1. Advanced Finance 2006-2007 IPO-SOE
Professor André Farber
Solvay Business School
Université Libre de Bruxelles

2. Belgacom IPO March 2004 # shares: 400m
Secondary offering: 146.6m shares – including 10% overallotment option
IPO technique: book-building
Price range: €23.0 to €26.5 per share
Final price: €24.50
Market cap: €9.8 billion
First trading: +5% in downmarket
Stock price: May 2, 2005 €29.43
Advanced Finance 2007 IPO/SOE

3. Primary and secondary offering Dutch auction
IPO August 2004
# shares 270m
Primary and secondary offering
Dutch auction
Initial plan: 24.6m shares offered at $108-$ (Mkt cap up to $36m)
Final offer: m shares offered at $85-$95
Offer price: $85
First day close: $ (+18.5%)
Stock price May 2, 2005: $222.25
Advanced Finance 2007 IPO/SOE

4. IPO Initial Public Offering
Why go public?
Mobility of capital
Realize capital gain
Liquidity for minority shareholders
Tranfer of control
Stock options
Access new sources of funds
Future equity offering
Equity linked
– Increase visibility
Costs of going public
Direct costs
spread (investment bank)
direct expenses
underpricing
Loss of confidentiality
Advanced Finance 2007 IPO/SOE

5. How to proceed?
Choose investment bank (competitive offer or negotiated offer)
Advice (key role of reputation)
Underwrite
Placement
Choose market
Prepare prospectus
Approval by market authorities
book building vs fixed price
greenshoe: option to place additional shares
Advanced Finance 2007 IPO/SOE

6. IPO - Belgium
Number
Average age of company
Average proceed €m
Average return day % %
Source: KBC “Introductions en Bourse” Courrier Economique et Financier 14 janvier 2000
Advanced Finance 2007 IPO/SOE

7. IPO-US
Advanced Finance 2007 IPO/SOE

8. IPO –US recent evolution
Advanced Finance 2007 IPO/SOE

9. Setting the Offering Price
Very difficult:
if price too high: unsuccessful
if price too low: loss for existing shareholders
In general: underpricing
Advanced Finance 2007 IPO/SOE

10. Advanced Finance 2007 IPO/SOE

11. Average initial returns for 37 countries Source: Loughran Ritter and Rydqvist "Initial Public Offerings: International Insights" Update January 23, 2001
Advanced Finance 2007 IPO/SOE

12. SOE Seasoned Equity Offering
General Cash Offering
Firm commitment: investment bank underwrites securities
Best efforts: investment bank acts as placing agent
Right issue (Europe)
Example: Lafarge launches rights issue to fund UK buy
Lafarge, the French building materials group, will today launch a € 1.1 bn one-for-eight rights issue to part-finance the acquisition of Blue Circle Industries, the UK cement manufacturer.
The new shares will be priced at €80 each, a discount of 18 per cent to the Lafarge share price, which fell €1.60 to €98.05 yesterday. The issue is being lead managed by BNP Paribas, joint financial advisers to Lafarge on the bid.
Financial Time 12 January 2001
Advanced Finance 2007 IPO/SOE

13. Valuing a right: example
Initial position
Number of shares outstanding: 10 m (nold)
Price per share: € 20 (Pcum)
Terms of offer
Number of new shares issued: 5 m (nnew)
Subscription price: € 16 (Psub)
Number of rights for a share: 2
After offer
Number of shares: m
Value of shares: € 280 m
Price per share: (Pex)
Value of a right: € 1.33
Advanced Finance 2007 IPO/SOE

14. Valuing a right: formula
Value of a right = Pcum - Pex
Mkt value of equity after SEO: V = nold Pcum + nnewPsub
= (nold+nnew) Pex
Combine these to equations to get:
In example: value of right = 5/15 * (20-16) = 1.33
Advanced Finance 2007 IPO/SOE

15. Does the subscription price matter?
Back to example: Proceed of issue = 80m
Subscription price
Number new shares 5 m 10 m
# rights / share
Value of right
Price per share after issue
Total cost of 1 new share
= * = * 6
Old shareholder
Before
After
= =
Advanced Finance 2007 IPO/SOE

16. In practice Subscription price set before start of offering
Offering valid for a few days (2 weeks)
Rights similar to American warrants
right to buy new share at fixed price
if exercised, number of share outstanding vary
From option pricing theory:
value of right = function of volatility
exercise as late as possible
Advanced Finance 2007 IPO/SOE

17. Event studies
How to measure the impact of some piece of information on the stock price? Event studies
Part of Efficient Market Hypothesis
Methodology:
(1) Sample of announcements of same type
(2) Calculate « abnormal returns » around announcement date Abnormal return = Realized return - Expect Return
(3) Statistical test
Advanced Finance 2007 IPO/SOE

18. Stock Market Response to SEO
Sample size 2-Day Announcement Return
Security sold:
Common Stocks %
Preferred stock %
Source: Smith, C.W. Raising Capital: Theory and Evidence
Advanced Finance 2007 IPO/SOE