PART TWO

STOCK Market and

IPO PROCESS

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 Process of Going Public
• Because firms that engage in an IPO are not well
known to investors, they must provide detailed
information about their operations and their
financial condition.
• A firm planning on going public normally hires a
securities firm that serves as the lead
underwriter for the IPO.
• The lead underwriter is involved in the
development of the prospectus and the pricing
and placement of the shares
2
 Developing a Prospectus
• A few months before the IPO, the issuing firm
(with the help of the lead underwriter) develops a
prospectus and files it with the Securitie sand
Exchange Commission (SEC).
Prospectus Contents:
• The prospectus contains detailed information
about:
1. The firm and includes
2. Financial statements and
3. A discussion of the risks involved 3
 Intentions of Prospectus
• It is intended to provide potential investors with
the information they need to decide whether to
invest in the firm.
• Within about 30 days, the SEC will assess the
prospectus and determine whether it contains all
the necessary information.
• In many cases the SEC, before approving the
prospectus, recommends some changes in order to
provide more information about the firm’s
financial condition
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 After SEC Approval
• Once the SEC approves the prospectus, it is sent
to:
• Institutional investors who may want to invest in
the IPO.
• In addition, the firm’s management and the
underwriters of the IPO meet with institutional
investors.
Often these meetings occur in the form of a road
show
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ROAD SHOW

A road show: the

firm’s managers
travel to various
cities and put on
a presentation
for large
institutional
investors in each
city.

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 Road Show and Investors
• The institutional investors are informed of the road
show in advance so that they can attend if they have
any interest in purchasing shares of the IPO.
• Some institutional investors may even receive separate
individual presentations.
• Institutional investors are targeted because they may be
willing to buy large blocks of shares at the time of the
IPO
• For this reason, they typically have priority over
individual investors in purchasing shares during an IPO
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PRICING

8
Example for Pricing

9
 “ Leaving Money on the table”
• As a result of the book building process for setting an offer price,
many institutional investors pay a lower price than they would have
been willing to pay for the shares. In the preceding example, some
institutional investors would have paid $13, but the underwriter used an
offer price of $11 for all investors to ensure that at least 4 million shares
would be sold. Should the issuing firm be satisfied as long as all the
shares are placed?

• What if St. Louis Company firmly believes that all 4 million shares
could have been sold at an offer price of $13 per share? In this case
the firm would have received $52 million (4 million shares × $13 per
share), but instead received only $44 million. It gave up $8 million
because the underwriter sold the shares for a lower price.
• In finance terminology, this is known as “leaving money on the table.”
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 Discussion

What do you think the major

concern for “ Leaving money on
the table”?

11
• Some issuing firms may be especially
concerned that they left money on the table
when the market price rises substantially on
the day of the IPO, because the price increase
may suggest that the demand for shares
exceeded the supply of shares for sale on that
day.

12
 Advantage of “ Leaving Money on the
table”

• If the stock price rises over time (which means

that the IPO investors benefit from their
investment), the issuing firm may more easily
engage in another stock offering in the future
because it has gained investors’ trust

13
• The lead underwriter may rely on a group (called
a syndicate) of other securities firms to
participate in the underwriting process and share
the fees to be received for the underwriting. Each
underwriter in the syndicate contacts institutional
investors and informs them of the offering.
• Brokerage firms may receive a very small portion
(such as 2 percent) of the IPO shares, which they
can sell to their individual investors. They
normally give priority to their biggest customers
14
Transaction Costs

15
• The lead underwriter’s performance can be
partially measured by the movement in the IPO
firm’s share price following the IPO.

• If investors quickly sell the stock that they

purchased during the IPO in the secondary
market, there will be downward pressure on
the stock’s price.

16
 Effect of Underwriter in poorly IPO
management

• If most stocks placed by a particular

underwriter perform poorly after the IPO,
institutional investors may no longer want to
purchase shares sold by that underwriter

17
 Technique for maintaining IPO in the
market

• Lockup: The lead underwriter attempts to

ensure stability in the stock’s price after the
offering by requiring a lockup provision, which
prevents the original owners of the firm and the
VC firms from selling their shares for a
specified period (usually six months from the
date of the IPO).

18
 Discussion

What is the purpose of Lock

Provision?

19
 Assignment

1.Research for :

• SOMTEL IPO PROCESS

2. Submit next period 19/1/2023

3. Individual Assignment

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• Initial public offerings have received negative
publicity because of several abuses. In 2003,
regulators issued new guidelines in an effort to
prevent such abuses in the future.
• Some of the more common abuses are described
here.
1. Spinning
2. Excessive Commission
3. Distorted Financial Statements

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THANK YOU ALL

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CLASS ACTIVITY
2. Prospectus and Road Show Explain the use of a
prospectus developed before an IPO. Why does a
firm do a road show before its IPO? What factors
influence the offer price of stock at the time of the
IPO?
3. Lockups Describe a lockup provision and explain
why it might be required by the lead underwrite
4. Venture Capital Explain the difference between
obtaining funds from a venture capital firm and
engaging in an IPO. Explain how the IPO may serve
as a means by which the venture capital firm can
cash out
5. Stock Offerings What is the danger of issuing
too much stock? What is the role of the securities
firm that serves as the underwriter, and how can
it ensure that the firm does not issue too much
stock