how corporations issue securities and payout policy initial public offering other new issue...
TRANSCRIPT
How Corporations Issue Securities and Payout Policy
• Initial Public Offering• Other New Issue Procedures• Subsequent Security Sales• Private Placements• Student Presentations• Payout Policy
Initial Public Offering1. Select managing underwriter and form
underwriting syndicate2. Arrange spread and greenshoe option3. Register with SEC and issue prospectus4. Roadshow to interest potential investors and build
book of demand5. SEC approval and issue price set6. Underwriters allocate stock7. Trading starts8. Managing underwriter makes liquid market
Underwriting a New Issue• Role of underwriter and underwriting syndicate
– Financial advisors– Buy the issue– Resell it to the public
• Alternatives for underwriting syndicate– Buy entire issue and resell it– Best-efforts basis– All-or-none arrangement
• Primary offering– New shares
• Secondary offering– Shares held by management, venture capitalist or other investors
Financial Terms for IPO
• Spread– Difference between what underwriter pays and the
offering price– Typically 7% for $20 – 80 million IPOs– Split among managing underwriter, syndicate and
sales force
• Registration costs• Greenshoe option
– Allows underwriter to buy and sell additional shares
Prospectus• Number of shares
– Primary offering– Secondary offering
• Price– To public– To underwriter– Proceeds to company and other sellers
• Registration expenses• Use of proceeds• Company information• Considerations – Warnings• Management and compensation• Prior transactions• Selling stockholders• Underwriting agreement• Legal matters
Underpricing of IPOs• IPOs often end the first day of trading above the
offering price• Average first day returns approximately 19% over
1963-2003• Long term, IPOs underperform the market• Why are IPOs underpriced?
– To assure selling entire issue– To entice investors to IPOs of underwriter– To reward favored clients
• Individual investors do not get favorable returns by bidding for each IPO
New Issue Procedures
• Bookbuilding– Typical in US
• Fixed price offer
• Auction– Google– Discriminatory auction– Uniform price auction– Impact of winner’s curse
Subsequent Security Sales• General cash offers
– Shelf registration• More common for debt than equity• Allows company to time market
• Spreads– IPOs - around 7%– Seasoned equity - around 5%– Debt – around 1%
• Market reaction to stock issues– US stocks approximately a 3% decline when stock issue is
announced– Signaling issue
• Rights issues
Private Placements
• Limits on number and type of investors
• Advantages– Lower cost– May deal directly with buyer
• Disadvantages– No active market to determine price– Hard to resell
• Example– State Farm and debt issues
Summary of Issuing Securities• Companies can raise capital in a variety of ways• Venture capital is a stepping stone to more long term
financing• Initial public offerings are a complex process• Issuing equity is more costly than issuing debt• Underwriters play an important role in raising capital• Underpricing of IPOs is typical• Signaling inside information impacts stock price• Beware of the winner’s curse in investing
Payout Policy
• Dividend Payments
• Stock Repurchases
• Taxation in US– Historically
• Capital gains taxed at lower rate than ordinary income
• Dividends taxed as ordinary income
• Occasionally first $x of dividends tax free
– Currently (2002-2009)• Dividends are taxed at the same rate as capital gains
How Companies Decide Payout• Long-run target for dividend payout ratio
– Mature – high level– Growth – zero or low
• Focus is on dividend changes• Dividend changes follow long-run sustainable
earnings– Smoothing of dividends
• Avoid reversing dividend changes• Stock repurchases for two reasons
– Large accumulation of cash– Change in capital structure
Signaling
• Dividends– Increase in dividends signals confidence in earnings– Positive stock price reaction to initial dividend
payout– Stock prices react to dividend changes
• Share repurchases– Indication management feels stock is undervalued
Payout Controversy• Miller and Modigliani
– Dividends are irrelevant– Investors can create the income stream they want
by selling stock, or reinvesting dividends
• Conservative view– Dividends increase firm value
• Radical view– If dividends are taxed more heavily than capital
gains, the dividend payouts decrease firm value
Summary of Payout Policy
• Dividends do matter as many companies pay dividends and investors consider dividend rate
• Changes in dividend levels impact stock prices
• Payout policy can signal information available to management
• Information content of announcement may be determining factor
Next Class – Tuesday March 27
• Guest Speaker– Keith Green, VP Operations at Allstate– Harvard Business Review Case Study
• A-Rod: Signing the Best Player in Baseball
– Pick up the case in the Finance Department Office (340 Wohlers) on Monday, March 28
– Read the case (5 pages of text) prior to class– Determine what you think is the appropriate bid
• No class on Thursday, March 29