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Pricing of Public Issues: Vivaswan Pathak
Pricing of Public Issues: Vivaswan Pathak
Pricing of Public Issues: Vivaswan Pathak
Vivaswan Pathak
The report aims at providing an insight into the procedures involved
in a public issue namely the Initial Public Offer (IPO) and Follow-on
Public Offer (FPO)
CPCFM
Indian Institute of Foreign Trade
Roll Number 13
vivaswan_ocfm1@iift.ac.in
[Pick the date]
First we address the fundamental question that why a company comes out with public offering. Let us
explain with example .Lets say that youve always dreamed of opening a pizzeria. You love pizza,
and youve done your homework to figure out how much it would cost to launch a new pizza business
and how much money you could expect to earn each year in profit.
The building and equipment would cost $500,000 up front, and annual expenses (ingredients,
employee salaries, utilities) would cost an additional $250,000. With annual earnings of $325,000,
you
expect
to
make
a
$75,000
profit
each
year.
Not
bad.
The only problem is that you dont have $750,000 (building + equipment + expenses) in cash to cover
all of those costs. You could take out a loan, but that accrues interest. What about finding investors
who would give you money in exchange for a share of the ownership of the restaurant?
This is the logic that companies use when they make the decision to issue stock to private or public
investors.
An initial public offering (IPO) or stock market launch is a type of public offering where shares
of stock in a company are sold to the general public, on a securities exchange, for the first time.
Through this process, a private company transforms into a public company. Initial public offerings are
used by companies to raise expansion capital, to possibly monetize the investments of early private
investors, and to become publicly traded enterprises.
A follow-on offering (often but incorrectly called secondary offering) is an issuance
of stock subsequent to the company's initial public offering. A follow-on offering can be either of two
types (or a mixture of both): dilutive and non-dilutive. A secondary offering is an offering of securities
by a shareholder of the company (as opposed to the company itself, which is a primary offering). A
follow on offering is preceded by release of prospectus similar to IPO: a Follow-on Public Offer (FPO).
The report aims at providing an insight into the various pricing techniques and the fundamental
difference between pricing of an Initial Public Offer and Follow-on Public Offer.
We summarize the basic definition and differences in an IPO and a FPO here.
An initial public offering (IPO) or stock market launch is a type of public offering where shares
of stock in a company are sold to the general public, on a securities exchange, for the first time.
Through this process, a private company transforms into a public company. Initial public offerings are
used by companies to raise expansion capital, to possibly monetize the investments of early private
investors, and to become publicly traded enterprises.
A follow-on offering (often but incorrectly called secondary offering) is one of the two types:1. This sort of secondary public offering is a way for a company to increase outstanding stock and
spread market capitalization (the company's value) over a greater number of shares. Secondary
offerings in which new shares are underwritten and sold dilute the ownership position of stockholders
who
own
shares
that
were
issued
in
the
IPO.
2. Typically, such an offering occurs when the founders of a business (and perhaps some of the
original financial backers) determine that they would like to decrease their positions in the company.
This kind of secondary offering is common in the years following an IPO, after the termination of the
lock-up period. Owners of closely held companies sell shares to loosen their position - usually
gradually, so that the company's share price doesn't plummet as a result of high selling volume. This
kind of offering does not increase the number of shares of stock on the market, and it is most
commonly performed in the case of a company that is very thinly traded. Secondary offerings of this
sort do not dilute owners' holdings, and no new shares are released. There is no "new" underwriting
process
in
this
kind
of
offering.
IPO is made when company seeks to raise capital via public investment while FPO is
subsequent public contribution.
First issue of shares by the company is made through IPO when company first becoming a
publicly traded company on a national exchange while Follow on Public Offering is the public
issue of shares for an already listed company.
Filing for an IPO and selling stock to the public is commonly called "going public" and can have
several advantages. Going public gives business access to a large pool of potential investment
capital that can help the business fund expansion. An IPO can also make a company more visible
and recognizable to consumers, which can potentially help with marketing and attracting top talent.
But on the other hand going through an IPO can be expensive because of fees associated with
registration, commissions paid to underwriters, legal costs and other expenses. In addition, managers
of corporations answer to a board of directors appointed by shareholders, which means they may not
have freedom to act as they see fit. Publicly traded companies are also subject to oversight by the
SEBI and must make certain financial and business information available to the public.
