Raising Money to
Grow a Business
Lesson 3
Investment Banks and Going Public
Going Public
Aim:
 Why is “going public” such an important
event for a growing company?
Do Now:
 Identify three billionaires that you know have
started companies. Chances are they’re
companies have gone public. If not, a big
public company probably bought them out!
How Companies Expand
 Do Now answers:
1. Mark Zuckerberg, Facebook.
Founded in 2004, public in 2012.
2. Bill Gates, Microsoft. Founded 1975,
public in 1986.
3. Brian Acton, WhatsApp. Founded
2009, bought by Facebook 2014 for
$19 billion.
Frizzle, Inc.
 Ice cream and restaurant.
 Opening new Frizzle’s around the world for the past five
years.
 One of the most popular ice cream restaurants in the
United States and Europe.
 20% market share.
 25,000 employees in multiple locations in the United States
and Europe.
 Headquartered in New York, NY.
 Looking to expand to China or Russia.
 Needs $500 million in order to expand.
 Financial statements indicate a healthy, profitable company.
Frizzle Inc.
Is Frizzle ready to go conduct an Initial
Public Offering (IPO)? Let’s see…
 Its restaurants have proven themselves to be
profitable in the U.S and Europe
 It has a substantial opportunity to grow into
new geographic markets
 It is in need of a substantial amount of money
 If the answers are Yes, Frizzle is a good
candidate and should work with an
investment bank.
Role of an Investment Bank
Assists a company in facilitating the
process by:
 Advising on alternatives in raising capital. It may
be best for Frizzle to issue bonds instead of
stock!
 Managing the issuance of the security (ie:
investment) that is chosen (bonds or stock)
 Helping the company determine the
characteristics of the stock or bond offering
(Example: if issuing bonds, how long their term
should be)
Role of an Investment Bank
Assists a company in facilitating the
process by:
 Determining the right price of the stock or bond - For
stock, the share price; for a bond, the coupon rate
 If the stock is priced too high, investors will not
want to buy it
 If the bond’s coupon rate is too low, investors will
not want to buy it
 In both instances, incorrect pricing results in
Frizzle not raising the money it seeks! An
investment bank can prevent these mistakes.
Role of an Investment Bank
Assists a company in facilitating the
process by:
 If a bond is being issued, assisting in the
assignment of credit rating
 In a bought deal, the investment bank buys the
stocks and bonds from the issuer and then
resells them into the marketplace.
 This is potentially risky for the investment bank
because it now the task of make sure all of the stocks
or bonds are successfully resold.
Frizzle, Inc.
New company
that has never
issued stock to
anyone but the
founders
IPO (Initial Public
Offering) –
Company intends
to sell stock to
outsiders for the
first time
Company is
valued by
Investment
Bankers
Frizzle is listed on
an exchange
(NASDAQ)
Investors are now
able to buy Frizzle
stock
Opening price
(per share) is
decided
Afterwards, the “Tombstone”
commemorates the successful IPO.
• What company raised money? How much money was raised?
On what date? How many shares were issued and at what
price? Which investment banks lead this offering?
• The investment banks pay to place them in financial
publications like the Wall Street Journal. It is basically
advertising by showing their ability to successfully raise money!
Lesson Summary 1 of 2
1. What are some of the characteristics of a
company that is ready to go public?
2. An Initial Public Offering (IPO) is associated
with what issuing stock or bonds?
3. What services does an investment banker
provide?
4. What document does an investment bank
produce so let everyone know that it has
conducted another successful IPO?
Lesson Summary 2 of 2
5. When an investment bank guarantees
the price at which a stock or bond will be
sold by basically purchasing everything
being issued, what type of arrangement
is this?
6. Why is “going public” such an important
event for a growing company?
Web Challenge #1
• Challenge: Search Google or Bing
images using “ipo tombstone”. Find the
largest offering in terms of dollar
raised, the most recent offering and the
investment banks who appear most
often.
Web Challenge #2
Q: Are IPOs always success stories?
•
A: No. Sometimes there’s an excitement
about a company that leads investors to
pay a lot at the IPO. Later, when the
company fails to deliver, the stock price
drifts lower.
•
Challenge: Find three examples of an IPO
success (where the stock is trading higher
one year after it went public) and three that
were failures. What commonalities can you
find among the successes? The failures?
Web Challenge #3
Q: Sometimes a company goes public and its
shares soar 50% or more on the first day of
trading as the initial investors who were able to
secure IPO shares at the IPO price sell them at
a big profit the very first day to eager investors
caught up in the excitement.
• Research how investment banks dole out
“IPO shares”, especially of companies
whose IPOs are highly anticipated. Hint:
The average investor cannot get IPO
shares.