T19.1 Chapter Outline Chapter 19, 20 Issuing Securities to the Public Chapter Organization 19.1 The Financing Life Cycle of a Firm: Early Stage Financing and Venture Capital 19.2 The Public Issue 19.3 The Basic Procedure for a New Issue 19.4 The Cash Offer 19.5 New Equity Sales and the of the Firm 19.6 The Cost of Issuing Securities 19.7 Rights 19.8 Dilution 20.1 Issuing Long-Term Debt 20.2 Issuing Long-Term Debt: comparisons 20.3 Callable Bonds T19.2 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. Lecture 10 Dan Liang slide 2 T19.2 Venture Capital T19.2 Venture Capital First Stage Market Balance Sheet ($mil) Second Stage Market Balance Sheet ($mil) Assets Cash from new equity Other assets 2.0 Liabilities and Equity New equity from venture capital Your original equity 2.0 Assets Cash from new equity Fixed assets Other assets 4.0 9.0 14.0 Liabilities and Equity New equity from 2nd stage Equity from1st stage Your original equity 4.0 5.0 5.0 14.0 Dan Liang slide 3 Dan Liang slide 4
T19.3 Evaluation Activities Carried Out By Venture Capitalists Prior to funding an investment as lead investor, how often do you engage in the following activities? Interview management team/tour facilities 100% Tour facilities 100% Contact former business associates/outside investors 96% Contact current customers 93% Have informal discussions with experts about the product 84% Conduct in-depth review of pro forma financials 84% Contact competitors 71% Contact banker 62% Contact suppliers 53% Secure formal technical study of product 36% Secure formal market research study 31% Source: Toward a Model of Venture Capital Investment Decision-Making by Fried and Hirsch, 1994. Dan Liang slide 5 T19.4 Choosing a Venture Capitalist Key Considerations in Choosing a Venture Capitalist Financial Strength - the ability to supply additional resources Management Style - level of involvement in decision-making References - the results of previous ventures Contacts - ability to provide introductions Exit Strategy - how and under what circumstances does the venture capitalist plan to cash out? Dan Liang slide 6 T19.4 Venture Capital Literature Whom You Know Matters: Venture Capital Networks and Investment Performance Journal of Finance, V62(1), 2007 How Smart Is Smart Money? A Two-Sided Matching Model of Venture Capital Journal of Finance, V62(6), 2007 Banks versus Venture Capital: Project Evaluation, Screening, and Expropriation Journal of Finance, V59(2), 2004 Blurring Firm Boundaries: The Role of Venture Capital in Strategic Alliances Journal of Finance, V63(3), 2008.. Dan Liang slide 7 T19.4 The Basic Procedure for a New Issue 1. Obtain Approval from the Board of Directors If increasing the number of shares outstanding, must submit to a vote of the shareholders 2. File a registration statement with the SEC. Two exceptions 20 days waiting period Tombstone advertisement 3. Distribute preliminary prospectus (red herring) to potential investors. 4. On approval of the SEC, determine price and prepare final prospectus. 5. Sell Securities to the Public Dan Liang slide 8
比利时 希腊 波兰 新加坡 瑞士 日本 泰国 韩国 巴西 印度 马来西亚 中国 T19.5 The Cash Offer - Terminology Underwriter The Underwriter syndicate buys the securities and sells to the public. Underwriter bears risk in the offering, and must be compensated Spread - the difference between what the Underwriter pays and the offering price of the securities. Bought Deal - issuer sells entire issue to a single investment dealer or group Firm commitment VS. best efforts. Selling period - Underwriting group agrees not to sell securities for less than the offering price until the syndicate dissolves. Underpricing - Issuing securities at an offering price set below the true value of the security. T19.6 Empirical Studies of Underpricing Year Number of Offerings Average