Learning Objectives
Identify the features and characteristics common stock and preferred stock
Examine the process by which common stock is issued in the primary stock market
Understand the role that an investment bank plays in the financial markets
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Common stock = certificate representing equity or partial ownership in a corporation
Issued in primary market by corporations that need long-term funds
Stock is then traded in the secondary market, creating liquidity for investors and company evaluation for managers
Common Stock
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Common Stock Right to ___
Many investor assign their vote to management via a _____ ____________________have two classes of common
shares outstanding, with different voting rights assigned to each class
__________________ voting the number of votes assigned to each stockholder equals the number
of shares held multiplied by the number of directors to be elected The number of shares needed to elect p directors, Np, is:
goutstandin sharescommon #elected be toneeded directors # where
11n
)(
sn
snppN
Example: Cumulative vs. Straight VotingABC firm has 1 million shares of common stock outstanding and 4 open directors slots. 6 people are running for the 4 open slots: Bob, Carol, Ted, Alice, Tom, and Jerry.
1. If the firm uses straight voting, what is the minimum number of votes needed to ensure election to the board?
2. If the firm uses cumulative voting, what is the minimum number of votes needed to ensure that youra) 1 candidate, Bob, is elected to the board?
b) 2 candidates, Bob and Carol, are elected to the board?
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Example: Cumulative vs. Straight Voting1. If the firm uses straight voting, what is the minimum number of votes
needed to ensure election to the board?
(50% x # share outstanding) + 1 =
(.50 x 1,000,000) + 1 = 500,000 + 1 = 500,001 shs.
If Mary owns 500,001 shares, she can elect the entire Board:
Suppose Mary wants Ted, Alice, Tom and Jerry on the Board, then votes are cast as follows:
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Candidate For Against Elected?
Bob 499,999 500,001 No
Carol 499,999 500,001 No
Ted 500,001 499,999 Yes
Alice 500,001 499,999 Yes
Tom 500,001 499,999 Yes
Jerry 500,001 499,999 Yes
Example: Cumulative vs. Straight Voting2. If the firm uses cumulative voting, what is the minimum number of
votes needed to ensure that youra) 1 candidate, Bob, is elected to the board?
Chart 1: Bob guaranteed: Chart 2: Mary’s voting Ted & Alice:
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800,001
1000,80015
000,000,4
114
)000,000,14(11
1n
)(1
snpN
Candidate For Elected?
Bob 800,001 Yes
Carol 0 No
Ted 800,000 Yes
Alice 800,000 Yes
Tom 800,000 Yes
Jerry 799,999 No
Total votes 4,000,000
Candidate For Elected?
Bob 800,001 Yes
Carol ? 1,199,995 Yes
Ted 800,000 Yes
Alice 800,000 Yes
Tom ? 0 No
Jerry ? 400,004 No
Total votes 4,000,000
Example: Cumulative vs. Straight Votinga) 2 candidates, Bob and Carol, are elected to the board?
Chart 1: Bob & Carol guaranteed: Chart 2: Mary’s voting Ted & Alice:
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Candidate For Elected?
Bob 800,001 Yes
Carol 800,000 Yes
Ted 800,000 Yes
Alice 800,000 Yes
Tom 0 No
Jerry 799,999 No
Total votes 4,000,000
Candidate For Elected?
Bob 800,001 Yes
Carol 800,000 Yes
Ted 800,000 Yes
Alice 800,000 Yes
Tom 400,004 No
Jerry 399,995 No
Total votes 4,000,000
2 candidate to 800,000 and
1 candidate to 800,001 with
1,600,001
1000,600,115
000,000,8
114
000,000,14(21
1n
)(2
snpN
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Common Stock Characteristics (cont.) Right to ________ , but they are discretionary and are thus
not guaranteed
Common stockholders have the lowest priority claim in the event of bankruptcy (i.e., a claim)
___________ implies that common stockholders can lose no more than their original investment
Par Value
No maturity
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Preferred Stock Characteristics
Hybrid security Represents equity or ownership
interest, but usually _________ rightsTrade voting rights for stated fixed
annual dividend Maturity
Perpetual vs. Limited life Call provisions
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Preferred Stock Characteristics (cont.)
