Investment Underwriting: Public and Private Placement

CHAPTER

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Investment Underwriting: Public and Private Placement

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©McGraw-Hill Ryerson Limited 2000

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Foundations of Financial PPT 15-1 Management

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Figure 15-1 Distribution process for an investment deal MaxwellCorporation Corporation Maxwell Managinginvestment investmentdealer dealer Managing Underwritingor orbanking bankingsyndicate syndicate Underwriting

Issues 250,000 additional shares of stock CIBC Wood Gundy 15 investment dealers (including Wood Gundy)

Selecteddealers dealersor orsellers sellersgroup group Selected Brokers Brokers Block Hirt Short

Public Public McGraw-Hill Ryerson


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Figure 15-2 Allocation of underwriting spread Price received

Price paid ($) $19.3725

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Managinginvestment investmentdealer dealer Managing

$19.60

Othersyndicate syndicatemembers members Other

$20.00

Selecteddealer dealergroup group Selected

$20.20

Broker Broker

$20.50

Public Public

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$20.00 if sold to selling group $20.50 if sold to public

$20.20 if sold through broker $20.50 if sold to public $20.50 to public


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Figure 15-3 New corporate issues underwritten in 1998 in Canada 20 18 16

$ billions

14 12 10 8 6 4 2 0

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IPOs common Othe r common shares shares

Convertible pre ferreds

Othe r pre ferreds

Medium term notes

Convertible de bt

Othe r debt

Source : Inve stme nt Dea lers Association

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PPT 15-4

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Figure 15-4 New equity financing, Toronto Stock Exchange, 1988-1998

$ billions

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24 22 20 18 16 14 12 10 8 6 4 2 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

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Public offerings

Private offerings

Rights offerings

So urce : Toron to S tock Excha ng e Re view, 19 98

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Table 15-3 Big international deals - The Americas ($ millions) Country

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Company

Business

Year

Sale Price

The Americas Argentina YPF

Oil and gas

1993

$2,500

Bolivia Brazil

Corani (part of Ende) Cia. Siderurgica Nacional

Power plant Steelmaker

1995 1993

$58 $1,056

Canada Chile

Petro-Canada CTC

Oil and gas Telecommunications

1991 1988

$1,980 $115

Columbia

Banco de Columbia

Banking

1994

$490

Cuba Jamaica

Telecommunications Telecommunications

1994 1987

$706 $61

Mexico

Etecsa Telecommunications of Jamaica Telmex

Telecommunications

1990

$7,000

Panama

Cementos Bayano

Cement

1994

$60

Peru

ENTEL-CPT

Telecommunications

1994

$2,000

Venezuela

Cia. Anonima NacionalTelefonos de VeneZuela

Telecommunications

1991

$1,900

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Percent Major Buyers Private 80% Public offering 51% Dominion Energy (U.S.) 100% Banco Bamerindus, Grupo Vicunha,Banco Gradesco, Banco Itau, Docenave (Brazil) *0% Public offering 100% Bond Corp. (Aus.) 99% Group led by Jaime Gilinski (Col.) 49% Grupo Domos (Mex.) 72% Cable & Wireless (U.K.) 100% Grupo Carso (Mex.), SBC Communications (U.S.), France Cable et Radio (France) 100% Cemex (Mexico) 35% Telefonica de Espana (Spain) 40% Group led by GTE (U.S.) ©McGraw-Hill Ryerson Limited 2000

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Chapter 15 - Outline

LT 15-1

• • • • •

What is Investment Dealing? Functions of the Investment Dealer Underwriting Spread Public Vs. Private Financing for Companies Advantages and Disadvantages of Public Financing • Initial Public Offering and Leveraged Buyout Block Hirt Short McGraw-Hill Ryerson


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What is Investment Dealing?

LT 15-2

• Investment Dealing deals with primary offerings of new securities • The Investment Dealer serves as the intermediary or link between the corporation and the investor • Brings the two parties together by channeling money from one to the other Block Hirt Short McGraw-Hill Ryerson


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Functions of the Investment Dealer

LT 15-3

Underwriter: – buying the security and reselling it to the public (large companies) – selling security on commission basis (unknown companies)

Market Maker: – ensuring an available market by buying and selling the security

Advisor: – on securities issues, mergers and acquisitions, leveraged buyouts, corporate restructuring

Agent: – for private placements, mergers, acquisitions Block Hirt Short McGraw-Hill Ryerson


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Underwriting Spread

LT 15-4

• Spread represents the compensation for those participating in the distribution Spread = Public Price - Issue Price • It is shared by all the participants • Spread on common stocks is greater than spread on bonds Block Hirt Short McGraw-Hill Ryerson


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Public Vs. Private Financing for Companies

LT 15-5

Publicly financed company: – when shares of a company are offered to the public – anyone can buy shares of the stock Privately financed company: – privately owned or held by an individual or family – securities not available to the general public – additional funds may be raised by private placement Block Hirt Short McGraw-Hill Ryerson


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Advantages and Disadvantages of Public Financing

LT 15-6

Advantages of being public: – greater availability of funds (easier to grow and raise money) – prestige

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Disadvantages of being public: – company information must be made available to the public (opening the company up to public scrutiny and criticism) – high costs of going public (expensive) McGraw-Hill Ryerson


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Initial Public Offering and Leveraged Buyout

LT 15-7

Initial Public Offering (IPO): – when a company sells its stock to the public for the first time – company becomes publicly traded Leveraged Buyout (LBO): – money is borrowed to repurchase all the shares of the company resulting in a great deal of debt – when a company “goes private” Block Hirt Short McGraw-Hill Ryerson
