FINA351-Managerial Finance, Chapter 15, (Ref. 15)
Skim through Ch. 15 (and especially the instructor notes) to answer the questions below. Unfortunately, we only have
one day to spend on this interesting chapter.
1. (A) What does OPM stand for?
(B) List a least four sources of OPM to fund a start-up business.
2. T or F: Banks are very interested in making loans to start-up companies with little or no collateral.
3. How do venture capitalists attempt to limit their substantial risks?
4. How expensive is venture capital?
5. (A) What is crowdfunding?
(B) Go to https://www.kickstarter.com/discover/most-funded and review some of the top funded projects in
Kickstarter. Find and record the name of the project you think is the “coolest.”
(C) Why is investing in crowd funding projects considered risky? (See instructor notes).
6. (A) What does IPO stand for?
(B) T or F: An IPO occurs in the secondary market, not the primary market (see end of Ch. 1).
(C) What are two reasons why a company might “go public”? (See instructor notes).
(D) What are SEOs?
7. (A) Go to http://www.renaissancecapital.com/ipohome/rankings/biggestus.aspx and list the five biggest global
IPO’s in terms of deal size (money raised).
(B) Of the five biggest global IPOs, how many were U.S.-based companies?
(C) Of the 25 largest global IPOs, which underwriter was used the most? (Hint: clicking on the
“underwriter” heading will sort them by name.)
8. List the eight basic steps in the IPO process (see instructor notes).
9. (A) Distinguish between the two forms of underwriting in a traditional, cash IPO.
(B) T or F: The firm commitment form of underwriting is more dominant than the best efforts form.
10. (A) Would a small time investor (e.g. Toews) be more likely to participate in a traditional IPO or a Dutch
Auction?
(B) One of the most famous Dutch Auctions was Google’s IPO (now called Alphabet Inc.). Suppose you had
purchased 100 shares of Google’s stock (GOOG) as part of its IPO in 2004 at $85 per share. Look up the stock
price today and calculate your dollar profit (excluding trading costs and taxes). Keep in mind that GOOG’s
only real stock split (2-for-1) occurred in April of 2014.
11. Review the information at the end of this document regarding Facebook’s IPO:
(A) Why did FB’s roadshow get off to a rough start?
(B) What was the IPO offer price set by FB and how much money did FB raise?
(C) Historically, successful IPOs have a 15-20% first day “pop” in price, which means that FB’s stock should
have closed at least $44-$46 by the end of trading. Was FB’s IPO considered successful within the first year?
Why or why not?
12. What is the purpose of lockup agreements?
13. When setting the IPO price, what negative consequences are there from setting the price too low? Too high?
14. Why is IPO underpricing fairly common?
15. According to Table 15.5 in your text:
(A) T or F: The smaller the IPO, the larger the underwriting spread.
(B) T or F: Selling equity is usually cheaper than selling debt.
(C) T or F: IPOs are cheaper than SEOs.
16. Go to http://biz.yahoo.com/ipo/. Which IPO had the best return and the worst return in the last year (see the 1Year links) and what were those returns as a gain/loss percent?
Facebook’s IPO
http://en.wikipedia.org/wiki/Initial_public_offering_of_Facebook
Facebook filed for an initial public offering on February 1, 2012 by filing their S1 registration document with the SEC.
The document also stated that the company was seeking to raise US$5 billion, which would make it one of the largest
IPOs in tech history and the biggest in Internet history.
The roadshow faced a "rough start" initially. Zuckerberg raised controversy for wearing a hoodie (rather than a
customary business suit) to the first meeting with investors. Wedbush Securities analyst Michael Pachter called it a
"mark of immaturity." A half-hour long video played during that meeting also frustrated investors who wanted to
discuss more technical details. The video was dropped for future meetings.
Trading was to begin at 11:00am Eastern Time on Friday, May 18, 2012 with an IPO price of $38.00. However,
trading was delayed until 11:30am Eastern Time due to technical problems with the NASDAQ exchange. Those early
jitters would foretell ongoing problems; the first day of trading was marred by numerous technical glitches that
prevented orders from going through, or even confused investors as to whether or not their orders were successful.
Initial trading saw the stock shoot up to as much as $45. Yet the early rally was unsustainable. The stock struggled to
stay above the IPO price for most of the day, forcing underwriters to buy back shares to support the price. At closing
bell, shares were valued at $38.23, only $0.23 above the IPO price. The opening was widely described by the financial
press as a disappointment.
Despite all the problems, the stock set a new record for trading volume of an IPO (460 million shares). The IPO also
ended up raising $16 billion, making it the third largest in U.S. history (just ahead of AT&T Wireless and behind only
General Motors and Visa Inc.). The stock price left the company with a higher market capitalization than all but a few
U.S. corporations – surpassing heavyweights such as Amazon.com, McDonald's, Disney, and Kraft Foods – and made
Zuckerberg’s share of stock worth $19 billion.
However, by the end of May, 2012, the stock lost over a quarter of its starting value, which led the Wall Street Journal
to call the IPO a "fiasco." By June 6 investors had lost $40 billion. It took 14 months for FB’s stock to trade above its
IPO price. Today, of course, FB’s stock looks pretty good . . . so the reward goes to the buy-and-hold investors.