Investment Banking

Chapter 2: Equity Offerings: Structure and Process

Thach H. Pham1

February 20, 2024

1
thach.ph@ou.edu.vn
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Outline

1 Why Do Companies Go Public?

2 The Offering Structure

3 Price-Setting Mechanisms

4 The Key Steps of the IPO Process

5 Seasoned Equity Offerings (SEOs) & Rights Offerings

Key Concepts & Skills

The offering structure.

How the offering price is set?
How the process of going public works?

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Topic

1 Why Do Companies Go Public?

2 The Offering Structure

3 Price-Setting Mechanisms

4 The Key Steps of the IPO Process

5 Seasoned Equity Offerings (SEOs) & Rights Offerings

Reasons

Cash
To fund new projects
To improve credit standing
Liquidity
Higher value
Non-cash
Acquisition currency
Reputation
Management compensation

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How?

IPO
Dual-track process

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Drawbacks

Burden of disclosure
Compliance costs
Direct costs: fees for lawyers, accountants, consultants,
investment banks
Indirect costs: underpricing

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Topic

1 Why Do Companies Go Public?

2 The Offering Structure

3 Price-Setting Mechanisms

4 The Key Steps of the IPO Process

5 Seasoned Equity Offerings (SEOs) & Rights Offerings

Which Shares?

Primary offering:
Offer for subscription
The proceeds finance the company
Secondary offering:
Offer for sale
The proceeds go to the shareholders

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To Whom?

Public offering:
to all investors
IPO: tranches (retail, institutional, friends and family,
employees)
Private offering:
to targeted institutional investors
employees

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Where?

Domestic (public offering) or international (private offering)

Private placement
the sale of securities to restricted group (accredited investors)
is exempted from registration requirements
However, the securities must be registered before they can be
resold or the subsequent sale must also qualify as a private
placement.

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Which Market?

Home market, foreign market, dual/multiple listing

Why should a firm list in a foreign market?
Concentration
M&A in a foreign country
The domestic market is small & without credibility
The issuer does not meet the listing requirements of the home
market

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American Depository Receipts (ADRs)

Foreign issurers attract US investors by issuing ADRs

Low-cost diversification for US investors
The ADR pay dividend in US dollars

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An Example of A ADR Program

A share (X) traded on the Borsa Italinana at €2

$/€: 1.25
ADR (on NYSE): $5
What is the price of X in $?
What is the ADR ratio (# of shares per ADR)?
If the company wants to raise €100 million. How many shares
and ADRs should be issued?

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Topic

1 Why Do Companies Go Public?

2 The Offering Structure

3 Price-Setting Mechanisms

4 The Key Steps of the IPO Process

5 Seasoned Equity Offerings (SEOs) & Rights Offerings

Open Price (Book-Building)

Roadshow
Issue is presented to institutional investors
A price range is suggested
Allocation of shares is decided by the investment bank on a
discretinary basis
Underwriting

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Fixed Price

The issuer and its investment bank set the price before bids are
submitted
Firm commitment (or underwritten)
Best effort (non-underwritten).

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Auction

Investors are invited to bid for shares, and once the offering is
covered, shares are allocated at a single clearing price.
As for book-building, the price is set after bids are submitted.

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Hybrid

Sequential:
The price is set with book-building prior than retail offer is
opened
Retail investors thus know exactly the price they will pay
Simultaneous:
Institutional and retail offerings are run at the same time
Thus retail investors bid without knowing the exact price they
will pay
Mid way:
During book-building (before the book is closed) a maximum
price is announced and the retail offer is launched
Retail investors do not know the exact price, but just the
maximum they will pay.

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Topic

1 Why Do Companies Go Public?

2 The Offering Structure

3 Price-Setting Mechanisms

4 The Key Steps of the IPO Process

5 Seasoned Equity Offerings (SEOs) & Rights Offerings

The IPO Process

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Preparation (Immediately):

Due diligence and prospectus drafting

Filing with Authority and Stock Exchange

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Approaching the Market (Pre-IPO):

Publication of Pre-IPO research reports

Research black-out period
Pre-marketing
Price range setting
Roadshow and book building
Setting of maximum IPO price
Retail offer period

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Going Public

Pricing and allocation

Start trading (stabilization)

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Topic

1 Why Do Companies Go Public?

2 The Offering Structure

3 Price-Setting Mechanisms

4 The Key Steps of the IPO Process

5 Seasoned Equity Offerings (SEOs) & Rights Offerings

SEOs

Follow-on offerings: primary or secondary.

Bought deal: an investment bank buys shares, then sells the
shares as quickly as possible to institutional investors.
Accelerated book-building: involves targeted marketing to a
small group of investors, over a shortened interval.
Follow a period of strong stock performance by the issuer & the
market.
However, share price usually drops when an equity offering is
announced.
SEOs convey negative message to investors: a manager will
launch an equity offering when he believes the firm’s current
stock price is too high.

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Rights Offerings

Intro
Protect existing shareholders from the dilution
Entitled to purchase new shares in the proportion
Issued at a certain ratio and at discount
If a shareholder does not exercise his rights, unexercised rights
are sold to investors (rump placement)

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Rights Offerings (contd.)

The Theorectical Ex-Right Price (TERP)

(n × P) + (N × S)
TERP =
(n + N)
n: # of shares outstanding
N: number of new shares issued
P: current stock price
S: subscription price

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A Fictional Rights Issue
Pre-right issue
Stock price €2
Number of shares outstanding 1.000
Market capitalization ?
Right issue
Exchange ratio 1
Subscription price €1.5
New shares issued ?
Gross proceeds ?
TERP ?
Gross discount ?
Discount to TERP ?
Right price ?
Post-right issue
Number of shares outstanding ?
Market capitalization ?

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Shareholders’ Wealth in Rights Issues

Consider the previous example: suppose a shareholders holds 100

shares, with 2 per share. He can either subscribes 100 new shares at
1.5 per share or sell the rights at 0.25 each. How are his wealth in
both cases (subscription and no subscription)?

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