Investment Banking(raising capital-IPO’s)

Corporate Finance USAC

Week 3 FINC 5880

Sources of Long Term Financing: Equity Terminology:

Common stock at par value Paid in capital (paid in above par

value) Retained earnings sum of not paid out

earnings) Rights and privileges of common

stockholders: Appoint the directors Pre-emptive right; first right to buy any

new shares of the firm Types of common stock

Class A (for instance with voting rights) Class B (for instance without voting

rights held by government) etc.

Stock market transactions

IPO or new issues market The company goes public

Primary market The company sells additional shares

Secondary market The company’s Outstanding shares

Going public

Advantages Founder can sell some of his

holdings and the company can seek finance in a wider circle

Facilitates raising new corporate cash

The value of the firm is transparent

Disadvantages Burden of reporting and SEC

rulings Disclosures to competition Self dealings of management

Bull Market

IPO ouch?

Air China IPO

Air China IPO makes solid HK debutBy Jian Er (China Daily)Updated: 2004-12-16 15:37

HONG KONG: Shares of Air China, the country's largest carrier, closed 8.2 per cent higher after its first trading day in Hong Kong yesterday, a solid debut in line with market expectation.

Its shares finished at HK$3.225 yesterday after hitting an intraday high of HK$3.25, compared with the offering price of HK$2.98.

Air China has been regarded as a good buy, given that its price/earning ratio and return on investment is better than its peers, China Eastern Airlines and China Southern Airlines.

SHK Research analyst Gary Zhang, who expected the stock to hit HK$3.60 in a 12-month period, said that Air China's growth would be well supported by Beijing airport's strong passenger growth before the Olympic Games which will be held in 2008 in the capital city.

Air China sold 2.805 billion shares, or 31 per cent of its enlarged equity, and raised approximately US$1.07 billion after pricing its IPO at HK$2.98 per share, the upper end of its indicated price range.

China Construction Bank prices IPO China Construction Bank said Thursday it

has set a price range of 1.90 Hong Kong dollars to 2.40 Hong Kong dollars (24 cents to 31 cents) per share for its initial public offering in Hong Kong -- expected to be the world's biggest IPO this year.

The bank, the first of China's big state-owned banks to list shares overseas, plans to sell 26.48 billion shares to raise 50.3 billion Hong Kong dollars to 63.6 billion Hong Kong dollars ($6.5 billion to $8.2 billion).

The bank has also authorized its underwriters to sell an additional 3 billion shares, which when exercised will bring the total amount raised to 57.9 billion Hong Kong dollars to 73.1 billion Hong Kong dollars ($7.46 billion to $9.42 billion).

Bank of China I.P.O. Raises $9.7 Billion BEIJING, May 24 — China's flagship

lender, Bank of China, defied slumping global stock markets to raise $9.7 billion today in the world's biggest public share offering in six years, executives involved with the deal said.

Bank of China, the second of China's four big state-run banks to go public, attracted an avalanche of funds as the sale of a 10.5 percent stake was heavily oversubscribed ahead of its stock listing in Hong Kong next Thursday.

The proceeds could swell to about $11.15 billion if Bank of China sells extra shares set aside to meet demand.

ICBC's IPO : Reckless Spending in China? Call it the Buy China syndrome. All year there has been a

virtual feeding frenzy for Chinese stocks. Mainland companies have raised nearly $50 billion in share offerings on domestic exchanges in Shanghai and Shenzhen and overseas bourses in 2006.

That includes the $20 billion that Chinese mega-lender, Industrial and Commercial Bank of China (ICBC), is expected to rake in with the biggest initial public offering in history. It's selling 15% of its shares to the public and its stock will start trading on Oct. 27 (see BusinessWeek.com, 9/27/06, "China's ICBC: The World's Biggest IPO Ever").

One reason is that China's hyper-growth wave shows no signs of abating. This $2.6 trillion economy grew at a torrid 10.6% pace during the first half, and third-quarter gross domestic product data due out on Oct. 19 are expected to show 10%-plus year-on-year.

The Hong Kong Hang Seng Index is up 20% in 2006, while key stock indices in Shanghai and Shenzhen (largely off limits to foreign investors) have delivered returns of more than 50%. And any day now, China's stockpile of foreign currency holdings—already the biggest on the planet—is expected to top $1 trillion, thanks to record export levels. The scent of fast money is everywhere.

The decision to list the company Fulfil exchange’s

minimum requirements concerning size, net income, number of shares outstanding etc.

Free advertising and publicity

This can help to increase stock value

This can help to decrease cost of equity Bear Market

New common stock offerings

Rights offering (pre-emptive rights) Public Offering Private Placement Employee purchase plans-advantages:

Tax Breaks Anti Takeover defense Pension Plan cost control Productivity enhancement

Disadvantages of Common stock Voting rights and control is

given to outsiders The shareholders will have to

share in the future’s benefits of the company

Costs of issuing and underwriting are very high

New equity issues (except IPO’s) are perceived by the market as a signal for dilution and will reduce the share price!

SEC-the security and exchange commission

Newly issued shares and bonds should be registered with the SEC All sales of securities need to be accompanied with a prospectus The prospectus has a preset form and requirements The SEC can impose serious penalties for any form of misconduct The SEC has a detailed requirement of reports and announcements that

companies have to follow (see www.sec.gov.) The SEC controls internal control by officers of the companies The SEC will prohibit any manipulation The SEC has control over the proxy statements of companies Margin requirements are set by the FED not by the SEC

China Securities Regulatory Commission Brief Introduction to the Department of

Public Offering Supervision

Structure of Department 1. Comprehensive Division 2. Public Offering Review Division 3. Public Offering Review Division 4. Division of Norms 5. Working Division of Public Offering Review

Committee 6. Division of Public Offering Supervision

© 2003 China Securities Regulatory Commission All rights reservedFocus Place 19 ， Jin Rong Street ， West District ， Beijing100032

Assignment: Get the IPO prospectus for Google and read it! Go to (YES) GOOGLE… Search for IPO prospectus of

Google Download the document Read it!

What are the main point of information for investors? Summarize in Max. 3 PPT’s

The investment banking process How much capital is needed

What types of securities to use Competitive bid or negotiated deal Select the investment banker Revaluate former decisions Who will lead the underwriting/co-underwrite Negotiate issuance costs with investment banker Setting the offering price Preparing the prospectus

Example implied growth…

Share MTI has price $ 28.60 Investment banker buys 10 M

new shares at 1$ discount on closing of the last registration day; which was $ 25

Following the formula: Po=D1/(Ks-g)=$ 28.60

With D1=$2 Ks=12% and Po as given then g(rowth) = 5%

The market receives the extra 10M shares as bad news and the Po drops to $ 25.60 all other equal g(rowth) now drops to 4,2%.

Investment bank once hired

Prepares SEC registration docs Prepares the prospectus Prepares the Road show Evaluate the results Stimulate the market after the issue Give guarantees to the issuing firm Takes excess proceeds Is paid an agreed issuance fee

Road Show…

Company wants listing Need to present itself To private and institutional

investors Get an idea of the interest

of investors Show the past track record Show the near future

outlook Show the pipeline of new

products

Week 3 Assignment IPO…

Download the S1 of Google Inc. or Facebook

Compare the statements about Return and Risk with the Actual Performance of the company YTD

Copy relevant paragraphs from the Prospectus and actual performance 10K results

What is your conclusion?

Assignment: A large IPO expecting this Summer Alibaba ($ 16 B USD)

Gather information about this IPO Is there an S1 doc? Who is/are the underwriters? What is the expected cost of the IPO? Where will listing take place? What are the road blocks?