• Initial Public Offering
• Other New Issue Procedures
• Subsequent Security Sales
• Private Placements
• Student Presentations
• Payout Policy

1. Select managing underwriter and form underwriting syndicate
2. Arrange spread and greenshoe option
3. Register with SEC and issue prospectus
4. Roadshow to interest potential investors and build book of demand
5. SEC approval and issue price set
6. Underwriters allocate stock
7. Trading starts
8. Managing underwriter makes liquid market

• Role of underwriter and underwriting syndicate
– Financial advisors
– Buy the issue
– Resell it to the public
• Alternatives for underwriting syndicate
– Buy entire issue and resell it
– Best-efforts basis
– All-or-none arrangement
• Primary offering
– New shares
• Secondary offering
– Shares held by management, venture capitalist or other investors

• Spread
– Difference between what underwriter pays and the offering price
– Typically 7% for $20 – 80 million IPOs
– Split among managing underwriter, syndicate and sales force
• Registration costs
• Greenshoe option
– Allows underwriter to buy and sell additional shares

• Number of shares
– Primary offering
– Secondary offering
• Price
– To public
– To underwriter
– Proceeds to company and other sellers
• Registration expenses
• Use of proceeds
• Company information
• Considerations – Warnings
• Management and compensation
• Prior transactions
• Selling stockholders
• Underwriting agreement
• Legal matters

• IPOs often end the first day of trading above the offering price
• Average first day returns approximately 19% over 1963-2003
• Long term, IPOs underperform the market
• Why are IPOs underpriced?
– To assure selling entire issue
– To entice investors to IPOs of underwriter
– To reward favored clients
• Individual investors do not get favorable returns by bidding for each IPO

• Bookbuilding
– Typical in US
• Fixed price offer
• Auction
– Google
– Discriminatory auction
– Uniform price auction
– Impact of winner’s curse

• General cash offers
– Shelf registration
• More common for debt than equity
• Allows company to time market
• Spreads
– IPOs - around 7%
– Seasoned equity - around 5%
– Debt – around 1%
• Market reaction to stock issues
– US stocks approximately a 3% decline when stock issue is announced
– Signaling issue
• Rights issues

• Limits on number and type of investors
• Advantages
– Lower cost
– May deal directly with buyer
• Disadvantages
– No active market to determine price
– Hard to resell
• Example
– State Farm and debt issues

• Companies can raise capital in a variety of ways
• Venture capital is a stepping stone to more long term financing
• Initial public offerings are a complex process
• Issuing equity is more costly than issuing debt
• Underwriters play an important role in raising capital
• Underpricing of IPOs is typical
• Signaling inside information impacts stock price
• Beware of the winner’s curse in investing

• Dividend Payments
• Stock Repurchases
• Taxation in US
– Historically
• Capital gains taxed at lower rate than ordinary income
• Dividends taxed as ordinary income
• Occasionally first $x of dividends tax free
– Currently (2002-2009)
• Dividends are taxed at the same rate as capital gains

• Long-run target for dividend payout ratio
– Mature – high level
– Growth – zero or low
• Focus is on dividend changes
• Dividend changes follow long-run sustainable earnings
– Smoothing of dividends
• Avoid reversing dividend changes
• Stock repurchases for two reasons
– Large accumulation of cash
– Change in capital structure

• Dividends
– Increase in dividends signals confidence in earnings
– Positive stock price reaction to initial dividend payout
– Stock prices react to dividend changes
• Share repurchases
– Indication management feels stock is undervalued

• Miller and Modigliani
– Dividends are irrelevant
– Investors can create the income stream they want by selling stock, or reinvesting dividends
• Conservative view
– Dividends increase firm value
• Radical view
– If dividends are taxed more heavily than capital gains, the dividend payouts decrease firm value

• Dividends do matter as many companies pay dividends and investors consider dividend rate
• Changes in dividend levels impact stock prices
• Payout policy can signal information available to management
• Information content of announcement may be determining factor

• Guest Speaker
– Keith Green, VP Operations at Allstate
– Harvard Business Review Case Study
• A-Rod: Signing the Best Player in Baseball
– Pick up the case in the Finance Department Office
(340 Wohlers) on Monday, March 28
– Read the case (5 pages of text) prior to class
– Determine what you think is the appropriate bid
• No class on Thursday, March 29