Essay on United Parcel Service

Textbook Ch. 15

October 21, 2015

8:43 AM

Venture Capital, IPO's, and Seasoned Offerings

Zero-stage: only money from owners and ideas

Venture capital

• Funding a new firm
• Can be from VC's or even banks, pension funds

Angel Investor

• Wealthy individual who can provide funds and even guidance

Require a business plan, and by investing all of your own savings, you signal faith in this business

• Need to make sure founders are committed through compensation plans that support growth

First-stage financing: VC's pay in stages, and get equity in the firm

[pic 1]

You place $0.5M, VC places $0.5M for 50% stake, therefore valuing business at $1M

Second-stage financing: e.g. injecting another 1 million shares but for $1 each this time

[pic 2]

These shares can be bought back by original VC, other VC's or other backers

Original shares went up from $0.50 to $1 now

Private Equity

• Limited-private partnerships

• Often fixed life of 10 years

• Pensions funds/investors = limited partners
• Management company = management partner --> VC?

• Receive fixed fee + some profits to manage

VC's

• Provide advice, management team
• 20-30% pass first-stage, remaining fail

Initial Public Offering

• First offering of stock to general public

• Primary offering

• New shares sold to raise additional cash

• Secondary offering

• Founders and VC's cash in by selling existing shares
• Money doesn’t flow to company

• Can be both primary and secondary at once?

• Can go back to private if company is bought out

• Some smaller public companies might want to be private again due to pressure for profits from shareholders

Underwriters

• Investment dealers who buy issues of securities from a company and resell

Firm commitment

• Buy and re-sell
• Allowed to sell for slight profit known as spread
• Bear risk of not selling all, higher fees

Best-efforts

• Doesn't guarantee sale of all sales, so lower fees
• Lockup period: original SH's can't sell for certain period of time so market isn't flooded

Prospectus

• Formal summary with information on securities

• Doesn’t include price

Underpricing

• Setting price below true value to attract investors
• Costs eaten by firm going public

Winners curse:  average investor more likely to receive more overpriced firms than underpriced firms offerings

Spinning: preferred clients

Flotation costs:

• Underpricing, preparation, legal, accountants, and spread for bankers
• Larger companies pay smaller % than smaller companies

e.g. Shares sold for $50 to underwriter sold to public for $53, so loss of $3 for spread. If after a day of trading price goes to $60, overpricing = $60-$53=$7.00