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CHAPTER

FIFTEEN

Investment
Underwriting: Public
and Private Placement

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FIF T H

Foundations of Financial PPT 15-1


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Figure 15-1
Distribution process for an investment deal
MaxwellCorporation
Corporation
Maxwell
Managinginvestment
investmentdealer
dealer
Managing
Underwritingor
orbanking
bankingsyndicate
syndicate
Underwriting

Issues 250,000 additional shares


of stock
CIBC
Wood Gundy
15 investment dealers
(including Wood Gundy)

Selecteddealers
dealersor
orsellers
sellersgroup
group
Selected
Brokers
Brokers
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Short

Public
Public
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Foundations of Financial PPT 15-2


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Figure 15-2
Allocation of underwriting spread
Price received

Price paid ($)


$19.3725

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Managinginvestment
investmentdealer
dealer
Managing

$19.60

Othersyndicate
syndicatemembers
members
Other

$20.00

Selecteddealer
dealergroup
group
Selected

$20.20

Broker
Broker

$20.50

Public
Public

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$20.00 if sold to selling group


$20.50 if sold to public

$20.20 if sold through broker


$20.50 if sold to public
$20.50 to public

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Figure 15-3
New corporate issues underwritten in 1998 in Canada
20
18
16

$ billions

14
12
10
8
6
4
2
0

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IPOs common Othe r common


shares
shares

Convertible
pre ferreds

Othe r
pre ferreds

Medium term
notes

Convertible
de bt

Othe r debt

Source : Inve stme nt Dea lers Association

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PPT 15-4

EDI TI ON

Figure 15-4
New equity financing, Toronto Stock Exchange, 1988-1998

$ billions

FIF T H

Foundations of Financial
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24
22
20
18
16
14
12
10
8
6
4
2
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

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Public offerings

Private offerings

Rights offerings

So urce : Toron to S tock Excha ng e Re view, 19 98

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PPT 15-5

EDI TI ON

Table 15-3
Big international deals - The Americas ($ millions)
Country

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Company

Business

Year

Sale
Price

The Americas
Argentina
YPF

Oil and gas

1993

$2,500

Bolivia
Brazil

Corani (part of Ende)


Cia. Siderurgica Nacional

Power plant
Steelmaker

1995
1993

$58
$1,056

Canada
Chile

Petro-Canada
CTC

Oil and gas


Telecommunications

1991
1988

$1,980
$115

Columbia

Banco de Columbia

Banking

1994

$490

Cuba
Jamaica

Telecommunications
Telecommunications

1994
1987

$706
$61

Mexico

Etecsa
Telecommunications of
Jamaica
Telmex

Telecommunications

1990

$7,000

Panama

Cementos Bayano

Cement

1994

$60

Peru

ENTEL-CPT

Telecommunications

1994

$2,000

Venezuela

Cia. Anonima
NacionalTelefonos de
VeneZuela

Telecommunications

1991

$1,900

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Percent Major Buyers


Private
80% Public offering
51% Dominion Energy (U.S.)
100% Banco Bamerindus,
Grupo Vicunha,Banco
Gradesco, Banco Itau,
Docenave (Brazil)
*0% Public offering
100% Bond Corp. (Aus.)
99% Group led by Jaime
Gilinski (Col.)
49% Grupo Domos (Mex.)
72% Cable & Wireless (U.K.)
100% Grupo Carso (Mex.),
SBC Communications
(U.S.), France Cable et
Radio (France)
100% Cemex (Mexico)
35% Telefonica de Espana
(Spain)
40% Group led by GTE (U.S.)
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Chapter 15 - Outline

LT 15-1

What is Investment Dealing?


Functions of the Investment Dealer
Underwriting Spread
Public Vs. Private Financing for Companies
Advantages and Disadvantages of Public
Financing
Initial Public Offering and Leveraged Buyout
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What is Investment Dealing?

LT 15-2

Investment Dealing deals with primary offerings of new


securities
The Investment Dealer serves as the intermediary or link
between the corporation and the investor
Brings the two parties together by channeling money from
one to the other
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Functions of the Investment Dealer

LT 15-3

Underwriter:
buying the security and reselling it to the public (large companies)
selling security on commission basis (unknown companies)

Market Maker:
ensuring an available market by buying and selling the security

Advisor:
on securities issues, mergers and acquisitions, leveraged buyouts,
corporate restructuring

Agent:
for private placements, mergers, acquisitions
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Underwriting Spread

LT 15-4

Spread represents the compensation for those


participating in the distribution
Spread = Public Price - Issue Price
It is shared by all the participants
Spread on common stocks is greater than spread on bonds
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Public Vs. Private Financing for Companies

LT 15-5

Publicly financed company:


when shares of a company are offered to the public
anyone can buy shares of the stock
Privately financed company:
privately owned or held by an individual or family
securities not available to the general public
additional funds may be raised by private placement
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Advantages and Disadvantages


of Public Financing

LT 15-6

Advantages of being public:


greater availability of funds (easier to grow and raise
money)
prestige

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Disadvantages of being public:


company information must be made available to the
public (opening the company up to public scrutiny and
criticism)
high costs of going public (expensive)
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Initial Public Offering and


Leveraged Buyout

LT 15-7

Initial Public Offering (IPO):


when a company sells its stock to the public for the first
time
company becomes publicly traded
Leveraged Buyout (LBO):
money is borrowed to repurchase all the shares of the
company resulting in a great deal of debt
when a company goes private
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