Dividends paid before common if dividends are declared by board of directorsNonparticipating versus participating
Dividend not affected by profits May receive special dividend if profits high
Cumulative versus noncumulative Preferred dividend may be omitted, but if
Cumulative provision, then no common dividends paid until P/S dividend in arrears are paid
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How Securities Are Issued Investment banker role Public placement
IPO Secondary/Seasoned Offerings Shelf Registration Preemptive Rights Offering Bought Deal Auction
Private placement
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Role of Investment Banker in Bringing New Securities to Market
Three steps of bringing a new security issue to market include:
1. Origination
2. Underwriting
3. Sales and distribution
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Role of Investment Banker in Bringing New Securities to Market
Three steps of bringing a new security issue to market include:
1. Origination
2. Underwriting
3. Sales and distribution
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Role of Investment Banker in Bringing New Securities to Market
Three steps of bringing a new security issue to market include:
1. Origination
2. Underwriting
3. Sales and distribution
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Front Page of a Final Prospectus
IPO
IPO
Syndicate members
Firm commitment
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Initial Public Offerings (IPOs) First-time offering of shares to the public Firm must provide information to public
Firm is assisted by an investment banker Registration statement to SEC Red-Herring Prospectus Road shows www.retailroadshow.com Final Prospectus Difficulty in buying IPO
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Google’s IPO: S-1 filing
http://www.sec.gov/Archives/edgar/data/1288776/000119312504073639/0001193125-04-073639-index.htm
As filed with the Securities and Exchange Commission on April 29, 2004 Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM S-1 REGISTRATION STATEMENT
Under
The Securities Act of 1933
GOOGLE INC. (Exact name of Registrant as specified in its charter)
Delaware 7375 77-0493581
(State or other jurisdiction of incorporation or organization)
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer Identification Number)
1600 Amphitheatre Parkway Mountain View, CA 94043
(650) 623-4000 (Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
Eric Schmidt
Chief Executive Officer Google Inc.
1600 Amphitheatre Parkway Mountain View, CA 94043
(650) 623-4000 (Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Larry W. Sonsini, Esq. David J. Segre, Esq.
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road Palo Alto, California 94304-1050
(650) 493-9300
David C. Drummond, Esq. Jeffery L. Donovan, Esq.
Anna Itoi, Esq. Google Inc.
1600 Amphitheatre Parkway Mountain View, CA 94043
(650) 623-4000
William H. Hinman, Jr., Esq. Simpson Thacher & Bartlett LLP
3330 Hillview Avenue Palo Alto, California 94304
(650) 251-5000
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Google’s IPO: S-1 filing
http://www.sec.gov/Archives/edgar/data/1288776/000119312504073639/0001193125-04-073639-index.htm
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Initial Public Offerings (IPOs) First-time offering of shares to the public Firm must provide information to public
Firm is assisted by an investment banker Registration statement to SEC Red-Herring Prospectus Road shows www.retailroadshow.com Final Prospectus Difficulty in buying IPO
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Initial Public Offerings (IPOs) First-time offering of shares to the public Firm must provide information to public
Firm is assisted by an investment banker Registration statement to SEC Red-Herring Prospectus Road shows www.retailroadshow.com Final Prospectus Difficulty in buying IPO
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Google’s IPO: Final Prospectus
http://www.sec.gov/Archives/edgar/data/1288776/000119312504143377/d424b4.htm
Prospectus August 18, 2004
19,605,052 Shares
Class A Common Stock
Google Inc. is offering 14,142,135 shares of Class A common stock and the selling stockholders are offering 5,462,917 shares of Class A common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares. The initial public offering price is $85.00 per share.
Following this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible at any time into one share of Class A common stock.
Our Class A common stock will be quoted on The Nasdaq National Market under the symbol “GOOG.”
Investing in our Class A common stock involves risks. See “ Risk Factors” beginning on page 4.
Price $85.00 A Share
Price to Public
Underwriting Discounts and Commissions
Proceeds to Google
Proceeds to Selling
Stockholders
Per Share $ 85.00 $ 2.3839 $ 82.6161 $ 82.6161 Total $ 1,666,429,420 $ 46,736,483 $ 1,168,368,039 $ 451,324,897
The selling stockholders have granted the underwriters the right to purchase up to an additional 2,940,757 shares to cover over-allotments.
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Initial Public Offerings (IPOs) First-time offering of shares to the public Firm must provide information to public
Firm is assisted by an investment banker Registration statement to SEC Red-Herring Prospectus Road shows www.retailroadshow.com Final Prospectus Difficulty in buying IPO
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Initial Public Offerings (IPOs) Performance of IPOs
Price generally rises on first day Average a 19% gain on first day of trading.
On average, the longer-term performance of IPOs is poor
Average 3-year return of IPO stocks lagged the average 3-year returns of similar non-IPO stocks by 7.2%.
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Example: Best Efforts vs. Firm Commitment
Stevens Bank intends to issue 2 million shares of common stock.
The bank’s investment banker has offered two alternatives:
Plan A:
A best efforts offering at $16 per share subject to an underwriting commission of 2% of expected gross proceeds plus $300,000. The investment banking firm expects 93% of the issue will be sold.
Plan B:
A firm commitment offer at $15.50 per share plus an underwriting fee of 7% of the gross proceeds.
