STOCK

OFFERINGS
AND INVESTOR
MONITORING
PRIVATE EQUITY
Private equity (private firm) is a business
that is privately held and the equity is not
traded in public stock exchange.

Some business owners hope to go public

so that:
0 They can obtain financing to support
the firm’s growth
1 They can “cash out” by selling their
original equity investment to others.
A public offering is feasible if:
2 The owners want to sell at least $50
million in stock.
3 Theshareholder base will be large
enough to support an active secondary
market.

Private Equity Financing

by Venture Capital Funds
4 Venture capital funds (VC funds)
receive money from wealthy
investors and from pension funds
that are willing to maintain the
investment for a long-term
period, such as 5 or 10 years.
5 Investors are not allowed to
withdraw their money before a
specified deadline.
Private Equity Financing
by Venture Capital Funds
6 Venture Capital Market
 - Brings together the private
businesses that need equity funding and
the VC funds that can provide funding.

7 Terms of a Venture Capital Deal

- A VC fund will negotiate the
terms of the deal when it decides to invest
in a business.
- The VC fund will set out
requirements for the business and VC fund
managers may serve as advisers to the
business.

Private Equity
Financing by Venture
Capital Funds
8 Exit Strategy of VC Funds
-VC funds typically plan to exit
in 4 to 7 years by selling the equity stake
to the public.
9 Performance of VC Funds
- Tends to vary over time

Financing by
Private Equity
Funds
10Private equity funds pool money
provided by institutional
investors (such as pension funds
and insurance companies) and
invest in businesses.
11 They also rely heavily on debt to
finance their investments.
12Unlike VC, private equity funds
take over businesses and mange
them.
13Their target are overvalued and
mismanage. They sell their stake
in the business after several
years.

Public Equity
14When a firm goes public, it
issues stock in the primary
market in exchange for cash.

15Going public has two effects on

the firm.
- It changes the firm’s
ownership structure by increasing
the number of owners.
- It changes the firm’s
capital structure by increasing the
equity investment in the firm.
16The secondary market allows
investors to sell the stock they
previously purchased to other
investors.

Public Equity Ownership

and Voting Rights
17In publicly traded firms, most
shareholders are not the
managers.

18Ownership of common stock

entitles shareholders to a number
of rights.
- Normally, only the owners of
common stock are permitted to vote
on certain key matters concerning
the firm.
 - Many investors assign their
vote to management through the
use of a proxy.

Preferred stock
Preferred stock - represents an equity
interest in a firm that usually does not
allow for significant voting rights.

19 Preferred shareholders share the

ownership of the firm with common
shareholders and are therefore
compensated only when earnings
have been generated.
20 A cumulative provision on most
preferred stock prevents dividends
from being paid on common stock
until all preferred stock dividends
have been paid.
21 Because the dividends on preferred
stock can be omitted, a firm assumes
less risk when issuing it than when
issuing bonds.
 22 Dividends are not tax-deductible
for the firm, making preferred stock
less desirable than bonds.

Public Equity
Participation in Stock
Markets
Investors can be classified
as individual or
institutional

23 Individual investments

commonly exceeds 50% of the
total equity.
24 Because of the size of
investment, institutional
investors can significantly
affect stock market prices.
How Investor Decisions
Affects Stock Prices
25Investors make decisions to buy.
A stock when its market price is
below their valuation, which
means they believe the stock is
undervalued.
26They may sell their holdings of a
stock when the market price is
above their valuation, which
means they believe that the
stock is overvalued.
27Investors' revision of
expectations of a firms
performance can affect stock
prices

Investor Reliance on
Information
28Investors respond to the release
of new information that affects
their opinions about a firm's
future performance
29In general, favorable news
about a firm's performance will
make investors believe that the
stock is undervalued at its
prevailing price.
30New information about
macroeconomic conditions
commonly causes for many firms
to be revised at the same
direction and therefore causes
stock prices to move in the same
direction.

INITIAL PUBLIC
OFFERINGS
 31 A first time offering of
shares by a specific firm to
the public.

Process of Going
Public
32 Developing a Prospectus

33 Pricing

34 Allocation of IPO Shares

35 Transaction Costs

Underwriter Efforts to
Ensure Price Stability
Underwriters may attempt to
stabilize the stock’s price by
purchasing shares that are for sale
in the secondary market shortly
after the IPO. If most stocks placed
by a particular underwriter perform
poorly after the IPO, institutional
investors may no longer want to
purchase shares sold by that
underwriter.

Lockup
36The lead underwriter attempts
to ensure stability in the stock’s
price after the
37offering by requiring a lockup
provision, which prevents the
original owners of the firm
38and the VC firms from selling
their shares for a specified period
(usually six months
39 from the date of the IPO).

