345 FINAL.docx - CH 15 venture capital and issuing new...

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CH 15 venture capital and issuing new securitiesVenture capital: money invested to finance a new firm-since success of a new firm is highly dependent on the effort of the managers, restrictions are placed on management by the VC company and funds are usually dispersed in stages, after a certain level of success is achieved-VC step in at initial stage when new firm lacks technology or skills, shape them and invest in them-take a fairly active role inside the companyex. Start with 100,000 by founder; 1ststage->VC buys 50% for 500,000, firm value=1M; 2ndstage-> VC buys 1/3 for 1M, firm value=3M (2S.VC. 1M & 2M old invest (½ 1M founder; ½ 1M 1S.VC.))Sources of VC-VC funds, angel investors (investors who finance companies in their earliest stage of growth), corporate VC divisions (corporation that offer venture assistance to finance young, promising companies), private equity investing (investors who offer funds to finance firms that do not trade on public stock, exchanges such as the NYSE or NASDAQ)The Primary Market-new issues (sold from companies to investors)-terms –initial public offering (IPO) –seasoned offering (both public offering)-private placement->go to qualified institutional investors get large amount invested-underwriting: by investment bankers who commit to selling securitiesIPO-benefits of going public: ability to raise new capital, stock price provides performance measure,information more widely available, diversified sources of finance-when a firm requires more capital than private investors can provide, it can choose to go public through IPO-primary offering (when new shares are sold to raise additional cash for company)-secondary offering (when the company’s founders and VC cash in some of their gains by selling shares) investors trading with each otherThe underwriting process-select underwriter-form syndicate-due diligence and road shows-registration statements (Red Herring, Final Prospects)-set offer price and issue security (overallotment option 15%)-aftermarket price stabilization (upto 10 days after offer date)Role of the underwriter/ Investment banks-informational role->due diligence->prospectus-certification-distribution network-pricing (what’s the P for the firm’s value)-allocation-after-market stabilizationIPO process->pick an underwriter
pitch->understand industry and companyresearch analyst] global settlementafter tech bubble->pricing on IPO-underwriter chosen-due diligence-produce prospectus-no price->Red Herring->discounted CF valuation->relative valuationmarket to book, P/E->price range->x shares @ 15-20/share->road shows->info exchange with large investors->book building->orders-># of shares15-20->100,00020 orders 1,000,000->allocation->evening of 10/18firm commitment 10/1810/19buy IPOissue to buyers1820stock starts trading 10/19->close @30closing P on day 1-issuing P=underpricing (30-20=10 underpricing)if place 10 on IPO ->20 undervalue, could invest 20 but only get invest 10->5 overvalue, investors lose 50% of investment, rating decrease, hard to raise$ next timethe cost of raising capital

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