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Markets & New Issues (Reasons for bringing new securities to the…
Markets & New Issues
Primary Market
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Where shares or bonds are issued for the first time. In the gilts market this would be the issuance by the DMO through its auctions
Two main scenarios
New corporate applicants who wish to obtain a listing for the first time which may be achieved by one of five permitted methods
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Secondary market
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The market for second hand selling. Securities are bought and sold between investors rather than the original issuer. The securities must have been issued in the primary market first
Conducted via screens, telephones and computer terminals
It is vital that there is an efficient and well regulated secondary market because without it there would be no means of disposal for those securities already purchased by investors in the primary market
Without the secondary market, potential investors are less likely to buy shares in the first instance
In the UK, the LSE provides an active and efficient secondary market for trading in a vast range of securities
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If investors know there is an efficient secondary market, they will be more inclined to buy in the primary market
Generally exceptionally liquid with both buying and selling prices made available throughout the trading day.
New issues
The issuing of new securities, either for a company coming to the market for the first time or as a rights issue for an already listed company in order to raise additional capital
If the directors do decide that it is time to obtain a stock exchange quotation, they must undergo a thorough vetting process for the company. The requirements are far more stringent than those for remaining an unquoted plc
Floating a company can be a very expensive process, there is usually a minimum cost of £500,000 but this could run into many millions
In order to obtain a listing on the main market of the LSE, a company must satisfy certain criteria. There will be the listing requirements of the United Kingdom Listing Authority (UKLA), which is a division of the FCA. These requirements will be set out in their rules and will include the following
Incorporation: The company must be incorporated under relevant laws, which in the UK means already being a plc
Accounts: The company seeking a listing must have published or filed audited account covering a three year period. This period must end no more than six months before a planned flotation
Track record: The company must have an indecent trading and revenue earning record covering a three year period
The Directors: The company must show that the directors possess the appropriate collective experience to run all areas of the business
Working capital requirement: The company must demonstrate that it has enough working capital not only for its immediate needs but also for the next 12 months and must also have a market capitalisation of not less than £700,000
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Admission to the LSE
Admission to the Main Market of the LSE for those companies wishing to have their securities listed is a two stage process
Their securities need to be admitted to Stock Exchange Official List by the UKLA, a division of the FCA
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There are five permitted issue methods for an unlisted company bringing its securities to market for the firs time
An Introduction
A method whereby an unlisted company can obtain a stock exchange listing without raising any capital or issuing shares. It would be used where the shares of a company are already widely held in the public domain. It is a marketing operation and would be used where there will be a guaranteed secondary market
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It is a method by which already established overseas companies and listed on their own national exchanges can gain access to the London Stock Exchange Official List
The stock exchange will only permit a listing where there is a wide spread of shares available and where more than 25% of its shares are in public hands
There are no underwriters fees and minimal requirements for advertising the issue, which may be in the form of a box advertisement
Because the advertising requirements are not as stringent as for the other methods, the opportunities to raise the company' profile are diminished considerably
A usual condition for an introduction is that some of the larger current shareholders ensure that sufficient of their own shares are available to market makers in order that a market can be made when dealing commences
May also be used where two previously listed companies have merged to form a new company and the newly formed company's shares will be brought to market by means of an introduction
A placing
The company through a sponsor or broker will offer its shares to a small number of institutional investors only (pension funds, insurance companies and financial institutions including banks) in order to raise capital
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May result in the company's shares being held by a narrower shareholder base and may result in less liquidity
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Majority of companies now tend to favour placing as these can be for any amount and do not have to be underwritten.
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An intermediaries offer
Very similar to a placing, the difference being that the sponsor or broker will offer the shares to other stockbrokers in addition to institutional investors.
These stockbrokers will then offer the shares to their own clients, thus increasing the shareholder base and in turn marketability
An offer for sale
Involves the appointment of an intermediary where a company appoints a sponsor issuing house to manage the issue
The issuing house will normally buy the new securities and then offer them to the public and institutional investors at a slightly higher price than what it paid
Most offers for sale will be new securities being brought to the market but can occur where existing shareholders wish to dispose of their current holdings
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Offers for sale using a fixed price means that investors will be invited to subscribe for shares at a fixed price determined by the company's financial advisors and sponsor. The price will be calculated using perhaps sector comparisons and market conditions
When the price has been determined the new securities will be offered to the public. Subscribers must state the number of shares they wish to purchase at or above his fixed price.
If the issue is oversubscribed, allocations will be scaled down as specified in the issue prospectus
If the issue is undersubscribed, all of the investors will receive the amount applied for and the remainder will be taken up by the underwriters
An offer for sale by tender will also involve the use of an intermediary issuing house, however the issuing house or sponsor will establish a minimum tender (offer) price. The subscribers will state the number of shares they wish to purchase at this minimum selling price. Allocation will then be made to those subscribers who have tendered at or above the minimum tender price
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A public offer is when a company's shares are offered to both private and institutional investors alike. The offer will be underwritten so that any shares not taken up by the public will be purchased by the institutions
Of the various methods, public offers are the most expensive, given that the aim is to raise as much capital for the company as possible
A public offer brings in private investors which will greatly increase the liquidity of a company's shares and should raise significant amounts of capital
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Underwriting
There are instances of new issues not being fully subscribed, shares trading at a substantial discount and offerings being withdrawn very close to the anticipated flotation date. This could be any number of reasons including
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Involves institutional investors agreeing to take up any shares for which the public does not subscribe
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Usually the issuing house itself will be the principal underwriter, followed by a series of sub-underwriters
Underwriting commission is the greatest expense of any new issue and is usually in the region of 2% of the new issue proceeds. The issuing house will generally retain 0.5% of the proceeds and pass the remaining 1.5% to the sub-underwriters
The commission is payable whether or not the underwriters are called upon to take up any unsubscribed shares
Mergers and acquisitions
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Acquisitions
One business buys another business, known as the target company and the purchasing company will control that acquired company. The acquiring company will wholly absorb that target company and generally the target company will lose its name. The assets, liabilities, rights and responsibilities of the target company will then become the responsibility of the acquiring company
A company will become a target when its share price is less than the total value of assets. The acquiring company believes it is getting a bargain and that perhaps it can make better use of the assets
Mergers and de-mergers
In a merger, two businesses join together. The control of the enlarged company is shared between the owners of the original two companies
A de-merger is where one large company is split into a number of smaller companies. This is often a tactic employed to prevent hostile takeovers
Consolidations
Two or more companies join together to become a new entity with a new name. Each of the original companies will sacrifice their previous company names
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Financing acquisitions
Shares in a target company may be paid for either in cash or alternatively with shares in the acquiring company or some other security
If the shares are paid for in cash, the shareholders of the target company must consider whether the offer is adequate in relation to the value of the underlying assets
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