3
1.3 PROCESS
The Beauty Contest
A beauty contest is financial jargon for the courtship process that takes place as a company selects
an investment bank to perform a transaction such as an initial public offering. During this process,
each bank prepares pitches that demonstrate each banks expertise.
Due Diligence
Once the investment banks are chosen for the initial public offering, due diligence begins. An
organizational meeting is held at company headquarters that usually consists of company
management .Due diligence gives the underwriting managers an opportunity to kick the tires of the
company and analyze it in as much detail as they can, diligence usually includes a tour of the
company, a discussion of any legal issues including potential litigation, questions about how the
company operates and what its plans are for future growth. Once the banks have collected enough
information, they begin drafting the prospectus.
The Prospectus
A company that seeks to go public must have a prospectus. The prospectus is the legal document
used to market the offering to investors. All the parties involved in the initial organizational meeting
will have a hand in drafting the prospectus. A prospectus will go through dozens and dozens of drafts
as lawyers, bankers and accountants scour over figures and legal wording. The drafting of the
prospectus can take anywhere from five to ten weeks to complete.
It is then filed with the SEBI and a preliminary prospectus or red herring is printed for marketing to
potential investors. A red herring is so named because it has a disclaimer printed in red that the SEBI
has not yet approved the offering. The preliminary prospectus is also printed without an offering price
as the offering price will be determined after the syndicate has built a book for the offering.
The Roadshow
The roadshow is a term used to describe the marketing period of an initial public offering. During this
period, the lead manager puts together a presentation for the management of the company as they
travel to major financial centers meeting with investors. The lead manager also prepares a sales
memo which contains key points for the syndicate to use as it pitches the offering to potential
investors. The syndicate is the network of investment banks and their sales force of brokers that will
sell the offering to the public.
The syndicate will then use the red herring and the sales memo as they contact institutional investors
and set up roadshow meetings. During the roadshow, the syndicate department builds the book for
the offering. The book is a list of potential investors that includes how much stock they would like to
purchase and at what price they are willing to buy it. The information compiled in the book is what is
used to price the offering.
6
2 ANALYSIS
The following section explains some analysis of the data for some select companies.
The companies so selected have been chosen because of some special attributes. They are as
follows:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Coal India: The most outstanding performer IPO, strong fundamentals of the company
make this a viable candidate for analysis.
Reliance Power : This is the biggest IPO after Coal India to hit the Indian market , so the
sheer size makes it worth analyzing
Reliance Petroleum: Though the company is now a part of Reliance Industries, the
uniqueness of IPO was that this was companys second IPO.
Tata Steel: This FPO was analyzed owing to its size, performance and reputation of the
TATA group of companies.
ONGC: The FPO has not yet hit the Indian Market, but it has already set the fever and is
pitching higher.
Engineers India Limited: This was chosen as it is a PSU, with a promoter holding in the
name of president of India.
2.1 IPO
a) COAL INDIA
Objects of the Issue:
The objects of the Offer are to carry out the divestment of 631,636,440 Equity Shares by the Selling
Shareholder and to achieve the benefits of listing the Equity Shares on the Stock Exchanges.
Issue Detail:
CRISIL has assigned an IPO Grade 5 to Coal India Ltd IPO. This means as per CRISIL company has
'Strong fundamentals'. CRISIL assigns IPO grading on a scale of 5 to 1, with Grade 5 indicating
strong fundamentals and Grade 1 indicating poor fundamentals
8
Qualified
Institutional
Buyers (QIBs)
284,236,398
0.6300
3.3900
0.1800
0.5400
0.1000
0.3500
0.0000
0.0100
0.3400
1.7100
24.7000
24.7000
2.8900
25.4000
1.1000
2.3100
0.0400
0.1000
11.8500
15.2800
NSE
Issue Price:
Rs. 245.00
Rs. 245.00
Open:
Rs. 287.75
Rs. 291.00
Low:
Rs. 287.45
Rs. 291.00
High:
Rs. 344.75
Rs. 344.90
Last Trade:
Rs. 342.35
Rs. 342.55
Volume:
192,839,607
479,716,245
b) RELIANCE POWER
Objects of the Issue:
The objects of the Issue are to achieve the benefits of listing on the Stock Exchanges & to raise
capital to
1. Fund subsidiaries to part-finance the construction and development costs of certain of 12 power
generation projects currently under various stages of development;
