VC Quiz 5

Since _, when _, the amount of _ has significantly outstripped the # of VC-backed IPOs

'0T Sarbanes-Oxley legislation passed VC-backed M&A

3 things Sarbanes-Oxley said/did:

- Ceo on the hook if acct statements are wrong - Two ppl in acct dept have to sign off on purchases - Made it annoying to be a public co

lockup period (two pts)

- remaining shares cannot be sold by co insiders and large stakeholders (incl VCs) until end of lockup period; rule is set in prospectus - at end of lockup period, VC and founders can sell the rest of their stakes; VC can now exit but often doesn't

two actions of prospectus step

1. File S-1 registration (prospectus) with sec, get approval T. Contains all relevant fin'l and biz info

6 actions/questions of pre-prospectus period

1. How much money to raise? T. What type of security to issue? 3. preliminary valuation 4. choose lead underwriter and other underwriters in the syndicate (beauty pageant, bake-off) 5. negotiate underwriting contract 6. get board approval

4 actions of registration period:

1. Mgmt can talk publicly only abt items in prospectus T. Road show = Dog and pony show; mgmt travels around the world to meet with potential investors and answer their questions; goal is to build hype so as to get a good IPO price 3. Book building = Underwriters accept orders for shares from investors indicating the number of shares they want and the px they are wiling to pay. Goal = discover the right price for IPO and find investors to buy the IPO shares 4. Amend prospectus as needed

8 steps in the IPO process

1. Pre-prospectus period (duration: several months) T. The prospectus 3. Registration period 4. Pricing the issue 5. The IPO 6. Covering the short/Greenshoe 7. end of "quiet period" (40 days after IPO) 8. end of lockup period (90-180 days after IPO)

a well known empirical fact about IPOs is that ... _ want the pop _ don't want the pop

they pop during the first day of trading underwriters founders

IPO def; also referred to as _ or _

when a company sells shares to the public for the first time public offering, flotation

11 cons of going public:

1. Public filings means more scrutiny, revealing secrets, upsetting investors T. IPO is not an immediate exit 3. IPO process is costly and time consuming; plus, explicit costs from fees, mgmt time, IPO underpricing 4. Too much focus on ST results (may skip some good investments in R&D, SG&A) 5. Could reveal a true, lower value, OR public investors will undervalue you 6. expose self to hostile M&A/activist HFs 7. Public trading means stock px will move in a v visible way 8. Too many cooks in kitchen (shareholders) 9. Increased poss of shareholder lawsuits 10. Lose some control (board seats) to new public investors 11. An M&A exit could lead to synergies, meaning M&A value could > IPO value (same with M&A control premium)

3 actions of "pricing the issue" step

1. Usually day before or morning of IPO T. Underwriters set i) final offer px for shares and ii) number of shares to be issued 3. Founders/major stakeholders have option to pull IPO at last minute (rare)

7 reasons for IPO underpricing

1. Winner's curse T. Book building 3. Cascades and herding 4. Distribution networks 5. After-market stabilization 6. Spinning 7. Trading commissions

rational explanation for IPO waves: 7 steps

1. drop in investor risk aversion T. drop in risk premia (required reward for holding risk) 3. drop in expected return on market 4. drop in cost of capital 5. stock px's go up 6. investment ideas become positive NPV and require capital, leading to more IPOs 7. future stock returns are lower

9 pros of going public:

1. founders, mgmt can sell shares T. creates currency for future acqu 3. founder keeps control, keeps job 4. free mkt (media buzz) 5. diversifies investor base; bringing in long-term shareholders (stability) 6. can raise $ from large, deep, public mkts (lower financing constraints, so value goes up; also, can do follow-on rounds/seo) 7. can get a high valuation from public mkts (ppl are dumb) 8. Sarbanes-Oxley and other sec/exchange compliance can lead to validation and therefore value going up 9. public scrutiny can increase discipline, causing value to go up

4 steps of "the ipo" step

1. underwirters buy the shares from the company at the offer price MINUS some discount (gross spread usually = 7%) T. Underwriters sell shares to institutional investors; sell at offer price, pocket the 7% profit 3. Shares then begin trading in the open mkt 4. Usually only around 1/4 of company's shares are publicly tradable after the IPO (the "float"); remaining shares are "locked up"

behavioral explanation for IPO waves

Firms issue shares in periods when stocks are overpriced (to exploit irrational investors), like doing a financing round when you know you're overpriced

two trends: - IPO activity since '08 - since 1996 IPOs have always _, and down cycles coincide with _

IPO activity way up since '08 but way down since 1996 come in waves, recessions

"Covering the short" def

If deal doesn't trade well, underwriter buys stock to stabilize the px

Greenshoe

If the deal trades well, the greenshoe will be exercised and the company will issue more stock

IPO recent trends in last twelve months - two months

Jun-Sep: Pullback in activity Oct: Doesn't seem like an abnormal month

underpricing is even stronger for _

VC-backed IPOs

in an IPO, a company will usually do two things

a. issue new shares (to raise money) b. sell existing shares (to transfer ownership)

why would VC agree to a lockup period?

b/c it's a good signal to the mkt

an IPO is also just a _

big financing round for the company

quiet period

btwn IPO and end of quiet period, company insiders are prohibited by law from issuing earnings forecasts, and underwriters are prohibited from making research reports

IPO waves are preceded by _ and followed by _

higher stock mtk returns lower stock mkt returns

firm-commitment IPO

in a firm-commitment IPO, the underwriter carries all the risk by buying the securities from the issuer. firm-commitment IPOs are more common than best-efforts IPOs, in which the underwriter doesn't buy the securities and doesn't guarantee that the company will receive any set amt of money

Another side reason why fewer IPOs: Companies have changed the way they _; historically used to have _, now, _

innovate giant in-house R&D units outsourcing innovaation

_ is replacing IPOs, but think of them as _, not led by VC firms but by _ also, there is a trend toward _

late-stage VC quasi-IPOs MFs, HFs, sov wealth funds M&A exits

_ of IPOs are tech stocks many IPO firms are _

less than half not profitable yet