FRL ch 15

firm commitment, best efforts, and dutch auction

3 basic types of underwriting involved in a cash offer

value

The ____ of the right is the difference between the old share price and the "new" share price

share

The ____ price will adjust based on the number of new shares issued

less

The price specified in a rights offering is generally _____ than the current market price

rights

____ are given to the shareholders, specify number of shares that can be purchased, specify purchase price, specify time frame

initial public offering

a company's first quite issue made available to the public. Also called an unseasoned new issue or an IPO

syndicate

a group of underwriters formed to share the risk and to help sell an issue

dilution

a loss in value for existing shareholders

seasoned equity offering

a new issue of securities by a company that has previously issued securities to the public

green shoe provision

allows the syndicate to purchase an additional 15% of the issue from the issuer, allows the issue to be oversubscribed, provides some protection for the underwriters as they perform their price stabilization function

underpricing

below market issue price on IPO's

rights

can be traded OTC or on an exchange

Underpricing

causes the issuer to "leave money on the table"

competitive firm cash offer

company can elect to award the underwriting contract through a public auction instead of a negotiation

dutch auction cash offer

company has investment bankers auction shares to determine the highest offer price obtainable for a given number of shares to be sold

best efforts cash offer

company has investment bankers sell as many of the new shares as possible at the agree-upon price. There is no guarantee concerning how much cash will be raised

Firm commitment cash offer

company negotiates an agreement with an investment banker to underwrite and distribute the new shares. A specified number of shares are bought by underwriters and sold at a higher price

direct rights offer

company offers the new stock directly to its existing shareholders

gross spread

compensation to the underwriter, determined by the difference between the underwriter's buying price and offering price

green shoe option

cost of additional shares that the syndicate can purchase after the issue has gone to market

term loans

direct business loans from commercial banks, insurance companies, etc. Maturities 1-5 years, repayable during life of the loan

market value

firm accepts negative NPV projects

underwriters

investment firms that act as intermediaries between a company selling securities and the investing public

rights offerings

issue of common stock offered to existing shareholders, allows current shareholders to avoid the dilution that can occur with a new stock issue

firm commitment underwriting

issuer sells entire issue to underwriting syndicate, the syndicate bears the risk of not being able to sell the entire issue for more than the cost

firm commitment underwriting

issuer sells entire issue to underwriting syndicate, the syndicate then resells the issue to the public, the underwriter makes money on the spread between the price paid to the issuer and the price received from investors when the stock is sold

standby rights offer

like the direct rights offer, this contains a privileged subscription arrangement with existing shareholders. The net proceeds are guaranteed by the underwriters

book value and EPS

occurs when market-to-book value is less than one

quiet period

once a firm begins to seriously contemplate an IPO, the SEC requires that a firm and its managing underwriters observe a " ____ ____". This means that all communications with the public must be limited to ordinary announcements and other purely factual matters

shelf registration

permits a corporation to register a large issue with the SEC and sell it in small portions over a two-year period

abnormal returns

price drop on existing stock

term loans, private placements

private issues of long term debt

direct placement

private method, securities are sold directly to the purchased, who, at least until recently, generally could not resell securities for at least two years.

bonds

public issue of long term debt

shelf cash offer

qualifying companies can authorize all shares they expect to sell over a two-year period and sell them when needed

shelf registration

requirements for ____ _____: company must be rated investment grade, cannot have defaulted on debt within last three years, market value of stock must be greater than $150 million, no violations of the Securities act of 1934 in the last 3 years

percentage ownership

shares sold to the general public without a rights offering

reduces

shelf registration ____ the flotation costs of registration

flexibility

shelf registration allows the company more ______ to raise money quickly

private placements

similar to term loans but with longer maturity

issuance costs

spread, other direct expenses, indirect expenses, abnormal returns, underpricing, green shoe option

decline

stock prices tend to _____ when new equity is issued

best efforts underwriting

the company bears the risk of the issue not being sold

180

the lockup period is commonly ____ days

best efforts Underwriting

the offer may be pulled if there is not enough interest at the offer price. In this case, the company does not get the capital, and they have still incurred substantial flotation costs

lockup agreement

the part of the underwriting contract that specifies how long insiders must wait after an IPO before the can sell stock

aftermarket

the period after a new issue is initially sold to the public is referred to as the ________

drop

the stock price tends to drop when the lockup period expires due to market anticipation of additional shares hitting the street

Firm commitment cash offer, best efforts cash offer, dutch auction cash offer

the three types of Public traditional negotiated cash offer

dutch auctions

the treasury has used these for years, google was the first large ____ ____ IPO

dutch auction underwriting

there is an incentive to bid high to make sure you get in on the auction but knowing that you will probably pay a lower price than you bid

private issues

these are easier to renegotiate than public issues and they are lower in costs than public issues

best Efforts underwriting

this is not as common as it used to be

firm commitment underwriting

this is the most common type of underwriting in the US

direct rights offer, standby rights offer

two types of privileged subscription

shelf cash offer, competitive firm cash offer

two types of public non traditional cash offers

Dutch auction underwriting

underwriter accepts a series of bids that include number of shares and price per share. The price that everyone pays is the highest share price that will result in all shares being sold.

Best efforts underwriting

underwriter must make their "best effort" to sell the securities at an agreed upon offering price

underwriters

who perform services such as the following for corporate issuers: formulating the method used to issue the securities, pricing the new securities, selling the new securities

cash, rights

with a ___ offer, securities are offered to the general public. With a ____ offer, securities are initially offered only to existing owners