IPOs Flashcards
(19 cards)
what are the 3 areas of work required for an IPO?
legal: “offering circular” with terms, conditions, company and industry outlook as well as due diligence.
valuation: with estimation of cashflows and cost of capital estimated by investors as well as an equity story.
negotiation: continuous process with 2 counterparties, the stock exchange and the market regulator (in Italy CONSOB, in gergon “watchdog institution”).
IPO timeline (6 steps)
-kickoff meeting to organize the mansions
- stock exchange regulator meeting to communicate the intention to go public
-draft preliminary valuation and offering circular to officially apply with the watchdog
-ITF (intention to float) and IPO launch: you announce you want to go public to investors. LAST CHANCE TO RENOUNCE AS AFTER ANNOUNCEMENT IT BECOMES VIRTUALLY IMPOSSIBLE. it is usually followed by a road show to build up the book.
-finalisation of valuation and draft of prespectus and official governments.
-IPO
what is an underwriting agreement?
document that dictates underwriting terms, size, consortium of underwriters etc. ATTENTION: underwriting only materializes at the end of the process, once the price is actually set.
what are the 5 determinants of price range?
-comps
-DCF valuation
-market conditions
-company objectives
-investor feedback.
what is the discount applied wrp to comparable companies in an IPO called?
discount to peers
why would a bank decide not to sell at the highest possible price if the deal is slightly oversusbcribed at that level?
to grant a healthy and liquid trading pattern in the secondary market. you must find a mid-way point between oversubscription and proceeds.
who are the more price sensitive clients, how can that impact your pricing decision?
long money clients tend to be more conservative in their trades as they do not have a second leg in the trade (unlike often hedge funds). these are often considered to be high quality clients that you want in your shareholder base–> you might reduce price so as to include them in spite of reduction in proceeds (in the case from 15.25 down to 15)
in summary which are the advantages of oversubscription?
-healthy secondary market trade
-increased quality of shareholder base
-buffer against possible withdrawals (as offers in the book are non binding)
who has the main say in how shares are allocated in an oversubscribed deal? how can it be done?
usually the client decides on a proposal by the global coordinator, it can be done arbitrarily but usually is done pro-quota based on initial subscriptions. the share reserved to retail investors is fixed in stone.
what are the issues with a largely retail subscribed deal?
the retail investors are uneducated and large retail subscription sends a bad signal about the quality of the deal, indeed, in retail deals it is often required by regulators for the deal to be capped at a price established by institutional investors for the sake of protection.
what is the ideal oversubscription for a deal?
usually between 2x and 3x
what is the composition, in terms of shares, of an IPO? (2 elements) what is the distinction among the 2 groups?
base+ green shoe (100%+15%). the first group is to be sold in the market, the 15% of green shoe is loaned to the bank by the issuer.
what is the purpose of the green shoe?
to aid in case of initial price drop, the initial 15% of green shoe is immediately sold in the market, however, if the price goes down the bookmaker purchases shares on the market up to 15% of the size of the offering for up to 1 month after the IPO date in order to stabilize the price. (TO NOTE: although initial price manipulation would usually be illegal, the authorities allow IBs to do so in the first month of trading)
how does the bookmaker close its position on the borrowed shares of the green shoe?
if price goes initially up the bookmaker does nothing, once he receives payment (115% of shares at initial price) he returns the borrowing in cash. If the price goes down, IBs rebuy the green shoe from the market to support price and after 1 month they return the shares in kind.
how are profits from repurchase of green shoe shares allocated?
the allocation is regulated within the underwriting agreement. might go to the initial issuer or to the global coordinator.
what was prysmian’s price range?
13.25 to 16.75 pps
in what order do investors join during bookbuilding? what are the last marketing efforts devoted to?
sector investors and mid cap specialists–> institutional–> retail (once you have momentum). Final marketing efforts aim at reducing price sensitivity and stabilize books to obtain the highest valuation possible.
what are 3 key points to consider when pricing an issuance? what is the final objective of pricing?
-discount to peers must be attractive
-feedback from the books and bookbuilding process
-anchored orders from sizeable and high quality investors
final objective is to achieve a satisfactory valuation while ensuring stable trading on secondary markets.
how were Prysmian shares allocated
considering its international nature the US share was kept constant and UK was increased. italian, french and other investors received a downward revised allocation.
