Issuing Securities to the Public

Lecture 8

Issuing Securities to the Public

The Public Issue vs The Private Issue

Alternative Issue Methods

The Cash Offer

New Equity and the Value of the Firm

The Cost of New Issues

Rights

Shelf Registration

The Private Equity Market

The Public Issue 증권의 공개매각

The Basic Procedure

Management gets the approval of the Board of

Directors.

The firm prepares and files a registration

statement with the SEC. 등록신청서, 증권거래위원회

The SEC studies the registration statement during

the waiting period. 20일의 대기기간

red herring ( 임시 투자설명서) 배포

If everything is copasetic with the SEC, a price is

set and a full-fledged selling effort gets

underway.

The Process of A Public Offering

Steps in Public Offering Time

1. Pre-underwriting conferences

2. Registration statements

3. Pricing the issue

4. Public offering and sale

5. Market stabilization

대기기간 중에는 증권을 매각할 수 없다.

증권의 가격은 등록이 효력을 가지게 되는 날 결정된다

Several months

20-day waiting period

Usually on the 20th day

After the 20th day

30 days after offering

Tombstone Advertisement Example

16-6

증권의 인수회사

인수회사가 제공하는 서비스

신규증권의 발행방법을 제시한다.

신규증권의 가격을 책정한다.

신규증권을 판매한다.

대표인수회사에 의한 주가의 안정화

인수연합(syndicate) – 증권을 매각하고 매각에 따른 위험을 분담할 수 있도록 증권인수회사들이 형성한 연합

총차액( gross spread) – 발행회사에게 인수회사가 지불하는 가격(인수회사의 매수가격)과 시장에서 판매할 때의 가격(발행가격; offering price)과의 차이

Alternative Issue Methods

There are two kinds of public issues:

Negotiated vs direct cash offer

The general cash offer

Nontraditional

Shelf cash offer . Stand-by offer

The rights offer

Privileged subscription or Rights offer

Almost all debt is sold in general cash offerings.

Direct placement

The Cash Offer 현금발행

There are two methods for issuing securities for cash:

Firm Commitment

Best Efforts

Dutch auction cash offer

There are two methods for selecting an underwriter

Competitive

Negotiated

Firm Commitment

Under a firm commitment underwriting, the

investment bank buys the securities outright from the

issuing firm.

Obviously, they need to make a profit, so they buy

at “wholesale” and try to resell at “retail”.

To minimize their risk, the investment bankers

combine to form an underwriting syndicate to share

the risk and help sell the issue to the public.

Best Efforts

Under a best efforts underwriting, the underwriter

does not buy the issue from the issuing firm.

Instead, the underwriter acts as an agent, receiving

a commission for each share sold, and using its “best

efforts” to sell the entire issue.

This is more common for initial public offerings than

for seasoned new issues.

The Announcement of New Equity

and the Value of the Firm

The market value of existing equity drops on the

announcement of a new issue of common stock.

Reasons include

Managerial Information

Since the managers are the insiders, perhaps they are

selling new stock because they think it is overpriced.

Debt Capacity

If the market infers that the managers are issuing new equity

to reduce their debt-equity ratio due to the specter of

financial distress the stock price will fall.

Falling Earnings

The Cost of New Issues

1. Spread or underwriting discount

2. Other direct expenses

3. Indirect expenses

4. Abnormal returns

5. Underpricing

6. Green Shoe Option

The Costs of Public Offerings Equity

Proceeds Direct Costs Underpricing

(in millions) SEOs IPOs IPOs

2 - 9.99 13.28% 16.96% 16.36%

10 - 19.99 8.72% 11.63% 9.65%

20 - 39.99 6.93% 9.70% 12.48%

40 - 59.99 5.87% 8.72% 13.65%

60 - 79.99 5.18% 8.20% 11.31%

80 - 99.99 4.73% 7.91% 8.91%

100 - 199.99 4.22% 7.06% 7.16%

200 - 499.99 3.47% 6.53% 5.70%

500 and up 3.15% 5.72% 7.53%

Rights 주주모집

If a preemptive right is contained in the firm’s

articles of incorporation, the firm must offer any

new issue of common stock first to existing

shareholders.

This allows shareholders to maintain their

percentage ownership if they so desire.

Mechanics of Rights Offerings

The management of the firm must decide:

The exercise price (the price existing shareholders must

pay for new shares).

How many rights will be required to purchase one new

share of stock.

These rights have value:

Shareholders can either exercise their rights or sell their

rights.

Rights Offering Example

Popular Delusions, Inc. is proposing a rights offering.

There are 200,000 shares outstanding trading at

$25 each. There will be 10,000 new shares issued

at a $20 subscription price.

What is the new market value of the firm?

What is the ex-rights price?

What is the value of a right?

What is the new market value of

the firm?

shares

20$shares 000,10

share

25$shares 000,200000,200,5$

There are 200,000

outstanding shares at $25

each.

There will be 10,000 new shares

issued at a $20 subscription

price.

What is the Ex-Rights Price?

There are 110,000 outstanding shares of a

firm with a market value of $5,200,000.

Thus the value of an ex-rights share is:

= $24.7619 $5,200,000

210,000 shares

Ex-Rights Price?

Thus the value of a right is

$0.2381 = $25 – $24.7619

The Rights Puzzle

Over 90% of new issues are underwritten, even

though rights offerings are much cheaper.

A few explanations:

Underwriters increase the stock price. There is not much

evidence for this, but it sounds good.

The underwriter provides a form of insurance to the

issuing firm in a firm-commitment underwriting.

The proceeds from underwriting may be available

sooner than the proceeds from a rights offering.

No one explanation is entirely convincing.

Shelf Registration 일괄등록제도

Permits a corporation to register an offering that it

reasonably expects to sell within the next two years.

Not all companies are allowed shelf registration.

Qualifications include:

The firm must be rated investment grade.

The cannot have recently defaulted on debt.

The market capitalization must be > $75 m.

No recent SEC violations.

The Private Equity Market

The previous sections of this chapter assumed that a

company is big enough, successful enough, and old

enough to raise capital in the public equity market.

For start-up firms and firms in financial trouble, the

public equity market is often not available.

Private Placements

Avoid the costly procedures associated with the

registration requirements that are a part of public

issues.

The SEC restricts private placement issues ot no

more than a couple of dozen knowledgeable

investors including institutions such as insurance

companies and pension funds.

The biggest drawback is that the securities cannot

be easily resold.

Venture Capital

The limited partnership is the dominant form of

intermediation in this market.

There are four types of suppliers of venture

capital:

1. Old-line wealthy families.

2. Private partnerships and corporations.

3. Large industrial or financial corporations have

established venture-capital subsidiaries.

4. Individuals, typically with incomes in excess of

$100,000 and newt worth over $1,000,000. Often

these “angels” have substantial business experience

and are able to tolerate high risks.

Corporate Equity Security Offerings

17.7

16.2

66.1

Private Rule 144Aplacements

Private non-Rule144A placements

Public equityoffering

Stages of Financing 1. Seed-Money Stage:

Small amount of money to prove a concept or develop a product.

2. Start-Up

Funds are likely to pay for marketing and product refinement.

3. First-Round Financing

Additional money to begin sales and manufacturing.

4. Second-Round Financing

Funds earmarked for working capital for a firm that is currently selling its product but still losing money.

5. Third-Round Financing

Financing for a firm that is at least breaking even and contemplating expansion; a.k.a. mezzanine financing.

6. Fourth-Round Financing

Financing for a firm that is likely to go public within 6 months; a.k.a. bridge financing.