going public – ipo lecture. venture capital process seed money 1st round financing 2nd round...

Going Public – IPO LectureGoing Public – IPO Lecture

Venture Capital Process

SeedMoney

1st RoundFinancing

2nd RoundFinancing

Clean-upFinancing

Year 1 Year 3 Year 5

Private InvestmentVenture Capital Firms

Going Public - Details Forms (audited

financials) S-1 (large offerings) SB-1 (<$10m) SCOR (<$1m)

Direct Public Offering (DPO)

Usually issue 20-40% Primary v. Secondary

issue (unseasoned v. seasoned)

Investment Bankers)

Due Diligence File with SEC Market securities

Preliminary Prospectus (“red-herring”)

File S-1 documents “Road Show” to potential

purchasers (mutual funds)

Costs (7% spread, underpricing IPO)

The benefits of IPO

Enhance the corporate’s reputation Increase the game capability with the financi

al institutions Establishing a new raising funds method by

capital market Received the capital advantage in more che

aper funds

IPO process On the Road

Underwriters and management team put together road show for prospective big investors, no media, last about 2 weeks; major cities.

Can discuss business prospects, but only orally; can expand the prospectus but not differ from prospectus

Lead underwriter gets indication of interest Final prospectus is printed, distributed for investors Investors subscribe to stock at an offering price

After market closes, day before public trading (IPO declared effective)

List of buy/sell orders called the book Difference between offering price and syndicate price about 7 to 8

% (gross spread) – split between broker and underwriter

IPO process 6 to 8 weeks before SEC registration

Issue Red Herring to see interest (filed with SEC) –no price or size Called Red Herring because of statements outlined in “RED”

Hold All-hands meeting, for IPO team and lead underwriter to decide responsibilities

Start developing final prospectus SEC Registration

Filing of S-1 documents and prospectus SEC imposes quiet period (until 25 days after IPO) SEC reviews documents

Form syndicate Lead underwrite forms group of underwriters to help sell deal,

syndicate members are allocated shares to sell (best-effort or bought deal/firm commitment)

IPO process Market opens, stock trades

Lead underwriter responsible for smooth trading Can support stock, become market maker (SEC rules)

Research: Over 50% of trading volume for first couple months Research: Buy back stock after trading (4% to 22%) – Why?

Impose penalty bids on brokers for flipping IPO declared final (completion) 5 to 7 days after market debut.

Quiet Period Ends (25 days after trading) Press and brokers can start covering stock New information can be issued by firm

Lock-up Period Ends (180 days after trading) Insiders can start selling stock Piggyback registration

Some issues of IPO

IPO underpring Scale of IPO and stock structure Mechanism selecting of selling

IPO underpring信息不对称与 IPO 折价

投资者之间的信息不对称

投资者与发行公司的信息

不对称认购风潮

投资者的信息优势

发行公司的信息优势赢家的诅咒

基本框架

现金流量价值 IPO 折价的目的私人控制利益

规避外部股权介入

吸引外部股权介入监督提升公司价值

优先分配给中小投资者

优先分配给机构投资者

Biais and Faugerson-Crouzet

Biais, Bosscarts and Rochet

信息结构

外部人中的机构投资者有私人信息

承销商与机构投资者有私人信息

承销机制

公开申购

单一价格竞拍

Mise en Vente

单一价格竞拍

Mise en Vente

价格发现功能

弱中好好弱

The Winner’s Curse Problem and IPO Underpricing

Firm A is planning to go public by selling 2,000 shares. The true value of Firm A shares is either $8 or $12 with equal probabilit

ies. Therefore, the expected price of the shares is $8 * (1/2) + $12 * (1/2) =

$10. Let’s suppose that the IPO offer price is set at the $10 expected price

… There are two groups of investors planning to subscribe for the IPO:

Informed investors: Learn the true value of the shares before the IPO and subscribe accordingly:

If they learn that the true price is $12, informed investors subscribe 2,000 shares.

If they learn that the true price is $8, informed investors subscribe ZERO shares.

Uninformed investors: Don’t know the true price but know the expected price. Subscribe 2,000 shares.


Now, let’s see the contingent payoff diagram with $10 offer price and 2,000 shares sold.

There is obviously a wealth transfer from uninformed investors to informed investors. Uninformed investors who are aware of this problem will be unwilling to subscribe to the IPO unless the IPO is underpriced (the price is set somewhere below $10 where the expected profits to uninformed will be $0.)

