...FINS3625 Applied Corporate Finance Lecture 6 (Chapter 14) Jared Stanfield April 4, 2012 14.1 Equity Financing for Private Companies • Sources of Funding: – A private company can seek funding from several potenNal sources: • Angel Investors • Venture Capital Firms • InsNtuNonal Investors • Corporate Investors 14.1 Equity Financing for Private Companies • Angel Investors: – Individual investors who buy equity in small private firms – The first round of outside private equity financing is oSen obtained from angels 14.1 Equity Financing for Private Companies • Venture Capital Firms: – Specialize in raising money to invest in the private equity of young firms – In return, venture capitalists oSen demand a great deal of control of the company Figure 14.1 Most AcNve U.S. Venture Capital Firms in 2009 (by Number of Deals Completed Figure 14.2 Venture Capital Funding in the United...
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...Initial Public Offerings Jay R. Ritter Cordell Professor of Finance University of Florida Gainesville FL 32611-7168 (352) 846-2837 jritter@dale.cba.ufl.edu http://bear.cba.ufl.edu/ritter Warren Gorham & Lamont Handbook of Modern Finance Edited by Dennis Logue and James Seward reprinted (with modifications) in Contemporary Finance Digest Vol. 2, No. 1 (Spring 1998), pp. 5-30 This is the modified version. Abstract In the 1990s, thousands of firms have gone public around the world. This article surveys the market for initial public offerings (IPOs). The process of going public is discussed, with particular emphasis on how contractual mechanisms deal with potential conflicts of interest. The valuation of IPOs, bookbuilding, price stabilization, and the costs of going public are also discussed. Three empirical patterns are documented and analyzed: shortrun underpricing, hot issue markets, and long-run underperformance. This article is reprinted, with modifications, from the chapter with the same title in the Warren Gorham & Lamont Handbook of Modern Finance, edited by Dennis Logue and James Seward. The chapter in turn draws heavily on "The Market's Problems with the Pricing of Initial Public Offerings," coauthored by Roger G. Ibbotson, Jody Sindelar, and Jay R. Ritter in the 1994 Journal of Applied Corporate Finance; "Going Public," coauthored by Kathleen Weiss Hanley and Jay R. Ritter, in The New Palgrave Dictionary of Money and Finance; and especially “Initial Public Offerings...
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...Journal of Financial Economics 53 (1999) 409 }437 Valuing IPOs Moonchul Kim , Jay R. Ritter * Department of Accounting, KyungHee University, C1 Hoegie-Dong, Dongdaemun-Ku, Seoul 130-701, South Korea Department of Finance, School of Business Administration, University of Florida, Gainesville, FL 32611-7168, USA Received 3 June 1997; received in revised form 18 August 1998 Abstract The use of accounting information in conjunction with comparable "rm multiples is widely recommended for valuing initial public o!erings (IPOs). We "nd that the price}earnings (P/E), market-to-book, and price-to-sales multiples of comparable "rms have only modest predictive ability without further adjustments. This is largely due to the wide variation of these ratios for young "rms within an industry. P/E multiples using forecasted earnings result in much more accurate valuations than multiples using trailing 1999 Elsevier Science S.A. All rights reserved. earnings. JEL classixcation: G24 Keywords: Initial public o!erings; Valuation; Comparable "rms * Corresponding author. Tel.: #1-352-846-2837; fax: #1-352-392-0301. E-mail addresses: kimc@nms.kyunghee.ac.kr (M. Kim), jritter@dale.cba.u#.edu (J.R. Ritter) This paper is based on Moonchul Kim's University of Illinois Ph.D. dissertation. We would like to thank seminar participants at Boston, Emory, Georgetown, Humboldt (Berlin), and Vanderbilt Universities, the Universities of Miami and Texas, the Stockholm School of Economics, the Chinese University...
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...Who do you believe usually “wins” in most IPOs? In an IPO, there are different parties involved which comprises of Issuer, banks, Legal counsels, Issuer’s Auditors, PR-Agency, and Investors In an IPO, the banks have the numerous responsibilities like Project Management and Timing , Valuation, Coordination of all work streams, Business Due Diligence, Placement and Bookbuilding, Trading and Roadshows. Their involvement in the IPO process is from the beginning of the project prior to the kick-off meeting and the merchant banks are largely benefitted from the ‘IPOs’ and are in a win-win situation. “Here is a deal for banks working on IPOs: Price the new stock high, get a bigger fee. Price it low, get free shares of the company.” A large IPO is generally underwritten by a ‘syndicate of investment banks, the largest of which is the ‘lead underwriter’. So, the lead underwriters ‘win’ by gaining from Underwriting spread. It is the difference between the amount paid by underwriting group in a new issue of securities and the price at which securities are offered for sale to public. It comprises of manager’s fee and Underwriting fee. To illustrate this, lets look at the case of eToy’s IPO in 1999 where Goldman Sachs was the key issuing bank. This example illustrates that by valuing the company little more over the actual valuations, banks make big gains as the commission fee (here 7%) is over the actual profit made in the IPO, rather than a straight figure of commission amount...
