Chapter
15
HOW CORPORATIONS ISSUE
SECURITIES
Brealey, Myers, and Allen
Principles of Corporate Finance
11th Global Edition
15-1 VENTURE CAPITAL
• Venture Capital
• Money invested to finance new firm
• Success of new firm dependent on managers
• Restrictions placed on management by venture
capital company
• Funds usually dispersed in stages after certain level
of success
15-2
15-1 VENTURE CAPITAL
15-3
15-1 VENTURE CAPITAL
15-4
FIGURE 15.1 U.S VENTURE CAPITAL
INVESTMENTS
15-5
15-2 THE INITIAL PUBLIC OFFERING
• Initial Public Offering (IPO)
• First offering of stock to public
• Underwriter
• Firm that buys and resells an issue of
securities
• Spread
• Difference between public-offer price and price
paid by underwriter
15-6
15-2 THE INITIAL PUBLIC OFFERING
• Prospectus
• Provides information on issue of securities
• Underpricing
• Issuing securities at price set below true value
of security
15-7
FIGURE 15.2 MOTIVES FOR IPO
15-8
TABLE 15.1 TOP MANAGING UNDERWRITERS,
2011
15-9
FIGURE 15.3 AVERAGE INITIAL IPO RETURNS
Russia
Argentina
Austria
Canada
Denmark
Chile
Norway
Netherlands
France
Turkey
Spain
Portugal
Nigeria
Belgium
Israel
Hong Kong
Mexico
UK
Italy
USA
Finland
S. Africa
New Zealand
Philippines
Iran
Australia
Poland
Cyprus
Ireland
Germany
Indonesia
Sweden
Singapore
Switzerland
Sri Lanka
Brazil
Bulgaria
Thailand
Taiwan
Japan
Greece
Korea
Malaysia
India
China
0
20
40
60
80
Return, percent
100
120
140
15-10
15-2 THE INITIAL PUBLIC OFFERING
Average Expenses on 1767 IPO's from 1990-1994
Value of Issues
Direct Avg First Day
Total
($mil)
Costs (%)
Return (%) Costs (%)
2 - 9.99
16.96
16.36
25.16
10 - 19.99
11.63
9.65
18.15
20 - 39.99
9.7
12.48
18.18
40 - 59.99
8.72
13.65
17.95
60 - 79.99
8.2
11.31
16.35
80 - 99.99
7.91
8.91
14.14
100 - 199.99
7.06
7.16
12.78
200 - 499.99
6.53
5.70
11.10
500 and up
5.72
7.53
10.36
All Issues
11.00
12.05
18.69
15-11
FIGURE 15.4 IPO PROCEEDS AND FIRST-DAY
RETURNS
15-12
15-3 ALTERNATIVE ISSUE PROCEDURES FOR IPOS
• General Cash Offer
• Sale of securities to all investors by already
public company
• Shelf Registration
• Allows firms to file one registration statement for
several issues of same security
• Private Placement
• Sale of securities to limited investors with no
public offering
15-13
TABLE 15.3 UNDERWRITING SPREADS
15-14
FIGURE 15.5 COSTS OF RAISING CAPITAL
15-15
15-4 SECURITY SALES BY PUBLIC COMPANIES
• Rights Issues
• Issues of securities offered only to current
stockholders
• Example
• Ivanhoe Mines needs C$1.2 billion of new
equity. Market price C$24.73. Ivanhoe Mines
decides to raise additional funds by offering the
right to buy 3 new shares for 20 at C$13.93 per
share. With 100% subscription, what is value of
each right?
15-16
15-4 SECURITY SALES BY PUBLIC COMPANIES
• Current Market Value
• 1 x C$24.73 = C$24.73
• Total Shares
• 20 + 3 = 23
• Amount of new funds
• 3 x C$13.93 = C$41.79
• Ex-Rights Price
• (C$41.79 + C$494.60) / 23 = C$23.32
• Value of a Right
• C$23.32 – C$13.93 = C$9.39
15-17
15-4 SECURITY SALES BY PUBLIC COMPANIES
• Rights Issue
• Lafarge Corp needs to raise €1.28 billion
• The market price is €60/sh
• Lafarge decides to raise additional funds via a 4 for
17 rights offer at €41 per share
• If we assume 100% subscription, what is the value of
each right?
15-18
15-4 SECURITY SALES BY PUBLIC COMPANIES
• Rights Issue
• Current market
• 17 x €60 = €1,020
• Total shares
• 17 + 4 = 21
• Amount of funds
• 1,020 + (4 x 41) = €1,184
• New share price
• (1,184)/21 = €56.38
• Value of a right
• 56.38 – 41 = €15.38
15-19