.72
7.53
10.36
All Issues
11.00
12.05
18.69
15-12
IPO Proceeds
IPO Proceeds and First Day Returns
80
70
60
50
40
Issue proceeds ($bn)
First-day return
30
20
10
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
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.
15-13
Underwriting Spreads (2008)
15-14
15-15
Total Direct Costs of Raising Capital
Total Direct Costs, %
9.0
IPOs
SEOs
Convertibles
Bonds
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Proceeds, $M
Source: Data from SDC Platinum. 5706 domestic issues between 2004 and 2008. Closed-end funds (SIC 6726), REITS (SIC 6798), ADRs, mortgage-backed and
Federal agency (SIC 6011, 6019, 6111 and 999B) issues are excluded.
Rights Issue
Rights Issue - Issue of securities offered only to
current stockholders.
Example – Xstrata needs to raise £4.1 billion of new
equity. The market price is £6.23/sh. Xstrata
decides to raise additional funds via a 2 for 1
rights offer at £2.10per share. If we assume 100%
subscription, what is the value of each right?
15-16
Rights Issue
Example - Xstrata needs to raise £4.1 billion of new equity. The market
price is £6.23/sh. Xstrata decides to raise additional funds via a 2 for 1 rights
offer at £2.10per share. If we assume 100% subscription, what is the value
of each right?
Current Market Value = 1 x £6.23 = £6.23
Total Shares = 2+ 1 = 3
Amount of new funds = 2 x £2.10 = £4.20
New Share Price = (6.23+4.20) / 3 = £3.48
Value of a Right = 3.48 – 2.10 = £1.38
15-17
Rights Issue
Slightly More Difficult Example
Lafarge Corp needs to raise €1.28billion of
new equity. 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
Rights Issue
Example - Lafarge Corp needs to raise €1.28billion of new equity. 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?
Current Market Value = 17 x €60 = €1,020
Total Shares = 17 + 4 = 21
Amount of funds = 1,020 + (4x41) = €1,184
New Share Price = (1,184) / 21 = €56.38
Value of a Right = 56.38 – 41 = €15.38
15-19
Web Resources
Click to access web sites
Internet connection required
www.nvca.org
www.evca.com
www.asianfn.com
www.pwcmoneytree.com
www.v1.com
www.vnpartners.com/primer.htm
15-20