Corporate Finance Mini Case
Pair assignment (5%)
Datuk Zack (the CEO of UnitedColors Sdn Bhd, hereafter known as UC) and Mr Eric Lim (the Vice President of Finance division of UC) have been discussing the future of UC. The company has been experiencing fast growth, and the future looks like clear sailing. However, the fast growth means that the company's growth can no longer be funded by internal sources, thus Datuk Zack and Mr Eric have decided the time is right to take the company public. To this end, they have entered into discussions with the Maycommercial, a reputable local investment bank that you work for. UC has a working relationship with Madam Lily, the senior lead underwriter who assisted with the previous bond offering. Maycommercial have helped numerous small companies in the IPO process, thus the CEO and vice president of finance division feel confident with this choice.
Madam lily begins by telling them about the process. Although Maycommercial charged an underwriter fee of 4percent on bond offering, the underwriter fees is 7% on all initial stock offerings of the size of UC 's initial offering. Madam Lily tells them that the company can expect to pay about RM 1,600,000 in legal fees and expenses, RM15,000 in SEC registration fees, and RM20,000 in other filing fees. Additionally, to be listed on the Malaysian Main Market, the company must pay RM100,000. There are also transfer agent fees of RM9,500 and engraving expenses of RM540,000. The company should also expect to pay RM125,000 for other expenses associated with the IPO.
Finally, Madam Lily tells the CEO and the Vice President that to file with the SEC, the company must provide 3-years's worth of audited financial statement. She is unsure of the cost of audits. Mr Eric tells Madam Lily that the company provides audited financial statement as part of its bond indenture, and the company pay RM300,000 per year to outside auditor.
As a finance executive in Maycommercial, your first task is to prepare a report to Madam Lily regarding the proposals. You should address all the FOUR issues as below.
1) At the end of the discussion, Mr Eric asked Madam Lily about the Dutch auction IPO process. What are the differences in the expenses to UC if it uses Dutch auction IPO compared to traditional IPO? Do you think UC should go public with a Dutch auction or use a traditional underwritten offering?
2) During the discussion of potential IPO and UC's future, Mr Eric states that he feels the company should raise RM60Million. However, Datuk Zack points out that if the company needs more cash soon, a secondary offering close to the IPO would be potentially problematic. Instead, she suggest the company should raise RM90 million in the IPO. Suggest to Madam Lily how can optimal size of IPO is calculated? Besides, justify any advantages and disadvantages of increasing the size to RM90 million.
3) After deliberation, Datuk Zack and Mr Eric have decided that the company should use firm commitment offering with Maycommercial as the lead underwriter. The IPO will be for RM70 million. Ignoring underpricing, how much will the IPO cost the company as a percentage of the funds received?
4) Currently, UC has 1500 employees. Many of the employees of UC have shares of stock in the company because an existing ESOS (Employee stock option scheme). To sell the stock, the employees can tender their shares to be sold in the IPO at the offering price, or the employees can retain their stock and sell it in the secondary market after UC goes public. (The lock up period for the IPIO is 180 days). Madam Lily asks you to advise the employees about which option is best. What would you suggest to the employee?
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