Raising Money to Grow a Business Lesson 3 Investment Banks and Going Public

Going Public Aim:  Why is “going public” such an important event for a growing company? Do Now:  Identify three billionaires that you know have started companies. Chances are they’re companies have gone public. If not, a big public company probably bought them out!

How Companies Expand  Do Now answers: 1.Mark Zuckerberg, Facebook. Founded in 2004, public in Bill Gates, Microsoft. Founded 1975, public in Brian Acton, WhatsApp. Founded 2009, bought by Facebook 2014 for $19 billion.

 Ice cream and restaurant.  Opening new Frizzle’s around the world for the past five years.  One of the most popular ice cream restaurants in the United States and Europe.  20% market share.  25,000 employees in multiple locations in the United States and Europe.  Headquartered in New York, NY.  Looking to expand to China or Russia.  Needs $500 million in order to expand.  Financial statements indicate a healthy, profitable company. Frizzle, Inc.

Is Frizzle ready to go conduct an Initial Public Offering (IPO)? Let’s see…  Its restaurants have proven themselves to be profitable in the U.S and Europe  It has a substantial opportunity to grow into new geographic markets  It is in need of a substantial amount of money  If the answers are Yes, Frizzle is a good candidate and should work with an investment bank. Frizzle Inc.

Assists a company in facilitating the process by:  Advising on alternatives in raising capital. It may be best for Frizzle to issue bonds instead of stock!  Managing the issuance of the security (ie: investment) that is chosen (bonds or stock)  Helping the company determine the characteristics of the stock or bond offering (Example: if issuing bonds, how long their term should be) Role of an Investment Bank

Assists a company in facilitating the process by:  Determining the right price of the stock or bond - For stock, the share price; for a bond, the coupon rate  If the stock is priced too high, investors will not want to buy it  If the bond’s coupon rate is too low, investors will not want to buy it  In both instances, incorrect pricing results in Frizzle not raising the money it seeks! An investment bank can prevent these mistakes. Role of an Investment Bank

Assists a company in facilitating the process by:  If a bond is being issued, assisting in the assignment of credit rating  In a bought deal, the investment bank buys the stocks and bonds from the issuer and then resells them into the marketplace.  This is potentially risky for the investment bank because it now the task of make sure all of the stocks or bonds are successfully resold. Role of an Investment Bank

New company that has never issued stock to anyone but the founders IPO (Initial Public Offering) – Company intends to sell stock to outsiders for the first time Company is valued by Investment Bankers Opening price (per share) is decided Investors are now able to buy Frizzle stock Frizzle is listed on an exchange (NASDAQ) Frizzle, Inc.

Afterwards, the “Tombstone” commemorates the successful IPO.

What company raised money? How much money was raised? On what date? How many shares were issued and at what price? Which investment banks lead this offering?

The investment banks pay to place them in financial publications like the Wall Street Journal. It is basically advertising by showing their ability to successfully raise money!

Lesson Summary 1 of 2 1.What are some of the characteristics of a company that is ready to go public? 2.An Initial Public Offering (IPO) is associated with what issuing stock or bonds? 3.What services does an investment banker provide? 4.What document does an investment bank produce so let everyone know that it has conducted another successful IPO?

Lesson Summary 2 of 2 5.When an investment bank guarantees the price at which a stock or bond will be sold by basically purchasing everything being issued, what type of arrangement is this? 6.Why is “going public” such an important event for a growing company?

Web Challenge #1 Challenge: Search Google or Bing images using “ipo tombstone”. Find the largest offering in terms of dollar raised, the most recent offering and the investment banks who appear most often.

Web Challenge #2 Q: Are IPOs always success stories? A: No. Sometimes there’s an excitement about a company that leads investors to pay a lot at the IPO. Later, when the company fails to deliver, the stock price drifts lower. Challenge: Find three examples of an IPO success (where the stock is trading higher one year after it went public) and three that were failures. What commonalities can you find among the successes? The failures?

Web Challenge #3 Q: Sometimes a company goes public and its shares soar 50% or more on the first day of trading as the initial investors who were able to secure IPO shares at the IPO price sell them at a big profit the very first day to eager investors caught up in the excitement. Research how investment banks dole out “IPO shares”, especially of companies whose IPOs are highly anticipated. Hint: The average investor cannot get IPO shares.