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...Engineering Limited (“Amtek”) in 2007 is noteworthy, primarily because it is one of the more recent example in Singapore of a leverage buyout of a public company involving private equity players , and it showcases a example of how private equity firms typically restructure and streamline the acquired company, subsequently executing their exit strategy via an initial public offering. In this paper, I will first provide a background on the leverage buyout and privatization of Amtek in 2007. This will be followed by an elaboration on the strategic, operational and organizational restructuring measures implemented by the new owners. Lastly, we shall examine why the exit strategy through an IPO in 2010 was not well received by retail and institutional investors, resulting in a pullback of the targeted IPO proceeds and a languishing first-day stock price. Background Amtek was founded in Singapore as Metaltek Engineering Private Limited in 1970. With a core business in precision metals engineering and metal stamping, Amtek was formed during Singapore’s rapid industrialisation period in the 1970s. In 1987, it was listed on the Stock Exchange of Singapore. As an engineering company that did not have an exciting business or product, Amtek was profitable but primarily stayed off investors’ radar for many years. On 22 May 2007, Metcomp Holdings, a private equity partnership between Britain's CVC Capital Partners Asia Pacific, Standard Chartered Private Equity Ltd, and two private...
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...ROSETTA STONE: pricing the 2009 IPO Teaching Note This case examines the April 2009 decision of Rosetta Stone management to price the initial public offering of Rosetta Stone stock during one of the most difficult periods in capital-raising history. The case outlines Rosetta Stone’s unique language-learning strategy and its associated strong financial performance. Students are invited to value the stock and take a position on whether the current $15 to $17 per share filing range is appropriate. The case is designed to showcase corporate valuation using discounted cash flow and peer-company market multiples. The epilogue details the 40% first-day rise in Rosetta Stone stock from the $18 offer price. With this backdrop, students are exposed to a well-known finance anomaly—the IPO underpricing phenomenon—and are invited to critically discuss various proposed explanations. The case provides opportunities for the instructor to develop any of the following teaching objectives: * Review the institutional aspects of the equity issuance transaction. * Explore the costs and benefits associated with public share offerings. * Develop an appreciation for the challenges of valuing unseasoned firms. * Hone corporate valuation skills, particularly using market multiples. * Evaluate the received explanations of various finance anomalies, such as the IPO underpricing phenomenon. Study Questions 1. What are the advantages and disadvantages...
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...Incorporated Strategy Paper There are many risks associated with both underpricing and overpricing an IPO relative to the underwriting company as well as to the company issuing the IPO. If Scott and Stringfellow were to underprice the IPO, they could easily be criticized for not obtaining the maximum possible value for Hop-In Food. This could lead to a loss of underwriting business not only from Hop-In Food, but from other corporations as well. Scott and Stringfellow could lose a good reputation and solid brand if they underprice Hop-In’s IPO, and there could be a possible increase in litigation costs from Hop-In. If Scott and Stringfellow were to overprice Hop-In’s IPO, there is a chance that the market will not develop and that the securities would be “stuck on the banker’s shelf.” In the case of Hop-In, Scott and Stringfellow purchased all of the offerings, meaning that all of the risk associated with properly pricing and selling them was transferred to Scott and Stringfellow. Goodwill among Scott and Stringfellow and the selling group would be damaged and their network would be weakened. If the IPO is underpriced, the risks for Hop-In vary. A low initial price can easily and immediately make Hop-In lose significant amounts of profit if there are considerable stag profits. The lost capital from the stock price jump could have been raised for and reinvested in the company. If the IPO is overpriced, Hop-In risks losing market with their stock. If the stock is overpriced and the...
