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How corporations issue securities - Coggle Diagram
How corporations issue securities
Equity financing for private companies
growth requires outside capital
Angel investors
VC firms
partnerships that raise money to invest in the equity of young private firms
role
invest to small companies with exceptional growth potential
quick growth and expansion
like to see founders personally invested and compensated based on performance
only 0,1% of new biz receive VC funding
however VC backed startups that have gone public account for 42% of total stock market capitalization
over 90% of the prospects fail
diverisification is important
bring in managerial/tech expertise and contacts
provide these at a high price
say in decision making
often demand board seats
large equity stake
financial institutions
wealthy individuals
business angel
large corporations
Exit after several years
buyout transaction
m&a
IPO
Private equity
Like VC but invests in existing private firms rather than startups
often PE looks for a public traded firm that is managed badly and buy the outstanding equity and take it private
undervalued companies
institutional investors
Pension funds
insurance companies
financing provided by the founder and family, friends
Initial public offering (IPO)
issuer sells it's shares first time to the market
on average 1/3 of the stocks outstanding
who are the shares sold to
General cash offerings
targeted to the investing public in general
Right offerings
merkintäoikeusanti
targeted to current stockholders
who gets the money
primary offerring
issuer gets the money
secondary offernig
current shareholders sell their shares to the investors
current shareholder gets the money
advantages
good liquidity
dispersed ownership
better access to capital
market discipline
disadvantages
dispersed ownership
agency problems
free rider problem
IPO's are costly
indirect
premium
underpricing
on average the price increases on hte first day of trading
but on 3-5 year average performance is poor
when its underpriced the demand for the stocks will be higher and exceed the supply
original owners leave money on the table
direct costs
underwriting fee typically 7%
administrative and legal costs
increased red tape
tighter regulation
financial dissclosures
terminology
best effort
firm commitment IB buys shares from issuer ans sells public
underwriter
green shoe option
can buy back shares at the offering price
if market price exceeds the offering price
can avoid incurring lost
if not then then they wont excersice the option
ai is to stabilize post issue price
gives the underwriter an option to buy additional 15 % of the company shares at the offering price
The underwriter oversells i.e shorts
when the stock begins trading underwriter can then buy back 15% and return them to the lender (issuer)
investment banks that manages the offering
decide its structure and deals with pricing
DCF
or pricing model on comparable firms
after price range
they determine what the market thinks of the valuation
roadshow
bookbuilding
multiples
2 more items...
Seasoned Equity offering (SEO)
takes place when IPO has already taken place
price setting is not necessary
primary shares
new shares issued by the company
secondary shares
shares sold by existing shareholders
Cash issue
FIrm offers the new shares to the general public
As in IPO's in general cash offers securities are sold to underwriters who then offers them to the publlic
Underperformance
results in a price drop
firms tend to sell equity when firms are overpriced
investors are aware of this
pecking order theory
asymmetric information is less of an issue in rights offers
rights issue
A given number of subscription rights gives the right to purchase one additional stock at a pre-specified price during a pre-specified period
subscriptions can be traded separately for a pre-specialised time period
each stock has one subscription right
offers to the existing shareholders
ownership dilution
suom. omistajuuden laimentuminen
osakkeen arvo laskee
koska osakkeiden määrä nousee
new shareholders benefit at the expense of existing shareholders
Debt financing
