See the IM for more information on some of the groups that provide capital for

VC operations. One group that students may be particularly interested in is

discussed in an article in the May 16, 2000 special issue of Inc. magazine. The
article discusses a venture capital firm that received the majority of its
financing from professional athletes (pp. 63 – 65). In addition, the IM contains
several other Real World Tips on information availability and the key criteria
venture investors should consider.

www: Click on the web surfer icon to go to the PriceWaterhouseCoopers web

site. The site provides information on venture capital deals each quarter.
Financial strength – you want to have the option to obtain additional financing
Style – do you want a hands-on or hands-off VC?
Contacts – will the VC provide you with additional business contacts that can
help your business succeed?
Exit strategy – VCs are not long term investors – what are the provisions for
the VC getting out of the business?

www: Click on the web surfer icon to go to the Asian Venture Capital Journal
website for news about venture capital activities in Asia.

Video Note: “Going Public” shows what must be done to take a company
Registration statements don’t have to be filed if the loan will mature in less
than nine months or the issue involves less than $5 million

The SEC makes no statement about the financial strength of the firm, it simply
indicates that the registration is in order

Real-World Tip: The June 2000 issue of Red Herring provides a summary of
the IPO process in “The Anatomy of an IPO” (p. 392). It provides a look at
how a company goes public starting with choosing the underwriter all the way
through the first day of trading. The process is a hectic one with a lot of
paperwork and marketing.
Price stabilization is an important component of the lead underwriter’s job for
IPOs. For more information, see “Stabilization Activities by Underwriters
After Initial Public Offerings” by Chen and Ritter in the June 2000 issue of The
Journal of Finance.

Spread – the typical spread for IPOs between $20 and $80 million is 7%. For
more information, see “The Seven Percent Solution” by Chen and Ritter in the
June 2000 issue of The Journal of Finance. For penny stock IPOs, the spread is
typically 10%; see “Penny Stock IPOs” by Bradley, Cooney, Dolvin and
Jordan in the Spring 2006 issue of Financial Management.
This is a good place to review the difference between primary and secondary
market transactions. Technically, the sale to the syndicate is the primary
market transaction, and the sale to the public is the secondary market
transaction.

Note that the cost of the issue includes the price paid to the issuing company
plus the expenses of selling the issue.
Real-World Tip: “Corporate America is turning more fickle in choosing
finance partners on Wall Street …[more companies are ditching the Wall
Street underwriters they had selected for initial public offerings and picking
different investment banks when it comes time to complete follow-on stock
sales.” So read the opening lines of an article in the December 19, 1996 issue
of The Wall Street Journal. But why is this occurring? According to the article,
the phenomenon is attributable in part to the fact that many offerings quickly
rise above the offering price, leading issuers to feel that their shares were
underpriced (and that they left millions of dollars “on the table” as a result).
Lecture Tip: More recent evidence (see “Underpricing, Overhang, and the Cost
of Going Public to Preexisting Shareholders” by Dolvin and Jordan in the 2007
issue of Journal of Business Finance and Accounting) suggests that
underpricing has little impact on owners, as very few preexisting shares are
sold in IPOs.
Real-World Tip: How good is the long-run performance of IPO firms? Not
overwhelmingly good. In addition to the growing academic research, there is a
good bit of institutional research suggesting that holding on to IPO stocks is a
risky proposition. A quick glance at Hoover’s IPO Central, under IPO
Performance, shows that a substantial number of firms have prices today that
are lower than the offer price.
Signaling and managerial information – managers may choose to sell new
shares of stock when they believe the current stock price is high (they can issue
fewer shares at a higher price)

Signaling and debt usage – issuing equity may send a signal that management
believes the company currently has too much debt

Issuing securities, especially stock, is very expensive, and the decrease in price
may be partial compensation for the cost of the issue.
Lecture Tip: You may wish to link the stock behavior associated with the ex
rights date to that of the ex dividend date. Point out that a time line could be
drawn that applies to stocks trading ex rights as well as stocks trading ex
dividend. Both dividend and rights declarations involve setting an ex date,
which is two days before the record date. In both situations, the share price
reacts on the ex date to reflect the value of the right or dividend that would not
be received if the shares were purchased after the ex date.
Shares issued = 10,000,000/20 = 500,000
Rights to buy one share = 5,000,000/500,000 = 10
Total investment = 10*25 + 20 = 270
Price per share = 270 / 11 = 24.55
Value of a right = 25 – 24.55 = .45

Buy 10 rights = .45*10 = 4.50 + 20 = 24.50 share price (difference is due to

rounding)
Although, coupons may be higher.

Real-World Tip: Corporate issuers continued to exploit the

relatively low level of long-term interest rates in 1996 and 1997. In
December 1996, IBM issued 100-year bonds with a face value of
$850 million. As evidence of the low required return, note that the
yield on these bonds is only one-tenth of one percent higher than on
similar 30-year IBM bonds. In all, approximately
$3.6 billion worth of 100-year bonds were issued between
November 1995 and December 1996. Previous “century bond”
issuers include Walt Disney Company, Coca-Cola and Yale
University.

Real-World Tip: An interesting article on private placements

appeared in the third quarter 1997 issue of the Dallas Federal
Reserve Bank’s Economic Review. An electronic version is
available at http://www.dallasfed.org/htm/pubs/er.html. Stephen
Prowse, an economist with the Dallas Fed, describes the structure of
In question three – I am going for firm commitment.
There are also legal implications for allocating shares. In July, 2004, Piper
Jaffray was fined $2.4 million for selling shares of “hot” IPOs to the executives
of firms that they have either recently done business with or with whom they
were trying to gain business.
Shares issued = $20,000,000/40 = 500,000
Rights to buy one share = 5,000,000/500,000 = 10
Total investment = 10*50 + 40 = 540
Price per share = 540 / 11 = 49.09
Value of a right = 50 – 49.09 = .91

Buy 10 rights = .91*10 = 9.10 + 40 subscription price = 49.10, which equals

the share price (difference is due to rounding)