1. ©2009 McGraw-Hill Ryerson Limited 1 of 19 15 Investment Underwriting Prepared by: Michel Paquet SAIT Polytechnic ©2009 McGraw-Hill Ryerson Limited

2. 2 of 19 Chapter 15 - Outline Description of Investment Dealing Functions of Investment Dealer The Distribution Process The Securities Industry and Underwriting Activity in Canada Public Versus Private Financing Summary and Conclusions

3. ©2009 McGraw-Hill Ryerson Limited 3 of 19 Learning Objectives 1.Describe investment dealers as intermediaries between corporations and governments in need of funds and the investing public. (LO1) 2.Identify the various roles of investment dealers. (LO2) 3.Outline the distribution process, the allocation of securities amongst syndicate participants and the calculation of the spread as cost or a return. (LO3)

4. ©2009 McGraw-Hill Ryerson Limited 4 of 19 Learning Objectives 4.Describe the dealer’s role in pricing corporate securities. Evaluate the influence of issued securities on earnings per share and market share price. (LO4) 5.Discuss the pros and cons of going public versus going private when raising funds. (LO5) 6.Describe a leverage buyout. (LO6)

5. ©2009 McGraw-Hill Ryerson Limited 5 of 19 Investment Dealing Investment dealing deals with primary offerings of new securities. A securities corporation performing this function is referred to as an investment dealer. An investment dealer serves as the intermediary or link between the corporation issuing securities and the investors. An investment dealer is also called an investment house, or a securities house, or a brokerage, because it plays other roles. LO1

6. ©2009 McGraw-Hill Ryerson Limited 6 of 19 Table 15-1 Largest Investment Dealers in Canada, by revenue in 2007 LO1

7. ©2009 McGraw-Hill Ryerson Limited 7 of 19 Functions of Investment Dealer Underwriter: –buying the security and reselling it to the public (large companies). Takes a risk. –selling security on commission basis (unknown companies) Market Maker: –ensuring an available market by buying and selling the security Advisor: –on securities issues, mergers and acquisitions, leveraged buyouts, corporate restructuring Agent: –for private placements, mergers, acquisitions LO2

8. ©2009 McGraw-Hill Ryerson Limited 8 of 19 Maxwell Corporation Managing investment dealer Underwriting or banking syndicate Selected dealers or sellers group Brokers Public Issues 250,000 additional shares of stock 15 investment dealers (including Wood Gundy) Figure 15-1 Distribution process for an investment deal CIBC Wood Gundy LO3

9. ©2009 McGraw-Hill Ryerson Limited 9 of 19 Underwriting Spread Spread represents the compensation for those participating in the distribution. Usually calculated as a cost to the issuer (the public price is the base). Spread = Public Price - Dealer Price It is shared by all the participants Spread on common stocks is greater than spread on bonds LO3

10. ©2009 McGraw-Hill Ryerson Limited 10 of 19 Figure 15-2 Allocation of underwriting spread Managing investment dealer Other syndicate members Selected dealer group Broker Public Price received $20.00 if sold to selling group $20.50 if sold to public $20.20 if sold through broker $20.50 if sold to public $20.50 to public Firm receives $19.3725 Price paid ($) $19.3725 $19.60 $20.00 $20.20 $20.50 LO3

11. ©2009 McGraw-Hill Ryerson Limited 11 of 19 Services Provided by Investment Dealer Pricing the security -applying the appropriate valuation techniques (Chapter 10) -taking the anticipated public demand for the new issue into consideration -considering the general market condition -dilution of earnings per share (e.p.s.) is initially a result of new issues Market stabilization -providing support to new securities by repurchasing them if the market price falls LO4

12. ©2009 McGraw-Hill Ryerson Limited 12 of 19 The Securities Industry and Underwriting Activity in Canada Dramatic changes in this industry have occurred due to  the deregulation of the industry in the 1980s  the internationalization of the capital markets and from technological advances Besides the underwriting function, the investment firms have expanded:  corporate finance, merger/acquisition advisory service, derivatives, and bond trading activities. LO4

13. ©2009 McGraw-Hill Ryerson Limited 13 of 19 Figure 15-3 New corporate issues underwritten in 2007, in Canada LO4 Source: Investment Industry Association of Canada, “Annual New Issues, 2007”.

14. ©2009 McGraw-Hill Ryerson Limited 14 of 19 Public vs. Private Financing Publicly financed company: –when shares of a company are offered to the public –anyone can buy shares of the stock Privately financed company: –privately owned or held by an individual or family –securities not available to the general public –additional funds may be raised by private placement LO5

15. ©2009 McGraw-Hill Ryerson Limited 15 of 19 Advantages and Disadvantages of Being Public Advantages: – greater availability of funds (easier to grow and raise money) – prestige Disadvantages: – company information must be made available to the public (opening the company up to public scrutiny and criticism) – high costs of going public (expensive) LO5

16. ©2009 McGraw-Hill Ryerson Limited 16 of 19 Initial Public Offering (IPO), Private Placement and Leveraged Buyout (LBO) Initial Public Offering (IPO): – when a company sells its stock to the public for the first time – the company becomes publicly traded Private Placement: – selling securities directly to institutional and individual investors Leveraged Buyout (LBO): – money is borrowed to repurchase all the shares of the company resulting in a great deal of debt – when a company “goes private”, converting a publicly financed company into a privately financed one LO6

17. ©2009 McGraw-Hill Ryerson Limited 17 of 19 Figure 15-4 New equity financing, Toronto Stock Exchange, 1997-2007 LO6 Source: Investment Industry Association of Canada, “Equity Issues, 2007”.

18. ©2009 McGraw-Hill Ryerson Limited 18 of 19 Summary and Conclusions The investment dealer and the securities industry are important to Canadian economy as they help corporations raise capital to finance their operations. The investment dealer may act as underwriter, market maker, advisor and an agent. Underwriting refers to an investment dealer and its syndicate buying and reselling securities issued by corporations. Investment dealers are compensated in the form of underwriting spread, which is the difference between the buying and reselling prices.

19. ©2009 McGraw-Hill Ryerson Limited 19 of 19 Summary and Conclusions Going public may give the corporation and major shareholders greater access to funds as well as additional prestige. Corporations go public through Initial Public Offering (IPO), which is the first time for a privately financed company to sell its shares to the public. To avoid the rigors of public scrutiny and save money, a publicly financed company may become “private”. Private placement is an alternative to public offerings.