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...University of Pennsylvania ScholarlyCommons Wharton Research Scholars Journal 5-1-2006 Valuation of Venture Capital Securities: An Options Based Approach A. Lloyd Thomas University of Pennsylvania This paper is posted at ScholarlyCommons. http://repository.upenn.edu/wharton_research_scholars/36 For more information, please contact repository@pobox.upenn.edu. Wharton School Valuation of Venture Capital Securities: An Options Based Approach Disciplines Business | Finance and Financial Management This journal article is available at ScholarlyCommons: http://repository.upenn.edu/wharton_research_scholars/36 Valuation of Venture Capital Securities 1 Valuation of Venture Capital Securities An Options Based Approach Wharton Research Scholars 2005-2006 Investigator: A. Lloyd Thomas Supervising Professor: Dr. Raffi Amit Copyright © A. Lloyd Thomas, 2006 Valuation of Venture Capital Securities 2 Table of Contents Table of Contents................................................................................................................ 2 Introduction......................................................................................................................... 3 Venture Capital Financing Negotiations......................................................................... 3 Venture Capital Securities .............................................................................................. 6 Common Stock...
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...CASE #2 – “Rosetta Stone: Pricing the 2009 IPO” Group 2 will have to make a presentation before the entire class during the synchronous session on Monday, November 23, 2015. In April 2009, the Rosetta Stone management had to price the initial public offering of Rosetta Stone stock during one of the most difficult periods in capital-raising history. The case outlines Rosetta Stone’s unique language-learning strategy and its associated strong financial performance. Students are invited to value the stock and take a position on whether the current filing range is appropriate. The case is designed to showcase corporate valuation using discounted cash flow and peer-company market multiples. Answer the following questions in your report: 1. What is going on at Rosetta Stone? 2. Describe the economics of the Rosetta Stone business. Is this a business that you expect will generate interest among investors? What do you think the current market price is for Rosetta Stone shares? Justify your valuation on a discounted-cash-flow basis and a market multiples basis. • What are the pros and cons of using a market-multiples approach in valuation? • Consider a discounted-cash-flow model for valuing Rosetta Stone. Are you comfortable with the financial forecast in case Exhibit 8? What are the key assumptions? Is the length of the forecast period reasonable? • What discount rate is appropriate for the cash-flow forecast? • What was your approach for terminal value? How do your...
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...JETBLUE AIRWAYS IPO VALUATION Teaching Note This case examines the April 2002, decision of JetBlue management to price the initial public offering of JetBlue stock during one of the worst periods in airline history. The case outlines JetBlue’s innovative strategy and the associated strong financial performance over its initial two years. Students are invited to value the stock and take a position on whether the current $25–$26 per share filing range is appropriate. The case is designed to showcase corporate valuation using discounted cash flow and peer-company market multiples. The epilogue details the 67 percent first-day rise in JetBlue stock from the $27 offer price. With such a backdrop, students are exposed to one of the well-known finance anomalies—the IPO underpricing phenomenon—and are invited to critically discuss various proposed explanations. The case provides opportunities for the instructor to develop any of the following teaching objectives, • Review the institutional aspects of the equity issuance transaction. • Explore the costs and benefits associated with public share offerings. • Develop an appreciation for the challenges of valuing unseasoned firms. • Hone corporate valuation skills, particularly using market multiples. • Evaluate the received explanations of various finance anomalies, such as the IPO underpricing phenomenon. Study Questions 1. What are the advantages and disadvantages...
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...6- 1 6- 2 Topics Covered Stocks and the Stock Market Book Values, Liquidation Values and Market Values Valuing Common Stocks Simplifying the Dividend Discount Model Growth Stocks and Income Stocks Market Efficiency (i.e., no free lunches on Wall Street) Market Anomalies and Behavioral Finance McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved Terminology of Stocks Public Common Stock - Ownership shares in a publicly held corporation. Primary Market - Place where the sale of new stock first occurs. Secondary Market - market in which already issued securities are traded by investors. Initial Public Offering (IPO) - First offering of stock to the general public. Seasoned Issue - Sale of new shares by a firm that has already been through an IPO McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved 6- 3 6- 4 Value of a Stock Book Value - Net worth of the firm according to the balance sheet under GAAP. Market Value Balance Sheet - Financial statement that uses market value of assets and liabilities. Liquidation Value - Net proceeds that would be realized by selling the firm’s assets and paying off its creditors. (i.e., S/H get what’s left over). McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved Simple Models 1. Stock Price = discounted future stream of dividends paid to Shareholders (where dividend = periodic cash distribution from...