Prob. OFFER Uninformed Informed

1/2

True price = $12

Offer price = $10

Receives 1,000 shares

Profits = $2,000


Profits = $2,000

1/2

True price = $8

Offer price = $10


Profits = - $4,000

Receives 0 shares

Profits = $0

Exp. E(profit) = -$1,000 =

0.5*2000 + 0.5*-4000

E(profit) = $1,000 =

0.5*2000 + 0.5*0


So, the question is what offer price do issuing firms set to make sure that the expected payoff to the uninformed will be $0 ?

The offer price that will induce the uninformed to subscribe is calculated as follows:

(1/2) * (1,000) * ($12 – OP) + (1/2) * (2,000) * ($8 – OP) = $0

$6,000 – 500 * OP + $8,000 – 1,000 * OP = $0

$14,000 = 1,500 * OP

OP = $9.33

Why do issuers like to attract uninformed investors to subscribe?

Because the existence of uninformed investors reduce the likelihood that a fixed price offer fails.

A case analysis: Google’s IPO Strategy

Outline Google’s Background & Financials Traditional IPOs Google’s IPO Strategy Dutch Auction Conclusion


Google’s Background Founded in 1998 by Stanford University students Larry

Page (31) and Sergey Brin (30) Started in a garage, 3 people Now employs more than 2,200 Its search algorithm out-powers all rivals Its name has become synonymous with Internet search 2 Main sources of revenue:

Giving advertisers the chance to display links to their sites Providing Google search capability on other Web sites

Main competition: Yahoo and Microsoft Factoid: the original name of Google was BackRub


Google Financials: Pre-IPO Estimated Value before going public: $15M -

$20M Estimated Annual Revenue - $500M - $1B

Generates 95 percent of its revenue from advertising. Estimated Profits - $150M - $300M IPO could generate $4B

Had an audience of 60 million unique visitors, or 40 percent of all U.S. Internet users.

Income Statement of Goole


Traditional IPO Company chooses an array of investment banks – led b

y one or two lead managers Investment bank sets price Bank sells to investors (Fidelity, wealthy individuals) Prices are usually set low to ensure a big first day run fo

r investment banks and their clients Investors resell to public (typically at a higher price)


Technical Industry Background of IPOs During the boom years of the 1990s, 400 comp

anies went public each year In 2003, only 69 companies completed IPOs(4 o

f which were dot-coms). This is the fewest since the 1970s

Weak market in 2004


Google’s IPO Strategy In April 2004, Google announced plans to make

its stock available via Dutch Auction Underwriters

Morgan Stanley and Credit Suisse First Boston Eighth largest IPO in history

E-mailed the selected bidders their price range Defied conventional wisdom by choosing to go

public in August, when the IPO market typically slows


Google estimated the price of its shares at well above $100 at a time average IPOs commanded far less

Predicted share price Between $108 and $135 each

Class A and Class B common stock Class A will have 10 votes per share; Class B wi

ll have 1 vote per share Founders did not want to lose control


Google’s Decision: The Dutch Auction Online auction Investors bid on an IPO before it goes public Benefits: in theory a fair market price is set and the com

pany reaps more cash Sets price on demand Investment bankers do not set the price Bankers do not control which investors get in. Equal opp

ortunity for every level of investor. Get sold directly to the public – cuts out the middle man


Aug 13, 2004 No IPO Delayed a week because of logistics details. Couldn’t e

nter everybody in the auction system. Morgan Stanley - “This is all new to us, but we just hit a

speedbump” August 18, 2004

Google stock (GOOG) opens at $100.01, after being priced at $85.00 ， lower than original ($108 - $135)

shares offered: 19.6 million ， Much less than original (25.7 million)


Was Google’s IPO strategy successful? Concerns leading up to the IPO

Google to issue 2.7 million shares to Yahoo! Due to settlement over a patent issue

Management may have broken securities laws in 18 states by neglecting to register stock previously distributed to its employees

No explicit growth plans outlined to SEC Overpriced stock in a weak market

A case analysis: Google’s IPO Strategy Success

Pricing did in fact become transparent Google remained a Good IPO in a Bad Market Opened the door for similar-sized companies to consider using t

he Dutch Auction Method

Failure Google left money on the table It scared off retail investors with a high price tag and annoyed

Wall Street Final auction price fell well below the initial price range Lower-than-expected price for shares raised fresh doubts about

the auction process

going public – ipo lecture. venture capital process seed money 1st round financing 2nd round...

Documents

true price

expected price

syndicate price

offer price

ipo team

public trading ipo

ipo underpricingnow

ipo underpricingfirm