Financial Markets and Institutions: Chapter 10

Chapter 10 Stock Offerings and Investor Monitoring: describe the private equity market, describe investor participation in the stock markets, describe the process of initial public offerings, describe the process of secondary offerings,...
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Financial Markets and Institutions: Chapter 10 FinancialMarketsandInstitutions Abridged10thEdition by Jeff Madura © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.1 Part 4 Equity Markets2 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Stock Offerings and Investor 10 Monitoring ChapterObjectives ■ describetheprivateequitymarket ■ describeinvestorparticipationinthestockmarkets ■ describetheprocessofinitialpublicofferings ■ describetheprocessofsecondaryofferings ■ explainhowthestockmarketisusedtomonitorand controlfirms ■ describetheglobalizationofstockmarkets © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.3 Private Equity Privateequityisabusinessthatisprivatelyheldandthe ownerscannotselltheirsharestothepublic. Somebusinessownershopetogopublicsothat: ■ Theycanobtainfinancingtosupportthefirm’sgrowth ■ Theycan“cashout”bysellingtheiroriginalequityinvestmenttoothers. Apublicofferingisfeasibleif: n Theownerswanttosellatleast$50millioninstock. n Theshareholderbasewillbelargeenoughtosupportanactivesecondarymarket.4 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Private Equity FinancingbyVentureCapitalFunds n Venturecapitalfunds(VCfunds)receivemoneyfromwealthyinvestorsand frompensionfundsthatarewillingtomaintaintheinvestmentforalongterm period,suchas5or10years. n Investorsarenotallowedtowithdrawtheirmoneybeforeaspecifieddeadline.5 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Private Equity VentureCapitalMarket n BringstogethertheprivatebusinessesthatneedequityfundingandtheVCfunds thatcanprovidefunding. TermsofaVentureCapitalDeal n AVCfundwillnegotiatethetermsofthedealwhenitdecidestoinvestina business. n TheVCfundwillsetoutrequirementsforthebusinessandVCfundmanagers mayserveasadviserstothebusiness.6 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Private Equity ExitStrategyofVCFunds n VCfundstypicallyplantoexitin4to7yearsbysellingtheequitystaketothe public. FinancingbyPrivateEquityFunds n Privateequityfundspoolmoneyprovidedbyinstitutionalinvestors(suchas pensionfundsandinsurancecompanies)andinvestinbusinesses. n Theyalsorelyheavilyondebttofinancetheirinvestments.7 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Public Equity ■ Whenafirmgoespublic,itissuesstockintheprimary marketinexchangeforcash. ■ Goingpublichastwoeffectsonthefirm. § Itchangesthefirm’sownershipstructurebyincreasingthe numberofowners. § Itchangesthefirm’scapitalstructurebyincreasingtheequity investmentinthefirm. ■ Stockmarketsarelikeotherfinancialmarket ...