Rights Issue

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Principles
of
Corporate
Finance
Chapter 15
How Corporations
Issue Securities
Tenth Edition
Slides by
Matthew Will
McGraw Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved
16- 2
Topics Covered
Venture Capital
The Initial Public Offering
Other New-Issue Procedures
Security Sales by Public Companies
– Rights Issue
Private Placements and Public Issues
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Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
16- 3
Venture Capital
Venture Capital
Money invested to finance a new firm
Since success of a new firm is highly dependent
on the effort of the managers, restrictions are
placed on management by the venture capital
company and funds are usually dispersed in
stages, after a certain level of success is achieved.
McGraw Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
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Venture Capital
First Stage MarketValue BalanceSheet ($mil)
Assets
Liabilities and Equity
Cash from new equity 1.0 New equity from venturecapital 1.0
Otherassets 1.0
Your originalequity 1.0
Value 2.0
Value 2.0
McGraw Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
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Venture Capital
Second Stage MarketValue BalanceSheet ($mil)
Assets
Liabilities and Equity
Cash from new equity 4.0 New equity from2nd stage 4.0
Fixed assets 1.0
Equity from1st stage 5.0
Otherassets 9.0
Your originalequity 5.0
Value 14.0
Value 14.0
McGraw Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
16- 6
U.S. Venture Capital Investments
120
104.4
$ Millions
100
80
53.5
60
40.5
McGraw Hill/Irwin
2005
22.4
19.6 21.8
2004
21.7
2003
2001
2000
1999
1998
14.6
1997
10.8
1996
0
7.9
1995
20
20.7
2002
40
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
16- 7
Initial Offering
Initial Public Offering (IPO) - First offering of
stock to the general public.
Underwriter - Firm that buys an issue of securities
from a company and resells it to the public.
Spread - Difference between public offer price and
price paid by underwriter.
Prospectus - Formal summary that provides
information on an issue of securities.
Underpricing - Issuing securities at an offering
price set below the true value of the security.
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Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
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Motives For An IPO
Percent of CFOs who strongly agree with the reason for an IPO
To create public shares for use in future acquisitions
59.4
To establish a market price/value for our firm
51.2
To enhance the reputation of our company
49.1
To broaden the base of ownership
45.9
To allow one or more principals to diversify personal holdings
44.1
To minimize our cost of capital
42.5
To allow venture capitalists to cash out
32.2
To attract analysts' attention
29.8
Our company has run out of private equity
27.6
Debt is becoming too expensive
14.3
0
McGraw Hill/Irwin
10
20
30
40
50
60
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
70
16- 9
The Top Managing Underwriters
Underwriter
Citigroup
J.P. Morgan
Deutsche Bank
Morgan Stanley
Lehman Brothers
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Value of Issues
($billion)
Number of issues
667
506
475
455
477
1966
1738
1444
1419
1306
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16- 10
Average Initial IPO Returns
Denmark
Canada
Netherlands
Spain
Turkey
France
Australia
Norway
Hong Kong
UK
USA
Italy
Japan
Singapore
Sweden
Taiwan
Germany
Switzerland
Korea
Brazil
India
China
McGraw Hill/Irwin
256 %
0
20
40
60
80
100
return (percent)
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
16- 11
Initial Offering
Average Expenses on 1767 IPOs from 1990-1994
Value of Issues
Direct Avg First Day
Total
($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
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IPO Proceeds
IPO Proceeds and First Day Returns
80
70
60
50
40
Issue proceeds ($bn)
First-day return
30
20
10
McGraw Hill/Irwin
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
16- 13
General Cash Offers
Seasoned Offering - Sale of securities by a firm that
is already publicly traded.
General Cash Offer - Sale of securities open to all
investors by an already public company.
Shelf Registration - A procedure that allows firms
to file one registration statement for several issues
of the same security.
Private Placement - Sale of securities to a limited
number of investors without a public offering.
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Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
16- 14
Underwriting Spreads (2006)
Type
Company
Common Stock:
IPO
IPO
IPO
IPO
Mastercard
Golfsmith International
Luna Innovators
Verigy
Seasoned
Issue Amount
($ millions)
Underwriter's
spread
2,399
29
21
128
4.70%
7.00%
7.00%
7.00%
Nasdaq Stock Market
556
4.00%
Seasoned
Parker Drilling
101
1.06%
Seasoned
KFX, Inc.
131
4.00%
Seasoned
Walter Industries
149
1.28%
Seasoned
Natural Gas Services Group
50
5.77%
Debt (cupon rate, type,
maturity) :
5.37% floating rate notes, 2009
5.75% debentures, 2036
Honeywell International
Boston Edison
300
200
0.25%
0.88%
Home Depot
Navigators Group
1,000
125
0.35%
0.65%
BioMartin Pharma
125
3.00%
5.2% senior global notes, 2011
7% senior notes, 2016
5% senior convertible notes,
2013
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16- 15
Rights Issue
Rights Issue - Issue of securities offered only to
current stockholders.
Example – BNP Paribas Bank needs to raise €5.50
billion of new equity. The market price is
€77.40/sh. Lafarge decides to raise additional
funds via a 1 for 10 rights offer at €65.40 per
share. If we assume 100% subscription, what is
the value of each right?
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Rights Issue
Example - BNP Paribas Bank needs to raise €5.50 billion of new equity.
The market price is €77.40/sh. Lafarge decides to raise additional funds via a
1 for 10 rights offer at €65.40 per share. If we assume 100% subscription,
what is the value of each right?
Current Market Value = 10 x €77.40 = €774.00
Total Shares = 10 + 1 = 11
Amount of funds = 774 + 65.40 = €839.40
New Share Price = (839.40) / 11 = €76.31
Value of a Right = 76.31 – 65.40 = €10.91
McGraw Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
16- 17
Rights Issue
Slightly More Difficult Example
Lafarge Corp needs to raise €1.28billion of
new equity. 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?
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Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
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Rights Issue
Example - Lafarge Corp needs to raise €1.28billion of new equity. 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?
Current Market Value = 17 x €60 = €1,020
Total Shares = 17 + 4 = 21
Amount of funds = 1,020 + (4x41) = €1,184
New Share Price = (1,184) / 21 = €56.38
Value of a Right = 56.38 – 41 = €15.38
McGraw Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
16- 19
Web Resources
Click to access web sites
Internet connection required
www.redherring.com
www.nvca.org
www.evca.com
www.asianfn.com
www.ventureeconomics.com
www.pwcmoneytree.com
www.v1.com
www.vnpartners.com/primer.htm
McGraw Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
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