Sources of Funds to
U.S. Corporations
Announcements of New Issues
Dow Jones News Service
TAFT, Calif. (Dow Jones)--Berry Petroleum Co. (BRY) entered a three-year, $150
million unsecured revolving line of credit with NationsBank Corp.'s (NB)
NationsBank of Texas unit. In a press release, Berry said the initial borrowing
base will be $50 million, which can be redetermined periodically based on its
needs, agreement with the bank and approval of its board. Initial borrowings under
the agreement will bear interest at LIBOR plus 60 basis points, which at current
market conditions is about 6 1/4% annually. Berry Petroleum, Taft, Calif., is an
independent oil and gas production and exploration company.
Business Wire
DAYTON,
Ohio--(BUSINESS
WIRE)--Nov.
8,
1995--Amcast
Industrial
Corporation(NYSE - AIZ) today announced that the company has entered into a
new $50 million, ten-year credit agreement with two institutional investors, Principal
Mutual Life Insurance Company, Des Moines, Iowa, and Northwestern Mutual Life
Insurance Company, Milwaukee, Wisconsin. The notes will carry an interest rate of
7.09% and will have an average term of eight and one half years. The proceeds of
the notes will be used to retire existing bank debt, fund Amcast's capital
expenditures for expansion, as well as other general corporate and business
purposes.
Sources of New Funds to U.S. Corporations
1.2
1
Debt
Equity
Internal Funds
0.8
0.6
0.4
0.2
0
1952
1962
1972
1982
-0.2
-0.4
Year
1992
2002
Debt Financing



Private - bank loans
Public – corporate bonds
 corporations rely mainly on bonds over other
public securities
 most widely used form of financing in recent years
Other - privately placed notes
External Equity


Preferred Stock
 least used of all long-term corporate securities
Common Stock
 represents a small percentage of long-term
financing
Regulation of the Securities Markets




Securities and Exchange Commission (SEC) is in charge of
regulating the organized stock exchanges
Purpose of the SEC is to protect investors from fraud and
manipulation
Trend in recent years has been toward more legislation to avoid
abuses in the market
Relevant laws






Securities Act of 1933
Securities Exchange Act of 1934
Glass-Steagall Act
Regulation Fair Disclosure
Sarbanes-Oxley
Coordinated worldwide 2008 bailout and increased role of the Fed
and the Treasury
How are new funds issued?
Maxwell Corporation
Managing investment banker
Underwriting syndicate
Selected dealers group
Brokers
Public
Issues 250,000 additional shares
of stock
Merrill Lynch
15 investment dealers
(including Merrill Lynch)
Public vs. Private Companies


Public company:
 when shares of a company are offered to the public
 anyone can buy shares of the stock
Private company:
 privately owned or held by an individual or family
 not available to the general public
Advantages and Disadvantages
of Raising Funds Publicly


Advantages of being public:
 greater availability of funds (easier to grow and raise
money)
Disadvantages of being public:
 information disclosure
 high costs of going public

higher potential for agency problems
Advantages and Disadvantages
of Raising Funds Privately



Closer monitoring and control
Highly illiquid
Lower access to funds
The Going Public Process

IPO – initial public offering


A firms offers a share of its ownership to the public in
exchange of new funds.
Typically the process is “underwritten” by an investment
banker for a fee.
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
IPO Activity
Total Proceeds
60,000.00
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
0.00
Issues in IPOs

“Hot cycles”: in some years there is much higher
IPO activity than in others


IPO Underpricing


October 23, 2002: 10:46 AM EDT
NEW YORK (Reuters) - Wynn Resorts Ltd., casino mogul Steve Wynn's
vehicle to build a multi-billion dollar Las Vegas resort, pushed back a $438
million IPO planned for Tuesday as investors balked at a business that
won't have revenue for three years.
Netscape closed at $75 on offering day, up from $28
IPO oversubscription: often there is much higher
demand for the offering than the shares offered.
IPO Underpricing
Initial Return
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1980
1985
1990
1995
2000
Private Placements

Private equity

Private debt placements

144A placements
LBO’s

Leveraged Buyout (LBO):


money is borrowed to repurchase all the shares of the
company, and take it private, resulting in a great deal of
debt
Reverse LBO: a company goes public after it has
been taken private