公司理财（英文版·第5版）课件 第23章 筹集股权资本

CorporateFinanceFifthEditionChapter23RaisingEquityCapitalCopyright©2020,2017,2014PearsonEducation,Inc.

AllRightsReservedChapterOutline23.1

EquityFinancingforPrivateCompanies23.2

TheInitialPublicOffering23.3I

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OPuzzles23.4

TheSeasonedEquityOfferingLearningObjectives(1of4)Describefourwaysinwhichaprivatecompanycanraiseoutsidecapital.Discusstheeffectsofacompanyfoundersellingstocktoanoutsider.Identifythetwomainexitstrategiesusedbyequityinvestorsinprivatecompanies.Defineaninitialpublicoffering,anddiscusstheiradvantagesanddisadvantages.LearningObjectives(2of4)DistinguishbetweenprimaryandsecondaryofferingsinanI

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O.DescribetypicalmethodsbywhichstockmaybesoldduringanI

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O;discussrisksforpartiesinvolvedineachmethod.EvaluatetheroleoftheunderwriterinanI

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O.LearningObjectives(3of4)DescribetheI

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Oprocess,includingthemethodsunderwritersusetovalueacompanybeforeitsI

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O.IdentifywaysinwhichunderwriterscanmitigateriskduringanI

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O.ListanddiscussfourpuzzlesassociatedwithI

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Os.LearningObjectives(4of4)Defineaseasonedequityoffering,describetwowaysinwhichtheyarebroughttomarket,andidentifythestockpricereactiontotheannouncementofaseasonedequityoffering.23.1EquityFinancingforPrivateCompaniesTheinitialcapitalthatisrequiredtostartabusinessisusuallyprovidedbytheentrepreneurandtheimmediatefamily.Often,aprivatecompanymustseekoutsidesourcesthatcanprovideadditionalcapitalforgrowth.Itisimportanttounderstandhowtheinfusionofoutsidecapitalwillaffectthecontrolofthecompany.SourcesofFunding(1of7)AngelInvestorsIndividualInvestorswhobuyequityinsmallprivatefirms.Findingangelsistypicallydifficult.SourcesofFunding(2of7)VentureCapitalFirmAlimitedpartnershipthatspecializesinraisingmoneytoinvestintheprivateequityofyoungfirmsVentureCapitalistsOneofthegeneralpartnerswhoworkforandrunaventurecapitalfirmSourcesofFunding(3of7)Venturecapitalfirmsofferlimitedpartnersadvantagesoverinvestingdirectlyinstart-upsthemselvesasangelinvestors.Limitedpartnersaremorediversified.Theyalsobenefitfromtheexpertiseofthegeneralpartners.SourcesofFunding(4of7)Theadvantagescomeatacost.Generalpartnersusuallychargesubstantialfees.Mostfirmscharge20%ofanypositivereturntheymake(carriedinterest).Theyalsogenerallychargeanannualmanagementfeeofabout2%ofthefund’scommittedcapital.Table23.1MostActiveU.S.VentureCapitalFirmsin2017*VentureCapitalFirmNumberofDealsAverageInvestedperDeal(in$million)SequoiaCapital219121.0AccelPartners15828.1NewEnterpriseAssociates14831.4YCombinator14112.8500Startups1411.8LightspeedVenturePartners9431.6BessemerVenturePartners8023.3GV(GoogleVentures)7934.9AndreessenHorowitz7841.0KleinerPerkinsCaufield&Byers7834.4SVAngel7510.2GeneralCatalystPartners7434.1*IncludesU.S.firmswithatleast$100millioninvested,rankedbynumberofdeals.Source:Prequin.Figure23.1VentureCapitalFundingintheUnitedStatesSource:NationalVentureCapitalAssociationSourcesofFunding(5of7)PrivateEquityFirmsOrganizedverymuchlikeaventurecapitalfirm,butitinvestsintheequityofexistingprivatelyheldfirmsratherthanstart-upcompanies.Privateequityfirmsinitiatetheirinvestmentbyfindingapubliclytradedfirmandpurchasingtheoutstandingequity,therebytakingthecompanyprivateinatransactioncalledaleveragedbuyout(L

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O).Inmostcases,theprivateequityfirmsusedebtaswellasequitytofinancethepurchase.Figure23.2GlobalLBOVolumeandNumberofDealsSource:DealogicTable23.2Top10PrivateEquityFundsin2017