Timing of IPOs
40Initial public offerings tend
to occur more frequently
during bullish stock markets,
when
41potential investors are
more interested in
purchasing new stocks.
Initial Returns of
IPOs
42The initial (first-day) return of
IPOs in the United States has
averaged about 20 percent
43over the last 30 years. Such a
return is unusual for a single day
and exceeds the typical
44return earned on stocks over an
entire year.

Flipping Shares
 Some investors who know
about the unusually high initial
returns on IPOs attempt to
purchase the stock at its offer price
and sell the stock shortly
afterward. This strategy is referred
to as flipping.

Google's IPO
45 On August 18, 2004,
Google engaged in an
IPO that attracted
massive media attention
because of the firm’s
name recognition.
Estimating the
Stock's Value
46Investors attempt to
determine the value of the
stock that is to be issued so
that they can decide
whether to invest in the IPO.

The Auction
Process
47Google’s IPO was unique in
that it used a Dutch auction
process instead of relying
almost exclusively on
institutional investors.
Results of Google's
Dutch Auction
48 Google’s auction resulted
in a price of $85 per share,
meaning that all investors
whose bids were accepted
paid $85 per share. Google
was able to sell all of its 19.6
million shares at this price,
which generated proceeds of
$1.67 billion.

Trading after the

Auction
 Any transactions that
occured after the auction was
completed took place in the
secondary market, meaning
that investors were buying
shares that were previously
purchased by other investors.
RESULTS OF
GooGLE’S DUTCH
AUCTION
 Google’s auction resulted in a
price of $85 per share, meaning
that all investors whose bids were
accepted paid $85 per share.
Google was able to sell all of its
share at this price, which
generated proceeds of $1.67
billion. In addition, some investors
who obtained the share sold their
shares in the secondary market
shortly after the auction was
completed, which made an
increase of 18 percent return on
the first day.

Facebook’s IPO
 On May 18, 2012 Facebook
engaged in an IPO and raised about
16 billion with its offering. Due to
popularity it attracted much
attention. There were 33 securities
that served as underwriters by
selling the share to investors
wherein it earned $176 million for
their services. Although it was
lower than the norm for
underwriter securities, many
people were willing to accept in
order to participate this major
event. The stock price initially
increased but declined later in the
day.

Abuses in the IPO

Market
49 Spinning
 50 Occurs when the underwriter
allocates share from an IPO to
corporate executives who may be
considering an IPO to another
business requiring the help of a
securities firm.
51 Laddering
52 Where brokers encourage investors
to place first-day bids for the shares
that are above offer price.
53 Excessive Commission
54 Sets offer price significantly below
the market price that would occur by
the end of the first day of trading,
investors were willing to
accommodate the business.

55Distorted Financial
Statements.
 56 With the info. Provided by the
Financial Statements, investors
decide whether the offer price of
shares at the time the IPO is below or
above their validation, which dictate
whether they purchase shares. To
the extent that financial statements
so may be the validations.

LONG TERM
PERFORMANCE
FOLLOWING IPOs
 IPOs perform poorly over a
period of a year or longer. Thus,
many IPOs are overpriced at the
time of the issue. These due to
FIRST, this weal performance may
be partially attributed to irrational
valuations at the time of the IPO,
which are corrected over time.
SECOND, the poor performance ff.
an IPO may be caused by the firm’s
managers, who may spend
excessively and waste some of the
funds received from the IPO by
making bad investments. THIRD,
some firms might have
exaggerated their earnings at the
time of the IPO in order to
maximize the price at which the
shares can be sold. The price
corrected downward over time
once it becomes obvious that the
firm cannot sustain such a high
earnings level.
STOCK OFFERINGS AND
REPURCHASES
SECONDARY STOCK OFFERINGS
57 A new stock offering by a specific firm
whose stock is already publicly traded.
Requires to be registered in the SEC.

Shelf Registration. Corporations can publicly

place securities w/o the time lag often caused
by registering with the SEC. Wherein,
Corporations can fulfill SEC requirements as
many as two years before issuing new
securities.

STOCK REPURCHASES
 58 With the help of corporate managers
asymmetric information. When they believe
that their firms stock is undervalued, they can
use the firms excess cash to purchase a
portion of its shares in the market at a
relatively low price base on their valuation of
what the shares are really worth. Firms tend to
repurchase some of their shares when share
price are at very low levels.