First-day Returns (%) 1975-79 112 5.7 1980-89 2348 6.9 1990-99 4129 20.9 2000 385 55.5 Total 6974 17.8 100 Canadian IPOs 116 Canadian IPOs 299 Canadian IPOs 1971-1983 1984-1987 1984-1995 9.0-11.5 4.3 7.8 Dan Liang slide 9 Dan Liang slide 10 T19.6 Empirical Studies of Underpricing - Loughran,Ritter,Rydqvist. Initial Public Offerings:International Insights 1994 Pacific-Basin Finance Journal Vol. 2 300.00% 250.00% 200.00% 150.00% 100.00% 各国平均首日收益率 T19.7 Empirical Studies of Underpricing Variable Direct Disclosures Sales and earning from existing operations Book value of existing assets Information intermediation High quality (good reputation) services + Signals of inside information Entrepreneurial ownership retention Use of proceeds for risky investments Stated dividend policy Empirical Evidence + or 0 + + or 0 + 0 50.00% 0.00% 丹麦奥地利加拿大智利 芬兰荷兰葡萄牙西班牙土耳其法国以色列挪威 英国香港美国尼日利亚澳大利亚印度尼西亚意大利伊朗菲利宾新西兰 瑞典德国台湾南非墨西哥 丹麦加拿大芬兰葡萄牙土耳其以色列比利时香港尼日利亚印度尼西亚伊朗新西兰波兰瑞典台湾墨西哥日本韩国 印度 中国 Dan Liang slide 11 Dan Liang slide 12
T19.8 Average Initial Returns by Month for SEC-Registered IPOs: 1960-1998 T19.8 IPOs in China 时间 阶段 发行方式 特点 1996 年以前 行政化定价阶段 固定价格 (1) 严格的市盈率行政定价阶段 (2) 采取抽签, 或者全额预缴款等方式解决超额认购等问题 1996-1999 年 相对固定市盈率定价阶段 (1) 市盈率限定在 13-16 倍之间 (2) 主要方式有全额预缴款, 比例配售, 余额即退, 全额预缴款, 余额转存与储蓄存款挂钩等 1999 年下半年 - 2000 年 2001 年 1 月 -2001 年 8 月 市场化定价阶段 法人配售与网上定价相结合 不设市盈率上限的市场化累计投标竞价 (1) 累计投标询价和固定价格公开发行的混合机制 (2) 法人配售部分的股份分配根据回拨机制和机构投资者投标情况进行, 但存在配售权黑箱交易现象 主承销商和发行人按照统一价格拍卖法自主确定发行价格和有效申购 Dan Liang slide 13 Dan Liang slide 14 T19.8 IPOs in China 时间 2001 年 9 月 - 2002 年 5 月 2002 年 6 月 - 2004 年 8 月 2005 年 1 月 2005 年 6 月 阶段 半市场化定价阶段 准市场化定价阶 发行方式 上限市盈率为 20 倍的累计投标询价 上限市盈率为 20 倍的二级市场配售 准累计投标询价制 特点 不完全的统一价格拍卖方式, 最终价格为询价区间上限价, 同比例配售 价格由承销商和发行人协商, 受上限限制, 新股发行 100% 向二级市场配售 (1) 包括初步询价和累计投标询价两个阶段 (2) 询价对象分为财务公司, 证券公司等六类 (3) 市盈率按发行后总股本计算 2006 年 6 月 - 股权分置完成后至今, 全流通环境下 (1) 中小企业板上市公司, 可通过初步询采取网下配售对价直接定价, 主板上市公司必须经过初步询象累计投标询价价和累计投标询价两个阶段 (2) 采用资金发行与网上资金申购上网定价, 网上网下根据发行规模一定申购定价发行相比例配售, 网下申购与网上申购同步进行 ( 结合的方式 3) 首发规模 4 亿股以上的, 可向战略投资者配售, 可采用 超额配售机制 (4) 询价对象仍为六类 Dan Liang slide 15 T19.9 New equity sales and the value of the firm Why should stock price decrease with the announcement of an equity issue? 1. Managerial Information New issue is a signal that managers, who are thought to be better informed about the firm s prospects, think that the stock is currently trading at a higher price. 2. Debt usage Investors ask why managers choose to issue stock when funds could be raised by a debt issue. Is the firm over-leveraged? Are there liquidity concerns? 3. Falling earnings 4. Issue costs Stock prices may fall because it is expensive to sell securities. Dan Liang slide 16
T19.10 Costs of issuing securities Spread - difference between investor price and proceeds to firm Direct expenses - fees of the offering (legal, filing) and taxes Indirect expenses - the time managers spend on the offering where they might otherwise be pursuing projects Abnormal returns - For established firms, stock price drops an average of 3% on announcement of new issue. Underpricing - For IPOs, the stock is offered to the market at a price below where it soon trades Green Shoe option - Special price to the underwriter. Dan Liang slide 17 T19.11 Direct and Indirect Costs, in Percentages, of Equity IPOs: 1990-94 Other Total Number Gross direct direct Proceeds ($ millions) of issuesspreadexpense cost Underpricing 2-9.99 337 9.05% 7.91% 16.96% 16.36% 10-19.99 389 7.24 4.39 11.63 9.65 20-39.99 533 7.01 2.69 9.70 12.48 40-59.99 215 6.96 1.76 8.72 13.65 60-79.99 79 6.74 1.46 8.20 11.31 80-99.99 51 6.47 1.44 7.91 8.91 100-199.99 106 6.03 3 7.06 7.16 200-499.99 47 5.67 0.86 6.53 5.70 500 - up 10 5.21 0.51 5.72 7.53 Total 1767 7.31% 3.69% 10% 12.05% Source: Inmoo Lee, Scott Lochhead, Jay Ritter, and Quanshi Zhao, The Costs of Raising Capital Journal of Financial Research 