Going Public – IPO Lecture
Venture Capital Process
Seed
Money
1st Round
Financing
2nd Round
Financing
Clean-up
Financing
Year 1 Year 3 Year 5
Private Investment
Venture 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 financial institutions
Establishing a new raising funds method by capital market
Received the capital advantage in more cheaper 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
弱
好
好
中
弱
价格发现功能
Mise en Vente
单一价格竞拍
Mise en Vente
单一价格竞拍
公开
申购
承销
机制
承销商与机构投资者有私人信息
外部人中的机构投资者有私人信息
信息
结构
Biais, Bosscarts and Rochet
Biais and Faugerson-Crouzet
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 probabilities.
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.
The Winner’s Curse Problem and IPO Underpricing
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.)
Exp.
1/2
1/2
Prob.
True price = $8
Offer price = $10
True price = $12
Offer price = $10
OFFER
E(profit) = $1,000 =
*2000 + *0
E(profit) = -$1,000 =
*2000 + *-4000
Receives 0 shares
Profits = $0
Receives 2,000 shares
Profits = - $4,000
Receives 1,000 shares
Profits = $2,000
Receives 1,000 shares
Profits = $2,000
Informed
Uninformed
The Winner’s Curse Problem and IPO Underpricing
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 = $
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
A case analysis: Google’s IPO Strategy
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
A case analysis: Google’s IPO Strategy
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 . Internet users.
Income Statement of Goole
A case analysis: Google’s IPO Strategy
Traditional IPO
Company chooses an array of investment banks – led by 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 for investment banks and their clients
Investors resell to public (typically at a higher price)
A case analysis: Google’s IPO Strategy
Technical Industry Background of IPOs
During the boom years of the 1990s, 400 companies went public each year
In 2003, only 69 companies completed IPOs(4 of which were dot-coms). This is the fewest since the 1970s
Weak market in 2004
A case analysis: Google’s IPO Strategy
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
A case analysis: Google’s IPO Strategy
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 will have 1 vote per share
Founders did not want to lose control
A case analysis: Google’s IPO Strategy
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 company reaps more cash
Sets price on demand
Investment bankers do not set the price
Bankers do not control which investors get in. Equal opportunity for every level of investor.
Get sold directly to the public – cuts out the middle man
A case analysis: Google’s IPO Strategy
Aug 13, 2004
No IPO
Delayed a week because of logistics details. Couldn’t enter 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 $, after being priced at $， lower than original ($108 - $135)
shares offered: million， Much less than original ( million)
A case analysis: Google’s IPO Strategy
Was Google’s IPO strategy successful?
Concerns leading up to the IPO
Google to issue 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 the 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
