Professional Documents
Culture Documents
Personal savings
Bank, but not likely to work
Government but a very limited resources
Large industrial companies
Venture Capital Funds
20 Yr
19.10
13.60
13.80
15.60
27.20
17.80
14.20
9.10
12.70
9.50
13.70
13.20
13.50
Years
700
600
500
400
300
200
100
Source: Ritter, Jay Rial and Welch, Ivo, "A Review of IPO Activity, Pricing and
Allocations" (February 2002). Yale ICF Working Paper No. 02-01.
http://ssrn.com/abstract=296393
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
Number of IPOs
IPO Activity
Advantages
Access to capital markets
Improved liquidity for shareholders
Allowing original owners to diversify
Monitoring by external capital markets
Information provided by capital markets
Enhanced credibility with stakeholders
Disadvantages
1.
2.
3.
4.
Expensive
Costs of dealing with shareholders
Allowing competitiors gain information
Public pressure
IPO Process
Underwriter Selection
Registration
Marketing and Book Building
Pricing
After Market Activities
Underwriter Selection
Factors to consider:
Lead Underwriter
The lead manager plays the major role in the
IPO - scheduling, pricing, distribution of new
issue, and assembling a group of underwriters to
sell shares to the public
The syndicate members are paid a portion of the
gross spread for their participation - 60% of the
gross spread
The lead underwriter receives a fee for its
efforts that is typically 20% of the gross spread
10
Underwriter
Letter of intent
The letter of intent protects the underwriter against expenses if the offer is
withdrawn
The letter of intent obligates the company to reimburse the underwriter
It also specify the gross spread
In most cases, the gross spread is 7% of the proceeds
It also includes clauses on:
11
Registration
The Securities Act of 1933 (Section 5) requires a registration statement to be filed with
the SEC
The registration statement consists of two parts
The prospectus to be given to every purchaser of the securities
Part II which contains information that need not be furnished to the public but is made
available for public inspection by the SEC
The registration statement allows public to obtain information about the issue
The underwriter has a due diligence requirement to verify the information
The Securities Act also makes it illegal to offer or sell securities to the public without
registration
The SEC has no authority to block a public offering based on the quality of the
securities involved. It can require the issuer to provide all material facts
The registration statement has to be signed by directors and principal officers of the
issuer, the underwriters, accountants, appraisers and other experts
Investors who maintain losses as a result of misstatements or omissions in the
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registration statement may sue these signatories
Marketing
Once it is filed the registration statement is
transformed into the preliminary prospectus or Red
Herring
The preliminary prospectus is used to market the issue
The SEC has 20 days to declare the issue effective
At that point the red herring becomes a prospectus
The company and the underwriter promote the IPO
through the road show
Road shows provide important monitoring for the
underwriter on investor demand
13
Marketing
During the road shows the underwriter receives orders
from individual and institutional investors - book
building
Retail investors typically submit a market order in which
only the quantity desired is stated
Institutions typically submit limit orders where the quantity
demanded is subject to a maximum price
Retail orders are received earlier than institutional orders since
institutions prefer to wait to a later stage of the process before
submitting their orders
Institutions submit an order with a commitment to purchase
more shares in the open market if their order is fulfilled
14
Pricing
Once the registration statement is approved by the
SEC then two most important items have to be
determined:
offer price
the number of shares to be sold
Pricing
Ritter (1991) on IPO pricing suggests that IPOs
are under-priced meaning that you can make
money buy buying stocks from an underwriter
and selling them in the market once public
trading starts
Flipping dumping of shares as soon as trading
starts is discouraged by the underwriters, but it
is not easy to control
16
IPO Underpricing
Percentage average
first-day returns
120
100
80
60
40
20
0
-20
Year
-40
1960 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000
17
0.00%
IPO Underpricing
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
Source: Ritter, Jay Rial and Welch, Ivo, "A Review of IPO Activity, Pricing and
Allocations" (February 2002). Yale ICF Working Paper No. 02-01.
http://ssrn.com/abstract=296393
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
Underpricing %
IPO Underpricing
Years
18
2001
2000
1999
1998
1997
1996
1995
1994
1993
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Source: Ritter, Jay Rial and Welch, Ivo, "A Review of IPO Activity, Pricing and
Allocations" (February 2002). Yale ICF Working Paper No. 02-01.
http://ssrn.com/abstract=296393
Years
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
Millions
IPO Underpricing
19
After Market
Stabilization activities by the underwriter:
These involve trading by the underwriter to support the stock by buying
shares if order imbalances arise
This price support can be done only at or below the offering price
The standard prohibitions against price manipulation do not apply to the
underwriter during this period
The final stage of the IPO begins 25 calendar days after the IPO
when the so called quiet period ends
During the quiet period investors rely on prospectus
After the quiet period underwriters can comment on the
valuation and provide earnings estimates on the new company
22
Periods
1980-1989
1990-1994
1995-1998
1999-2000
Source: Ritter, Jay Rial and Welch, Ivo, "A Review of IPO Activity,
Pricing and Allocations" (February 2002). Yale ICF Working Paper
No. 02-01. http://ssrn.com/abstract=296393
23
-0.21
-0.34
-0.18
-0.67
-0.18
-0.64
Source: Ritter, Jay Rial and Welch, Ivo, "A Review of IPO Activity,
Pricing and Allocations" (February 2002). Yale ICF Working Paper
No. 02-01. http://ssrn.com/abstract=296393
24
Why Spin-off?
Eliminate negative synergies
Increases focus
Improves managerial compensation contract
design
Reduces the possibility of unprofitable business
lines being supported by profitable ones
26
Additional Articles
Muscarella and Vetsuypens, 1989, A simple test of Barons Model of IPO Underpricing,
Journal of Financial Economics 24, 125-135.
SSRN-Ritter, Jay Rial and Welch, Ivo, "A Review of IPO Activity, Pricing and
Allocations" (February 2002). Yale ICF Working Paper No. 02-01.
http://ssrn.com/abstract=296393
29
Additional Articles
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