Vade Mecum - Ipo

Vade mecum – IPO  IPO – first sale of stock by company to the public  Companies  Private – few shareholders and not so strict in terms of disclosure of information  Public – large number of shareholders and very strict regulations  Why go Public?  Easier to obtain cheaper debt  Prestige  If demand exists then issue more  Trading in open markets means liquidity  The Process  Underwriting – raising money through debt or equity (in this case equity) 

Middlemen between issuers and public

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Company & Investment Bank negotiate deal •

Firm Commitment – IB guarantees that a certain amount will be sold by buying the entire offer and then reselling to the public; responsible for unsold inventory

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Best Efforts agreement – underwriter sells securities but does not guarantee the amount raised

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Deal agrees then sent to SEC with all relevant financial info

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“Cooling off period” •

SEC evaluates

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Underwriter puts together Red Herring - initial prospectus (w/o offer price and effective date

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With Red Herring – Underwriter and Company put up a “Dog and Pony Show” to court institutional investors

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Offering Circular – abbreviated prospectus given to individuals and brokerages to generate interest abt the IPO

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Price arrived at

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Stock sold to investors

Epili Sagar ©

Vade mecum – IPO •

Tombstone – a written advertisement placed by investment bankers giving basic details of the issue

 IPO - hard for small investors to get their hands on  Things to Consider  No History – scrutinise Red Herring  Management goals for use of IPO money  Underwriters? Big or small?  Research asa possible on company  Lock-up period – a time period specified by underwriter till which insiders of company cannot sell their stocks. But asa they can, they all sell to realise profits and it puts a downward pressure on price.  Flipping – IPO stock is sold in early days to earn quick profit 

Discouraged since company looking for LT investors

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PTN – be wary of buying IPO shares in early days because price will see sharp fall once institutions book profits.

 Avoid Hype – buy if you consider it a good investment; not just because it is an IPO  Other Terms  Eating Stock – when underwriter is forced to buy stock if it is unable to sell the IPO  Greenshoe Option – whereby underwriter is allowed to sell more stock than originally intended because the supply increases to meet the demand and prevents wild price fluctuations  Greensheet – summary of prospectus outlining both GOOD and BAD points of the IPO for the insiders of an underwriting firm.

Epili Sagar ©