1. How corporations issue securities15
How corporations issue securities

2. 15-1 VENTURE CAPITAL Venture Capital
Money invested to finance new firm
Success of new firm dependent on managers
Restrictions placed on management by venture capital company
Funds usually dispersed in stages after certain level of success
These are high-risk, unproven businesses that need financing. Funds are usually disbursed in stages after ensuring that a certain level of success is achieved at each stage. Venture capital firms also provide consulting services.

3. 15-1 VENTURE CAPITAL
Venture capital is disbursed in stages depending on the success of the firm. This is the first-stage balance sheet based on market value.

4. 15-1 VENTURE CAPITAL
Venture capital is provided in stages after ensuring the progress of the firm. Typically, firms require large amounts of capital to grow rapidly. The second-stage balance sheet is shown.

5. FIGURE 15.1 U.S VENTURE CAPITAL INVESTMENTS
The graph shows how venture capital investment has grown over time.

6. 15-2 THE INITIAL PUBLIC OFFERING
Initial Public Offering (IPO)
First offering of stock to public
Underwriter
Firm that buys and resells an issue of securities
Spread
Difference between public-offer price and price paid by underwriter
From venture capital to IPO is a big step. Many firms fall by the wayside by then. A few successful firms, however, do make it to this stage. Examples: Federal Express, Compaq, Intel, Google. Terminology is important.

7. 15-2 THE INITIAL PUBLIC OFFERING
Prospectus
Provides information on issue of securities
Underpricing
Issuing securities at price set below true value of security
This slide defines prospectus and underpricing.

8. FIGURE 15.2 MOTIVES FOR IPO
This frame shows results of a CFO survey on the motives for issuing an initial public offering. The top three reasons are:
-To create public shares for use in future acquisitions
-To establish a market price value for the firm
-To enhance the reputation of the firm

9. TABLE 15.1 TOP MANAGING UNDERWRITERS, 2011
This table shows the top underwriters for IPO issues in descending order.

10. FIGURE 15.3 AVERAGE INITIAL IPO RETURNS
Initial IPO returns for various countries are provided. Developing country issues have a much higher initial returns. China and India had the highest returns.
Return, percent

11. 15-2 THE INITIAL PUBLIC OFFERING
Average Expenses on 1767 IPO's from
Total costs of IPOs are high for smaller issues. This shows that IPOs are generally underpriced.

12. FIGURE 15.4 IPO PROCEEDS AND FIRST-DAY RETURNS
IPO proceeds and first-day returns are shown in graphical form. Years 1999 and 2000 had very high IPO proceeds as well as first-day returns. Since then, these values have come down substantially.

13. 15-3 ALTERNATIVE ISSUe PROCEDURES FOR IPOs
General Cash Offer
Sale of securities to all investors by already public company
Shelf Registration
Allows firms to file one registration statement for several issues of same security
Private Placement
Sale of securities to limited investors with no public offering
Terminology is important here. Special rules govern shelf registration and private placement. [SEC Rule 415 and SEC Rule 144A]

14. TABLE 15.3 UNDERWRITING SPREADS
This table shows the differences in costs of IPOs, seasoned issues, and debt issues. Underwriter’s spread is the highest for IPOs.

15. FIGURE 15.5 COSTS OF RAISING CAPITAL
Review the costs of raising money. There is a cost associated with raising capital, and students must not ignore that cost when making decisions.

16. 15-4 SECURITY SALES BY PUBLIC COMPANIES
Rights Issues
Issues of securities offered only to current stockholders
Example
Ivanhoe Mines needs C$1.2 billion of new equity. Market price C$ Ivanhoe Mines decides to raise additional funds by offering the right to buy 3 new shares for 20 at C$13.93 per share. With 100% subscription, what is value of each right?
These are issues of securities offered only to current stockholders. Stockholders have a preemptive right. This is an example of a rights issue.

17. 15-4 SECURITY SALES BY PUBLIC COMPANIES
Current Market Value
1 x C$24.73 = C$24.73
Total Shares
= 23
Amount of new funds
3 x C$13.93 = C$41.79
Ex-Rights Price
(C$ C$494.60) / 23 = C$23.32
Value of a Right
C$23.32 – C$13.93 = C$9.39
This slide is the mathematical solution to the previous slide’s example.

18. 15-4 SECURITY SALES BY PUBLIC COMPANIES
Rights Issue
Lafarge Corp needs to raise €1.28 billion
The market price is €60/sh
Lafarge decides to raise additional funds via a 4 for 17 rights offer at €41 per share
If we assume 100% subscription, what is the value of each right?
This is another example of rights issue.

19. 15-4 SECURITY SALES BY PUBLIC COMPANIES
Rights Issue
Current market
17 x €60 = €1,020
Total shares
= 21
Amount of funds
1,020 + (4 x 41) = €1,184
New share price
(1,184)/21 = €56.38
Value of a right
56.38 – 41 = €15.38
This slide is the mathematical solution to the previous slide’s example.