4/8/2021

Principles of
Corporate Chapter 15
Finance
How Corporations Issue
Seventh Edition
Securities
Richard A. Brealey
Stewart C. Myers

Slides by
Matthew Will

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Topics Covered
 Venture Capital
 The Initial Public Offering
 Other New-Issue Procedures
 Private Placements and Public Issues
 Rights Issue

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Venture Capital

Venture Capital
Money invested to finance a new firm

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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.

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Venture Capital

First Stage Market Value Balance Sheet ($mil)

Assets Liabilities and Equity
Cash from new equity 1.0 New equity from venture capital 1.0
Other assets 1.0 Your original equity 1.0
Value 2.0 Value 2.0

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Venture Capital

Second Stage Market Value Balance Sheet ($mil)

Assets Liabilities and Equity
Cash from new equity 4.0 New equity from 2nd stage 4.0
Fixed assets 1.0 Equity from 1st stage 5.0
Other assets 9.0 Your original equity 5.0
Value 14.0 Value 14.0

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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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The Underwriters
Top U.S. Underwriters in 2000
($bil of total issues)

ABN AMRO $357

Merrill Lynch 248
Citigroup/Soloman Smith Barney 227
JPMorgan 207
Credit Suisse First Boston 169
Morgan Stanley 151
Goldman Sachs 140
Lehman Brothers 136
Deutsche Bank 113
Bear Stearns 96
All Underwriters 1,844

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The Underwriters
Top Intl.Underwriters in 2000
($bil of total issues)

ABN AMRO $387

Merrill Lynch 185
Deutsche Bank 140
Citigroup/ Solomon Smith Barney 113
BNP Paribas 113
Credit Suisse First Boston 108
JP Morgan 108
Barclays Capital 100
Morgan Stanley 99
UBSWarburg 77
All Underwrit ers 1,430
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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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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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Underwriting Spreads
Gross underwriter spreads of selected issues, 2001

Issue amount, Underwriter's

Type Company millions of dollars spread, percent

IPO Torch Offshore 80.0 7.00

IPO Alliance Imaging 122.0 7.00
IPO Usp 126.0 7.00
IPO Tellium 135.0 7.00
IPO Agere Systems 3600.0 3.90

Seasoned National Golf Properties 29.6 5.13

Seasoned Lifepoint Hospitals 92.8 5.00
Seasoned Valspar corp 168.0 4.25
Seasoned Raytheon Co. 343.8 3.75
Seasoned Pepsico, Inc. 534.6 2.00
Seasoned Allegheny Energy, Inc. 598.3 3.01

Debt:
8.3 % Sub notes, 2011 Bank of the West 50 0.65
6.875% Med term notes, 2006 Maytag Corp 185 0.50
7.75% Notes, 2011 Shurgard Storage Centers 250 0.65
8.5% Senior notes, 2011 Hilton Hotels 300 0.88
5.875% Global bonds, 2004 American Home Products 500 0.35
3.5% Conv bonds, 2031 Cox Communications 385 2.25
7.45% Global bonds, 2031 Kellogg 1100 0.88

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Rights Issue
Rights Issue - Issue of securities offered only to
current stockholders.

Example - Lafarge Corp needs to raise E1.1billionof

new equity. The market price is E99.65/sh.
Lafarge decides to raise additional funds via a 1
for 8 rights offer at E80 per share. If we assume
100% subscription, what is the value of each
right?

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Rights Issue
Example - Lafarge Corp needs to raise E1.1billionof new equity. The
market price is E99.65/sh. Lafarge decides to raise additional funds via a 1
for 8 rights offer at E80 per share. If we assume 100% subscription, what is
the value of each right?

 Current Market Value = 8 x E99.65 = E797.20

 Total Shares = 8 + 1 = 9
 Amount of funds = 797.20 + 80 = 877.20
 New Share Price = (877.20) / 9 = E97.47
 Value of a Right = 97.47 - 80 = 17.47

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