Professional Documents
Culture Documents
Content 1. Introduction. 1 2. Going Public 2 2.1. Advantages of Going Public 2 2.2 Disadvantages of Going Public. 3 2.3. Legal Requirements 4 3. The Initial Public Offerings Process. 6 3.1 Choosing an Investment Banker 6 3.2 Registration 12 3.3 Marketing 13 3.4. Pricing of the Stocks 15 3.5. Theories for Underpricing. 19 3.5.1. Problems with the underpricing 24 3.6 The Offering. 26 4. After-market Stabilizing Activities of the Underwriter 29 5. Conclusion. 33 References 34 II
List of Figures
Figure 1: Source: PricewaterhouseCoopers ............................................................5 Figure 2: An Example for Tombstone announcement..........................................8 Figure 3: Ranking according to proceeds Source: Thomson Financial ...................8 Figure 4: An example for a Red Herring..............................................................14 Figure 5: Source: Carter, Dark, Singh, Underwriter Reputation, Initial Returns, and the LongRun Performance of IPO Stocks, The Journal of Finance, February 1998, pages 285-311 ..............................................................................................25 Figure 6: Average annual returns for the five years after the offering date...........29 Figure 7: Source: Carter, Dark, Singh, Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks, The Journal of Finance, February 1998, pages 285-311 ............................................................................................. 30
List of Tables
Table 1: Direct and Indirect Costs ...........................................................................5 Table 2: Mean first-day returns and money left on the table .................................20 Table 3: Analysts Ratings for an IPO stocks for the period January 2001- July 2002Source: http://bear.cba.ufl.edu/ritter/publ_papers/The%20IPO%20Quiet%20Period%20Re visited.pdf , visited on 05 July 2005 ......................................................................28 III
1. Introduction
The world of finance is complex. There are many aspects, which cannot be fully explained and still confuse the researchers. One of the most discussed topics is that of Initial Public Offerings (IPO) mainly because of the intricate connections between investment bankers (underwriters), issuers and buyers. This paper will try to summarize the whole process of going public and emphasize on the role of the (lead) underwriter in it.
The paper discusses mainly the American way of going public, but the procedure is generally the same for the European market with some differences that are explained in the text. The advantages, disadvantages and the legal requirements for going public are enlightened, in order of understanding the important role, which the underwriter plays in the whole process. The structure and the legal consequences of the due diligence process are presented. The types of agreement between the underwriter and the issuer are described, with the consequences that originate from them. The ways of determining the price and the advantages and disadvantages of any of them are presented, with respect to the importance of the underwriters role in them and the liabilities that she has. The problem with the underpricing is discussed more detailed, since this is one of the big challenges in the IPO process. Some theories that explain this phenomenon are briefly discussed, showing the mechanism that is behind the underpricing problem. Some of the unlawful allocation practices are listed, with examples that show that even the top underwriters use prohibited actions to ensure the successful completion of the IPO process. The importance of the preopening period for the determination of the right market price and the active participation of the underwriter in the bidding during the first day of the offering is emphasized, as well as the fact that the reputation of the underwriter is one of the most important qualities that she possesses, with respect to the choice of underwriter, the initial returns and the long-run underperformance of the IPO stocks.
2. Going Public
A firm is said to go public, when it offers securities to the general public for a first time. Usually the securities offered are unissued ones, but there can be small amounts of securities held by the present owners. The moment in time of going public is very important. There are the so called hot issue periods (periods of high average initial returns and rising volume)1, which are characterized with excess supply of funds and which are the best time to go public. Since, the market changes really fast, the timing of the actions is crucial. Once the decision to go public is made, the time is scarce, thus rapid actions are needed. Therefore, the shelf registration could be very useful in catching the hot issue periods. The shelf registration is a process that allows the firms to fill their pre-IPO registration requirements up to two years before going public. In return for this option, the company must fill quarterly and annually reports with the Securities and Exchange Commission (S.E.C.).2
1 2
Ritter, J.,Initial Public Offerings,http://bear.cba.ufl.edu/ritter, visited on 05 July 2005 www.sec.gov, visited on 06 July 2005
Utal,Inside the deal that made Bill Gates $350,000,000,FortuneJuly 21 1986 p.23-31
2 - an IPO increases the companys net worth, does not need to be repaid and permits additional borrowings; - there is a possibility for a future mergers and acquisitions, using securities instead of cash; - increased access to capital and financial markets - an IPO among with the other reasons can be used as a marketing tool, attracting the customers to the products of the company (Amazon).4
Song, Rhee, Adams,The Initial Public Offering as a marketing tool,Business horizons, vol.44,no.4, p. 49-54 5 Chen, H., Ritter, J.,The Seven Percent Solution, Working Paper,Journal of Finance 55, 1105-1131
3 removal of the owner (Apple Computers). The time and the efforts of the managing team that must be devoted to the preparation of the whole process and consequently to the research, needed for the quarterly and annual financial statements are also a large disadvantage. By the rule of thumb, a firm should go public if the advantages of IPO are more than the disadvantages. If not, there are lots of alternatives to the IPO process, (asset-based lending, venture capital, private placement etc.). In 2004 in U.S.A 179 operating companies went public.6
and the Sarbanes-Oxley Act of 2002 (increases the company responsibility, oversees the activities of the auditing business)7
6 http://bear.cba.ufl.edu/ritter/work_papers/Some%20Factoids%20about%20the%202004% 20IPO%20Market.pdf, visited on 26 June 2005 7 http://www.sec.gov/about/laws.shtml, visited on 06 July 2005
US$ 19.99
The Role of the Underwriter in the Initial Public Offering Process Author Georgi Georgiev Year 2005 Pages 40 Archive No. V72982 ISBN (eBoo k) 978-3-638-63031-3 I S B N ( B o o k ) 978-3-656-20890-7
10.3239/9783638630313
667 KB
English
RoleUnderwriterInitialPublicOfferingProcess Quote paper Georgi Georgiev , 2005, The Role of the Underwriter in the Initial Public Offering Process, Munich, GRIN Publishing GmbH, http://www.grin.com/en/e-book/72982/the-role-of-the-underwriter-inthe-initial-public-offering-process Embed in website or blog
DOI
Similar texts
INSEAD School
Business economics - Business Management, Corporate Governance Term paper, 44 Pages US$ 22.99
Wertorientierte Kennzahlen (EVA, CVA, MVA) Inkl. Beispiele aus dem Untern...
BWL - Sonstiges Term paper, 29 Pages US$ 19.99
Blue Ocean Strategy. Darstellung und Analyse eines neuen Instruments d... Im Vergleich zu etablierten Un...
BWL - Unternehmensfhrung, Management, Organisation Bachelor Thesis, 51 Pages US$ 22.99
US$ 1.31
Neue Kapitalregeln in Basel II - Quantitative Eigenkapitalanforderung Das Rating und die Auswirkunge...
BWL - Bank, Brse, Versicherung Term paper, 22 Pages US$ 19.99
Auswirkungen der Umstellung von HGB auf IAS/IFRS auf Gewinnausweis und
BWL - Rechnungswesen, Bilanzierung, Steuern Term paper, 19 Pages US$ 19.99
<="" section="" style="margin: 0px -20px; padding: 15px 20px 0px; border-bottom-width: 0px; background-color: rgb(255, 255, 255); color: rgb(0, 0, 0); font-family: Arial, sans-serif; fontsize: 12px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 16.796875px; orphans: auto; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; widows: auto; word-spacing: 0px; -webkit-text-stroke-width: 0px;">
Comments
No co