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...Today I will talk about Facebook; it’s a very topical subject particularly since Facebook submit paperwork to regulators for an IPO, 1 month ago. But let’s start with a little part of history * Histoire «From Harvard dorm room to all Canadian and US University : Mark Zuckerberg, 28, founded Facebook while studying psychology at Harvard University. Zuckerberg had already developed a number of social-networking websites for fellow students, including Facemash, where you could rate people's attractiveness. In February 2004 Zuckerberg launched "The Facebook” with the help of Eduardo Saverin (business aspects), Dustin Moskovitz (programmer), Andrew McCollum (graphic artist). Within 24 hours, 1,200(one thousand two hundred) Harvard students had signed up, and after one month, over half of the undergraduate population had a profile. In March 2004, Facebook expanded to Stanford, Columbia, and Yale. It soon opened to the other Ivy League schools, Boston University, New York University, MIT, and gradually most universities in Canada and the United States. Facebook was then opened on September, 2006, to everyone of age 13 and older with a valid email address. * Chiffres clé As of February 2012, Facebook has more than 845 million active users and in average Facebook’s user increase by 100(one hundred) million each 120 (one hundred twenty) days. Facebook it’s 1 of every 5 of all page views on Internet. It’s 250 (two hundred fifty) million photos uploaded daily, 78 different languages...
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...production, rising from 98.6 million barrels in 200 to 148.3 million barrels in 2004 * Was appointed by the Russian government as Russia’s representative in the negotiation of the multitude of production-sharing agreements, which it was signing with major oil producers from all over the world * Acquired Yuganskneftegas unit from Yukos through the Baikal Finance Group * Why does Rosneft want to do an IPO? * To pay off debts * $7.5 billion debt, borrowed from the National Oil and Gas Company of India * $1 billion in Russian capital gains taxes on the IPO itself * What does Rosneft’s owner want out of an IPO? * The Russian government did not want to lose control over the company (and was not sure what share it wished to float) * Wanted the highest possible proceeds for a share * To prevent the losses it had suffered in previous privatization efforts and was highly contentious about what a fair price would be for its stake * What are the key considerations in considering to do any IPO? * Credible leadership, Enterprise vision * A reasonable deal size (at least $10 million) * Evidence of growth * Outstanding products of services that are difficult to copy * High-quality employees * Logical strategy for growth * What are the risks of investing in a share of Rosneft?...
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...TWITTER: IPO PAPER By: Jarmar Jackson 1. Identify the company and its industry. The name of the company I choose to do my IPO paper on is Twitter, Inc. (TWTR). Twitter is in the Technology/ Internet Information Provider industry. It is an online social networking website that allows users to send 140 character messages called “tweets”. The headquarters is located in San Francisco but it has more than 25 offices around the world. Twitter was launched by Jack Dorsey, Evan Williams, Biz Stone, and Noah Glass on July 15, 2006. The website handles nearly 1.6 billion searches a day and as of July 2014 it had more than 500 million users for the website. Jack Dorsey is the chairman and Dick Costolo is the CEO of the company. Some of Twitter’s biggest competitors are Facebook (FB), Google (GOOG), and LinkedIn (LNKD). Twitter currently has a market cap of 24.06 Billion while competitors Facebook and Google have market caps of 212.88 billion and 356.32 billion respectively. One article on ektron.com speaks of why Twitter is better than Facebook is that Twitter allows for user to follow complete strangers. While this sounds like something most people would defer from this gives Celebrities, Actors, Athletes, and even different businesses to stay close to their fans and customers. This also gives users to feeling of being close friends with celebrities while also sharing different pictures and other types of media. This differs from Facebook where it is suggested that you only...
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...Contents Introduction 1 Reasons of Converting Start up business to Public Limited Company 1 Process of Converting Start up business to Public Limited Company 1 Legal Requirements for Formation of Public Limited Company 2 Prospectus 2 Contents of Prospectus 2 Initial Public Offering (IPO) 3 How to get the permission of IPO 3 Restrictions & rules of IPO face value 4 Prospect of Book Building Method 4 The Prospect of Dutch auction method 4 Conclusion 5 References: 6 Introduction A startup company or startup is organization formed to search for a repeatable and scalable business model. These companies are usually small in size. These companies, generally newly created, are in a phase of development and research for markets. Paul Graham says that "A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of "exit." The only essential thing is growth. Everything else we associate with startups follows from growth." A public limited company is a company which offers equity shares with limited liability to public investors on a registered exchange. Reasons of Converting Start up business to Public Limited Company Going public raises cash, and usually a lot of it. Being publicly traded also opens many financial doors: * Because of the increased scrutiny, public companies can usually get better rates when they issue...
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