1) Which plan offers the highest net proceeds to Stevens Bank?
2) What other factors must Stevens consider when making their choice?
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Example: Best Efforts vs. Firm CommitmentProceeds to Firm Proceeds to IB
Plan A:
Gross Proceeds (2 mill. shs. x $16/sh x .93)
$29,760,000
Less: Commission ($29,760,000 x .02) - 595,200 $ 595,200
Less: Fee - 300,000 300,000
Net proceeds $28,864,800* $ 895,200
Plan B:
Gross Proceeds (2 mill. shs. x $15.50/sh) $31,000,000 - $31,000,000
Less: Fee ($31,000,000 x .07) - 2,170,000 2,170,000
Proceeds from sale of shares _________0 ?
Net proceeds $28,830,000 $2,170,000 + net profit from share sales**
* This amount could change since IB could sell < 93% or > 93% of the issue.
________________bears the risk.
**IB may not be able to sell the shares at a profit.
_______________ bears the risk.
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Secondary Stock Offerings
New stock issued by firm that already has shares outstandingQuanta Services-secondary stock offering
Filed an S-3
http://www.sec.gov/Archives/edgar/data/1050915/000095012904002449/h14786sv3.htm
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Regulation of the Primary Market
Securities and Exchange Commission (SEC) regulates underwriting activities
Securities Act of 1933 governs issuance of securities
Rule 415: Shelf Registration Rule file single registration document for selling securities on
a continuous basis (within 2 years)
CryoLife’s Shelf Registration: S-3 and check Rule 415
http://www.sec.gov/Archives/edgar/data/784199/000091406204000552/0000914062-04-000552-index.htm
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Three Variations in the Underwriting Process
1. ___________________ Common stock only Existing shareholders
have the right to buy new common stock at a price below market value.
Elements of a rights offering: Subscription price Number of rights Option to transfer rights Right’s expiration time
2. _________________ Debt securities only Investment banking firm
or group of firms offers to buy an entire issue from the issuer.
Attractive features: quick in bringing issue to
market lower risk of capital loss
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Three Variations in the Underwriting Process
3. ______________________ Applies to stocks and bonds Mandatory for certain securities of regulated
utilities and municipals Competitive Bidding Underwriting
______________________________ All at same bid price
______________________________ All at individual bid price
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Private Placement of Securities
Sale of securities to a limited number of institutional investors.
SEC specified conditions to be met for private placement.
Issuers usually work with investment bankers.
Rule 144A offering or non-Rule 144A offering
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Rule 144 A SEC rule permitting large institutions to trade
securities acquired in a private placement among themselves without having to register these securities with the SEC.
SEC Rule 144A improves liquidity of privately placed securities.
Encourages non-U.S. firms to issue securities in the U.S. private placement market.
Example: Preemptive Rights Offering
George owns 10,000 shares of ABC Corp. that has 10 million shares outstanding. ABC plans to sell an additional 5 million shares through a rights offering. Current share price is $50. Then new shares are offered to current stockholders at $45/sh.
1. How many rights will George receive?
2. If George exercises his rights, what is his ownership interest? If he does not, what is his ownership interest?
3. Assume George exercises his rights. What is the per share value of George’s investment after the rights offering?
4. Suppose George decides to sell his rights to another investor. What must be the minimum sales price per right, such that George loses no value in wealth?
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Solution: Preemptive Rights Offering
1. How many rights will George receive?
Ownership before offering = 10,000/10 mill. = .001 = .1%
Rights per share to be received = New shs./Outstanding shs.
= 5 mill/10 mill = 0.5 rights / sh. owned
George will receive 10,000 x .5 = _______________________
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Solution: Preemptive Rights Offering
2. If George exercises his rights, what is his ownership interest? If he does not, what is his ownership interest?
Ownership after exercising rights =
= (10,000 +5,000)/(10 mil. + 5 mil.)
= 15,000/15 mill. = _______________________
Ownership interest if he does not exercise rights =
= 10,000/15 mill. = .000667 = ______________________
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Solution: Preemptive Rights Offering
3. Assume George exercises his rights. What is the per share value of George’s investment after the rights offering?
Share value before offering = 10,000 x $50/sh = $500,000
Cost of rights = 5,000 x $45/sh = $225,000
15,000 $725,000
Share value after = $725,000/15,000 = _________________
It is same for Total Firm:
15 mill. shs x $48.33 = $725 mill.
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Solution: Preemptive Rights Offering
4. Suppose George decides to sell his rights to another investor. What must be the minimum sales price per right, such that George loses no value in wealth?
$48.33 - $45 = _____________________
Total wealth:
Stock value 10,000 shs x $48.33 = $483,333.33
Rights sold 5,000 x $3.33 = 16,666.67
Wealth remains the same as before offering = $500,000
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