2. General corporate purposes;
3. Achieve the benefits of listing on the Stock Exchanges.
Issue Detail:
Qualified Institutional
Buyers (QIBs)
Non Institutional
Investors (NIIs)
Retail Individual
Investors (RIIs)
Total
16.2115
7.0231
0.8218
10.6800
20.6947
6.9704
4.4065
14.4400
30.6897
32.4070
9.0232
24.3600
82.6190
190.0231
14.8716
73.0400
NSE
Issue Price:
Rs. 450.00
Rs. 450.00
Open:
Rs. 547.80
Rs. 530.00
Low:
Rs. 355.05
Rs. 355.30
10
High:
Rs. 599.90
Rs. 530.00
Last Trade:
Rs. 372.50
Rs. 372.30
Volume:
63,882,239
134,392,544
11
c) RELIANCE PETROLEUM
There have been two IPOs of Reliance Power. The first issue came in 1993 , then the company was
merged with Reliance Industries In 2002, which set up the 660,000 bpd refinery at Jamnagar in 1999.
. Later on , when it again became a separate entity it came out it again came out with another IPO
.Then again , it was merged with Reliance Industries in 2009
Reliance Petroleum opened for bidding on April 13, 2006. The price band was fixed at Rs 57 to Rs 62
and the bidding closed on April 20, 2006. This was the second time in the market for the
petrochemical major, after 1993 when it first came out with an IPO.
The company offered 45 Crore (450 million) equity shares for subscription.
Retail investors could bid for up to 1,600 shares at the upper end of the price band and they needed
to pay only Rs 16 per share at the time of bidding. The balance amount was to be payable on
allotment.
The company raised Rs 2,700 Crore (Rs 27 billion) through the IPO.
IPO size: Rs 2,172 Crore, year of issue: 1993
The company raised Rs 2,172 Crore (Rs 21.72 billion) through the IPO in 1993.
The original RPL, which was subsequently merged with Reliance Industries in 2002, floated the IPO
in September 1993 with a stated plan of commissioning its 9 million tonne capacity refinery by the
second quarter of 1996.
12
2.2 FPO
a) TATA STEEL
Objects of the Issue:
The objects of the Issue are to:
1. Part finance the Companys share of capital expenditure for expansion of existing works at
Jamshedpur;
2. Payment of redemption amounts on maturity of certain redeemable non-convertible debentures
issued by the Company on a private placement basis; and
3. General corporate purposes.
Issue Detail:
Qualified
Institutional
Buyers (QIBs)
Employee
Reservations
Total
19,425,000
8,325,000
19,425,000
1,500,000
48,675,000
0.4200
0.0700
0.0400
0.0000
0.2000
0.6700
0.7900
0.2000
0.0000
0.4800
10.4100
7.2100
1.6000
0.0600
6.0300
13
500470
NSE Symbol:
TATASTEEL
Listing In:
Sector:
Steel
ISIN:
INE081A01012
Issue Price:
Face Value:
NSE
Issue Price:
Rs. 610.00
Rs. 610.00
Open:
Rs. 630.15
Rs. 631.10
Low:
Rs. 615.65
Rs. 615.80
High:
Rs. 633.85
Rs. 634.95
Last Trade:
Rs. 625.70
Rs. 626.25
Volume:
3,973,924
15,400,454
Basis of allotment
Category
A
B
C
D
E
No. of Applications
No. of Shares
185,711
475
169
680
33
187,068
No. of times
subscription
30,289,150
59,819,760
202,756,450
91,790
9,659,680
302,616,830
1.52
7.01
10.07
0.06
1.16
5.31
14
15
b) ONGC
Few highlights about ONGC:
1.
2.
3.
4.
