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Business week december 10 2001 p 100 alan clendenning

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Unformatted text preview: he company was also trading at a high price/earnings multiple, about 40 times. Sources: Adapted from Robert Barker, “Weight Watchers: A Little Debt Heavy?” Business Week (December 10, 2001), p. 100; Alan Clendenning, “Weight Watchers Shares Surge,” AP Online (November 15, 2001), downloaded from www.findarticles. com; Elena Molinari, “IPO Market Ends Sluggish Year with a Boom,” Reuters Business Report (December 9, 2001), downloaded from eLibrary, ask.elibrary.com; and Tania Padgett, “Weight Watchers New Plan Offers IPO,” Newsday (November 13, 2001), p. A71, downloaded from eLibrary, ask.elibrary.com. investors around the country and sometimes overseas. In addition to providing investors with information about the new issue, road show sessions help the investment bankers gauge the demand for the offering and set an expected pricing range. After the underwriter sets terms and prices the issue, the SEC must approve the offering. The Investment Banker’s Role Most public offerings are made with the assistance of an investment banker. The investment banker is a financial intermediary (such as Salomon Brothers or Goldman, Sachs) that specializes in selling new security issues and advising firms with regard to major financial transactions. The main activity of the investment banker is underwriting. This process involves purchasing the security issue from the issuing corporation at an agreed-on price and bearing the risk of reselling it to the public at a profit. The investment banker also provides the issuer with advice about pricing and other important aspects of the issue. In the case of very large security issues, the investment banker brings in other bankers as partners to form an underwriting syndicate. The syndicate shares the financial risk associated with buying the entire issue from the issuer and reselling the new securities to the public. The originating investment banker and the syndicate members put together a selling group, normally made up of themselves and a CHAPTER 7 Stock Valuation 319 FIGURE 7.2 The Selling Process for a Large Security Issue The investment banker hired by the issuing corporation may form an underwriting syndicate. The underwriting syndicate buys the entire security issue from the issuing corporation at an agreedon price. The underwriter then has the opportunity (and bears the risk) of reselling the issue to the public at a profit. Both the originating investment banker and the other syndicate members put together a selling group to sell the issue on a commission basis to investors. Issuing Corporation Underwriting Syndicate Investment Banker Investment Banker Originating Investment Banker Investment Banker Investment Banker Selling Group Purchasers of Securities large number of brokerage firms. Each member of the selling group accepts the responsibility for selling a certain portion of the issue and is paid a commission on the securities it sells. The selling process for a large security issue is depicted in Figure 7.2. Compensation for underwriting and selling services typically comes in the form of a d...
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