STOCK EXCHANGES
59 Any shares of stock that have
been issued as a result of an IPO or a
secondary offering can be traded by
investors in the secondary market.
ORGANIZED EXCHANGES
60 Each organized exchange has a
trading floor where floor traders
execute transactions in the
secondary market for their clients.

EXAMPLE:
 NYSE has trading floors where
trades can be executed. There are two
broad types of members: Floor Brokers,
which is either commission brokers that
are employed by brokerage firms and
execute orders for clients on the floor of
NYSE or Independent brokers that trade
for their own account and are not
employed by any brokerage firm. The
other member is the specialist where it
match order of buyer and sellers. In
addition, they can buy or sell stockfor their
own account and thereby create more
liquidity for the stock.

OVER-THE-COUNTER MARKET
 61 Stocks not listed on the organized
exchanges are traded in the over-the-
counter(OTC) market. OTC market
also facilitates secondary market
transactions and does not have a
trading floor instead the buy and sell
orders are completed through a
telecommunications network. It is
also necessary to register wit the
SEC,.

OTC Bulletin Board

62 A list of stocks that have a price
below $1 per share, which are
sometimes referred to penny
stocks
63 - more than 3, 500 stocks are
listed here

Pink Sheets
64 Is
another segment of OTC
Bulletin Board
65 These stocks typically do not
satisfy the Nasdaq’s listing
requirements
66 financial data are very limited
67 pinksheets market do not have
to register with the SEC

Stock Quotations
- an estimate of price or a price at which
one party is willing to buy or sell a certain
number of shares of stock from the other

Note: Stock price are absolutely

determined by changes in supply and
demand

Illustration of SQ:
Formula:

Dividend Per Share =

Total Dividend Paid ÷
No. of Outstanding
Shares Issued

Example:
 Company A announced a
total dividend of $500,000
paid to shareholders in the
upcoming quarter. Currently,
there are 1 million shares
outstanding

Formula:

Dividend Yield
=Dividend Paid Per
Share ÷ Prevailing
Stock Price
Formula:

PER = Current
Stock Price ÷
Earnings Per Share

Example:
 The Island
Corporation stock is
currently trading at $50
a share and its
earnings per share for
the year is 5 dollars.
Island’s P/E ratio would
be?

ROLE OF
ANALYST
68ANALYST – analyze financial
condition of the firm
69 Detect financial problems
70Publicize opinion
(recommendation)

Stock Exchange
Rules (2002-
2004)
71Prevent obvious conflicts of
interests faced by analyst
72Provide more unbiased
ratings of stocks

Sarbanes – Oxley
Act (2002)
73Ensure more accurate disclosure
of financial information
74Prevent potential conflicts of
interest
75Requires CEO and CFO to centify
audited financial statement and
be accountable

SHAREHOLDER
ACTIVISM
1st: Do nothing and retain
their shares in the hope that
management’s action will lead
to strong stock price
performance
2nd: Sell stock. Those do not
wish to spend time and money
to change
3rd: Engage in shareholder
activism
Communication with the firm
76 Institutional investors
communication to high-level
corporate manager and offer
their concerns about the firm’s
operations.
Proxy contest
77 Formal procedure (voting)
where shareholder’s exercising
control
Shareholder Lawsuits
78 Investors sure the board if
they believe that the directors
are not fulfilling their
responsibilities to shareholders.

Market for Corporate

Control
 79Weak businesses are
subject to a takeover by
more efficient corporations
“market for corporate
control”.

Use of LBOs to Achieve

Corporate Control
80 Acquisition requires a
substantial amount of
financial leverage
(borrowed funds)
Barriers to the Market
for Corporate Control
81 Antitakeover Amendments –
amendment that require
atleast 2/3 of the shareholders
approval vote to take over
 82 Poison Pills – special rights
given to shareholders on the
occurence of specified events
83 Golden Parachules –
discourage takeoever attempts
by increasing cost of
acquisition and protects
managers.

Globalization of
stock markets
84 Purchase of foreign stocks
85 Issuance of stock globally
Methods used to invest
in foreign stocks
Direct Purchases
 86 Through the list of local stock
exchange
87 Through some brokerage
firms

American Depository Receipts –

purchasing ADRs (shares of non-US
stock) attractive for some reasons:

88 Closely followed by US nvestment

analyst
89 ADRs required by SEC with the
GAAp (not available for other non-US
companies)
90 ADR prices are consistently
available and translation into dollars.

International Mutual Funds

 91 Purchase of shares of
(IMFS)/International Mutual
Funds
92Individuals can diversify
across international stocks

International Exchange

93 Traded funds

94 Purchased of ETFs
95ETF represents index
which are listed on
exchange
96 Have lower expenses for
it avoids cost of active
portfolio management