President of India
PreFPO
74.14%
7.69%
2.40%
3.06%
Public
1.95%
Others
10.76%
Total
PostFPO
100%
16
Qualified
Institutional
Buyers (QIBs)
16,490,830
11,543,581
Employee
Reservations
712,000
Total
33,693,660
17
0.0000
0.0000
0.0400
0.0000
0.0100
0.9400
0.0100
0.1300
0.0300
0.5100
23.4300
0.1400
0.4100
0.1000
11.6300
23.4300
5.8500
2.9900
0.5700
13.3600
532178
NSE Symbol:
ENGINERSIN
Listing In:
B Group
Sector:
Consulting Services
ISIN:
INE510A01028
Issue Price:
Face Value:
Rs. 290.00
Open:
Rs. 315.00
Low:
Rs. 315.00
High:
Rs. 329.80
Last Trade:
Rs. 321.15
Volume:
3,766,509
Rs. 315.40
Rs. 315.40
Rs. 330.00
Rs. 320.95
8,918,145
18
19
WEBSITES
(I) Bloomberg
www.bloomberg.com
www.moneycontrol.com
www.ft.com
www.angelbrolking.com
www.in.finance.yahoo.com
www.business.rediff.com
www.bse.com
www.nse.com
(ix) Nasdaq
www.nasdaq.com
(x) Investopedia
www.investopedia.com
BOOKS
(i) The Indian Financial System , Markets , Institutes and Services
Bharati V. Pathak
Pearson publications
20
FACEBOOK IPO
The social networking company Facebook, Inc. held its initial public offering (IPO) on May 18,
2012.[1] The IPO was one of the biggest in technology, and the biggest in Internet history, with a peak
market capitalization of over $104 billion.
There was an estimate cut by the underwriters signaling the weak growth of the company in the
second quarter. The estimate cut, moreover, was followed by three additional pieces of information
that were interpreted negatively by some institutional investors:
1) The price range for the deal was increased, which made the deal even less attractive in light of
the estimate cut,
2) The size of the deal was increased, which meant that more stock would be sold, and
3) Many smart institutional Facebook shareholders like Goldman Sachs decided to sell more
stock on the dealthe "smart money," in other words, was cashing out.
Institutional investors, having digested the news of the underwriter estimate cut, were comfortable
buying Facebook stock at $32 a share.
Retail investors, meanwhile, who were presumably unaware of the estimate cut, were comfortable
buying Facebook at $40 a share.
Knowing that a big percentage of the IPO stock could be sold to retail investors instead of institutional
investors, Facebook and Morgan Stanley decided to price the IPO at $38.
Ultimately underwriters settled on a price of $38 per share, at the top of its target range.
First day
Trading was to begin at 11:00 am Eastern Time on Friday, May 18, 2012. However, trading was
delayed until slightly half an hour 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. Only the aforementioned technical glitches and underwriter support
prevented the stock price from falling below the IPO price on the first day of trading.
21
At closing bell, shares were valued at $38.23, only $0.23 above the IPO price and down $3.82 from
the opening bell value. The opening was widely described by the financial press as a disappointment.
Despite technical problems and a relatively low closing value, the stock set a new record for trading
volume of an IPO (460 million shares). The IPO also ended up raising $16 billion
Aftermath
The IPO had immediate impacts on the stock market. Other technology companies took hits, while
the exchanges as a whole saw dampened prices. Investment firms faced considerable losses due to
technical glitches. Bloomberg estimated that retail investors may have lost approximately $630 million
on Facebook stock since its debut The IPO impacted both Facebook investors and the company
itself. It was said to provide healthy rewards for venture capitalists that finally saw the fruits of their
labor.] In contrast, it was said to negatively affect individual investors such as Facebook employees,
who saw once-valuable shares become less lucrative.[13] More generally, the disappointing IPO was
said to lower interest in the stock by investors. The IPO could jeopardize profits for underwriters who
face investors skeptical of the technology industry. In the long-run, the troubled process "makes it
harder for the next social-media company that wants to go public." Reuters' Alistair Barr reported
that Facebook's lead underwriters, Morgan Stanley (MS), JP Morgan (JPM), and Goldman
Sachs (GS) all cut their earnings forecasts for the company in the middle of the IPO roadshow. ] Some
have filed lawsuits, alleging that an underwriter for Morgan Stanley selectively revealed adjusted
earnings estimates to preferred clients. The remaining underwriters (MS, JPM, and GS) and
Facebook's CEO and board are also facing litigation. It is believed that adjustments to earnings
estimates were communicated to the underwriters by a Facebook financial officer, who in turn used
the information to cash out on their positions while leaving the general public with overpriced shares.
Additionally, a class-action lawsuit is being prepared] due to the trading glitches, which led to botched
orders. Apparently, the glitches prevented a number of investors from selling the stock during the first
day of trading while the stock price was falling - forcing them to incur bigger losses when their trades
finally went through.
In June 2012, Facebook asked for all the lawsuits to be consolidated into one, because of overlap in
their content. Facebook's IPO is now under investigation by SEC and has been compared to pump
and dump schemes. Massachusetts Secretary of State William Galvin subpoenaed Morgan
Stanley over the same issue.
22