Investment

Banker

Why Issue Equity Publicly

Advantages

Disadvantages

Current stockholders can

diversify.
Liquidity is increased.
Easier to raise capital in the
future.
Going public establishes firm
value.
Makes it more feasible to use
stock as employee incentives.
Increases customer recognition.

Must file numerous reports.

Operating data must be
disclosed.
Officers must disclose holdings.
Special deals to insiders will be
more difficult to undertake.
A small new issue may not be
actively traded, so marketdetermined price may not reflect
true value.
Managing investor relations is
time- consuming

Outline of the IPO process:

Select an Investment Banker (Underwriter)

Register IPO with the SEC

Print prospectus

Present roadshow

Price the securities

After Market Activities

The Underwriter
An underwriter is an investment firm that acts as an intermediary
between a company selling securities and the investing public.
A large IPO is usually underwritten by a syndicate of investment
banks, the largest of which take the position of lead underwriter.
Firm commitment underwriting v/s Best efforts underwriting
Initiate the process of deal negotiation by discussing various issues
like how much money is the company willing to raise and others
Leading IPO writers:
JPMorgan
Merrill Lynch
Goldman Sachs

Registration of IPO

The Securities Act of 1933 (Section 5) requires a registration statement to

be filed with the SEC
The registration statement consists of two parts
The prospectus to be given to every purchaser of the securities
Part II which contains information that need not be furnished to the
public but is made available for public inspection by the SEC
The registration statement allows public to obtain information about the
issue
The underwriter has to verify the information
The Securities Act also makes it illegal to offer or sell securities to the public
without registration
The registration statement has to be signed by directors and principal
officers of the issuer, the underwriters, accountants, appraisers and other
experts

Roadshows

Senior management team, investment banker, and lawyer visit potential

institutional investors
Usually travel to ten to twenty cities in a two-week period, making three to
five presentations each day.
Management cant say anything that is not in prospectus, because company
is in quiet period
Allows the firm and its underwriters to gather information from potential
purchasers

Price the Securities

Since the firm is going public, there is no established price.

Banker and company project the companys future earnings and

free cash flows The banker would examine market data on
similar companies.

Price set to place the firms P/E and M/B ratios in line with
publicly traded firms in the same industry having similar risk and
growth prospects.

On the basis of all relevant factors, the investment banker would

determine a ballpark price, and specify a range in the preliminary
prospectus.

 Investment banker asks investors to indicate how many shares they plan to
buy, and records this in a book.
Investment banker hopes for oversubscribed issue.
Based on demand, investment banker sets final offer price on evening
before IPO.

Statistics:
For 75% of IPOs, price goes up on first day.
Average first-day return is 14.1%.
About 10% of IPOs have first-day returns greater than 30%
For some companies, the first-day return is well over 100%.
Percentage average
first-day returns
120
100
80
60
40
20
0
-20
-40

Year

1960 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000