19 (Spring 1996). Dan Liang slide 18 T19.12 Rights Offerings: Basic Concepts T19.13 The of a Right Rights offering Issue of common stock to existing shareholders Subscription price The dollar cost of one of the shares to be issued. Ex-rights date Beginning of the period when stock is sold without a recently declared right, normally two trading days before the holder-of-record date. Holder-of-record date Date on which existing shareholders are designated as the recipients of stock rights. The value of a right equals the difference in the price of the issuer s outstanding shares before and after the rights offering, and is determined by three factors: - the total amount of money to be raised, - the subscription price of the new shares, and - the number of existing shares. The number of new shares to be issued equals Funds to be raised/subscription price Dan Liang slide 19 Dan Liang slide 20
T19.13 The of a Right T19.14 Ex Rights Stock Prices The number of rights needed to buy one share equals (Number of old shares)/(number of new shares) After the offering, the new value of the firm is Pre-offering firm value + funds raised, and the new share price must be (New firm value)/(total number of shares outstanding). The value of the right must equal Old share price - new share price. Effects on shareholders Shareholders don t gain or lose, as long as they either exercise or sell their rights. Dan Liang slide 21 Dan Liang slide 22 T19.15 Rights Offerings: Issues Standby fees Amount paid to underwriter participating in a standby underwriting agreement. Standby underwriting The type of underwriting in which the underwriter agrees to purchase the unsubscribed portion of the issue. Oversubscription privilege A privilege that allows shareholders to purchase unsubscribed shares in a rights offering at the subscription price. Dan Liang slide 23 T19.16 New Issues and Dilution Dilution Loss in existing shareholders value in terms of either ownership, market value, book value, or EPS Which is most important? What matters most to investors? Types of dilution Dilution of proportionate ownership A shareholder s reduction in proportionate ownership due to lessthan-proportionate purchase of new shares Dilution of market value Loss in share value due to use of proceeds to invest in negative NPV projects. Dilution of book value and earnings per share (EPS) Reduction in EPS due to sale of additional shares Dan Liang slide 24
T20.1 Issuing Long-Term Debt T20.2 Issuing Long-Term Debt: comparisons Generally, use the same procedures as for equity. Register security with securities regulator, issue prospectus, etc. Direct private long-term financing Term loans - direct business loans Private placements Investment dealer rather than an underwriter Offering memorandum rather than a prospectus Sold to exempt purchasers Compare the costs for term loans, private placements and publicly issued debt for each of the following cost classifications: Registration costs Restrictive covenants Renegotiation Suppliers of funds Transaction costs The interest rates on term loans and private placements are usually higher than those on an equivalent public issue: Trade-off: higher interest rate but more flexibility vs. lower transaction costs associated with private placement Dan Liang slide 25 Dan Liang slide 26 T20.3 Callable Bond The value of the callable bond Call provisions are valuable if interest rate fall and bond prices go up. The price of callable bond is higher, i.e., higher coupon rate. Why do firms still issue callable bonds? Superior interest-rate prediction Taxes Financial flexibility for future investment opportunities Less interest-rate risk When should the company call its bonds? Wait until the market value of the bond exceeds the call price before calling bonds. Dan Liang slide 27