TYPES OF OFFER
Initial public offerings (IPO)
A company moves from privately owned to publically owned by selling shares on the open mrket for the first time.
IPOs reduce the amount of control the original owners have as selling shares also sell voting rights with them.
IPO +
- Raise loads of dosh
- Gets the subject company lots of publicity
- does not encumber company assets as collateral like debt offerings.
IPO -
- Loss of voting rights
- New shareholders can appoint a new board of directors, removing power from previous owners
- Shares can be resold onto secondary markets so the origiinal owners have no control of who buys the shares.
- Can be taken-over by another firm
IPO strucuture (number of shares, over allotment)
IPOs are structured with a set number of shares to be sold at IPO.
The firm can also reserve the right to sell more shares if there is demand for more shares than on offer.
The option to increase the number of shares sol (by a pre-set maximum) is called a greenshoe or over allotment clause these terms are included in the underwriting docs.
3 key stages to an IPO
- Decision - the issuing firm and advisers (IB,ECM) decide to raise capital via an IPO following consideration of = and -
- Prep of teh prospectus - prospectus=official foc outlning terms of the IPO. Is constructed together by all advisers (IBC, legal, accounting)
- sale of securities - IB will lead-manage the sale and can establish a syndicate of co managers to assist by selling the securities to their clients.
Underwriting and best efforts underwriting
- Responsibility of the banks that manage the sale.
- Put guarantees in place to buy securities if the sale is unsuccessful/a target isn’t met.
- Best efforts underwriting= no commitment from banks to buy securities but they will do their best to sell all shares in the offering. This reduces the risk of loss to the bank having to buy shares but can cause reputational damage if shares remain unsold.
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Follow on offerings/secondary offers
- Already listed company wants to list more shares in a follow-on offering.
- Usually conducted in a strong equity market to ensure shares sell.
- Like an IPO - there is a base offering number of shares and a greenshoe
- Usually quicker and cheaper than an IPO as the firm has been through it all before
- Same 3 main stages as an IPO
Follow on offering underwriting
- Follow-on offering can be underwritten by banks or best efforts underwriting by other banks and brokers.
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3 major ways that a firm can use IPOs to become listed
- offer for sale (most common way)
- placings
- introductions
Offer for sale
The issuing company sells it’s shares to the issuing house (IB) which will then invite public offers to buy the shares at a higher price that what the IB paid for them.
The company doesn’t neccessarily have to issue new shares as it can just sell shares held by owners
Offer for sale diagram
physcial
Offers for sale - fixed and tender price offers
- Fixed price offer - price is fixed just below the price that is believe to be perfect to achive full subscription of shares (selling them all) to boost secondary market activity. If the offer is over subscribed due to the favourable pricing, each application can be scaled down or random requests can be picked at random.
- Tender offer - Sets a price that is less attracitve than fixed price to avoid over subscription. The issuer doesn’t stipulate a fixed share price but invites tenders for the issuer by setting a minimum tender price instead. Investors state how many shares they want and the price they are willing to pay for each one. More complex than ^
Over allotment options
HAs become almost standard practice to use a greenshoe/over allotment option.
Gives the underwriter the right to sell an additional 15% of teh original number of shares at IPO price if demand is high. It helps smooth out price fluctuations if demand surges and supports the IPO if the market is having a stinker.
Selective marketing and placing
Placing = a firm markets their equity issue directly to a broker/issuing house which places shares with selected clients. Least expensive. Can be used
Placing is often referred to as selective marketing as the intermediary selects the clients that the offer is directed to.
Private placements (2nd type of issue)
A prospectus is a mandatory requirement pre-IPO to outline the key details of the offering and the business plan etc.
The prospectus is less stringent for accreditied investors as they are exempt from MiFID regulations.
Introductions (third way a company can become listed)
Not an issue of shares and not a marketing technique
Used by companies that do not wish to raise capital by issuing shares but want to increase the liquidity of their shares. it could be a company listed on another foreign stock exchange moving’
Convertible bond offerings
Same as equity with greenshoe and pre decided number fo bonds being sold
Listing advisers, reporting accountants, legal advisers, PR consultants, corporate brokers - roles
- Lisiting agent/sponsor - investment bank - assesses suitability for IPO, best method of IPO, coordinating the listing. Called Nomad in AIM market.
- reporting accountants/public auditors - attest to the validitiy of a firm’s fin. info. in the prospectus
- legal advisors - ensure the prospectus meets regulation/is accurate.
- PR consultants - Improve/maintain positive public opinion of the firm
- corporate brokers - acts as an intermediary between teh issuer and the stock market, advising on mkt conditions etc.
Underwriting
=Agrement with fin. institutions to buy shares that are not sold (shortfall). Acts as an insurance policy. The underwriters recieve fees regardless of the performance of the IPO.
The underwriter will tend to agree to buy shares (in teh event of shortfall) at a discounted price.
Guarantees the issuer a minimum capital gain/subscription.
Stabilisation
=lead manager agrees to support the price by buying back the newly issued securities if the price falls below a certain predefined level. Allows the market to adjust to the influx of new securities.
It increases the demand for the securities whilst new ones are issued = price stabilises = security appears less volatile = investors don’t panic sell. The lead manager will resell the stock once the price stabilises.
Greenshoe is another stabiliser option.
What is the syndicate group and the roles within it. (Sponsors and managers/co-managers)
- Large listings with large numbers of shares - the sponsor will gather a syndicate of IBs and brokers to market teh shares to their clients.
- Sponsor acts as a lead-manager who appoints co-managers. If the issue is big enough, more than 1 lead-manager can be appointed.
- Managers and co managers contact large scale investors and determine a price (10-15% max price range from upper/lower values)
- When price range is announced, marketing begins, leading to subscription requests
Book building
=The process finding buyers of the shares.
The lead-manager(s) guage demand across the syndicated = called the Book runner
UK regulation of stabilisation
FCA requires disclosure to the market that stabilisation is taking place and that the market price might not be a true representative as a result.
Exchanges can use circuit breakers to suspend trading in the event of high volatility.
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Chapter 1: The Financial Seevices Industry14
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Chapter 2: Asset Classes - Equity3
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Chapter 2 - Asset Classes - Debt57
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Chapter 2: Asset Classes - Other, FX, CIS, Structured Prods69
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Chapter 3: Markets1
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Chapter 4: Primary Markets37
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Chapter 5: Secondary Markets40
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Chapter 6: Corporate Actions25
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Chapter 7: Clearing And Settlement42
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Chapter 8: Accounting Analysis56
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Chapter 9: Investment Management43