RankFirmnameHeadquartersFive-YearFundraising

Total(in$billion)1TheCarlyleGroupWashington,D

C60.02BlackstoneNewYork52.33K

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RNewYork51.84ApolloGlobalManagementNewYork45.45C

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CCapitalPartnersLondon42.46WarburgPincusNewYork33.37E

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TStockholm28.78NeubergerBermanGroupNewYork27.69SilverLakeMenloPark26.110T

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GFortWorth25.9Source:PrivateEquityInternational,SourcesofFunding(6of7)InstitutionalInvestorsInstitutionalinvestors,suchaspensionfunds,insurancecompanies,endowments,andfoundations,areactiveinvestorsinprivatecompanies.Institutionalinvestorsmayinvestdirectlyinprivatefirmsortheymayinvestindirectlybybecominglimitedpartnersinventurecapitalfirms.SourcesofFunding(7of7)CorporateInvestorsAcorporationthatinvestsinprivatecompanies.Alsoknownascorporatepartner,strategicpartner,andstrategicinvestor.Althoughmostothertypesofinvestorsinprivatefirmsareprimarilyinterestedinthefinancialreturnsoftheirinvestments,corporateinvestorsmightinvestforcorporatestrategicobjectives,inadditiontothefinancialreturns.VentureCapitalInvesting(1of8)PreferredStockPreferredstockissuedbymaturecompaniesusuallyhasapreferentialdividendandseniorityinanyliquidationandsometimesspecialvotingrights.Preferredstockissuedbyyoungcompanieshasseniorityinanyliquidationbuttypicallydoesnotpayregularcashdividendsandoftencontainsarighttoconverttocommonstock.VentureCapitalInvesting(2of8)ConvertiblePreferredStockPreferredstockthatgivestheowneranoptiontoconvertitintocommonstockonsomefuturedate.VentureCapitalInvesting(3of8)RealNetworks,whichwasfoundedbyRobertGlaserin1993,wasinitiallyfundedwithaninvestmentofapproximately$1millionbyGlaser.AsofApril1995,Glaser’s$1millioninitialinvestmentinRealNetworksrepresented13,713,439sharesofSeriesApreferredstock,implyinganinitialpurchasepriceofabout$0.07pershare.VentureCapitalInvesting(4of8)RealNetworksneededadditionalcapitalandmanagementdecidedtoraisethismoneybysellingequityintheformofconvertiblepreferredstock.VentureCapitalInvesting(5of8)Thecompany’sfirstroundofoutsideequityfundingwasSeriesBpreferredstock.RealNetworkssold2,686,567sharesofSeriesBpreferredstockat$0.67pershareinApril1995.Afterthisfundingroundthedistributionofownershipwasasfollows:BlankNumberofSharesPriceper

Share($)TotalValue($million)PercentageOwnershipSeriesA13,713,4390.679.283.6%SeriesB2,686,5670.671.816.4%Blank16,400,006Blank11.0100.0%VentureCapitalInvesting(6of8)TheSeriesBpreferredshareswerenewsharesofstockbeingsoldbyRealNetworks.Atthepricethenewsharesweresoldfor,Glaser’sshareswereworth$9.2millionandrepresented83.6%oftheoutstandingshares.VentureCapitalInvesting(7of8)Pre-MoneyValuationAttheissuanceofnewequity,thevalueofthefirm’spriorsharesoutstandingatthepriceinthefundinground$9.2millionintheRealNetworksexamplePost-MoneyValuationAttheissueofnewequity,thevalueofthewholefirm(oldplusnewshares)atthepriceatwhichthenewequitysold$11.0millionintheRealNetworksexampleVentureCapitalInvesting(8of8)Overthenextfewyears,RealNetworksraisedthreemoreroundsofoutsideequityinadditiontotheSeriesBfundingroundSeriesDateNumberofSharesSharePrice($)CapitalRaised

($million)BApril19952,686,5670.671.8COctober.19952,904,3051.965.7DNovember.19962,381,0107.5317.9EJuly19973,338,3748.9930.0TextbookExample23.1(1of2)FundingandOwnershipProblemYoufoundedyourownfirmtwoyearsago.Initially,youcontributed$100,000ofyourmoneyand,inreturn,received1,500,000sharesofstock.Sincethen,youhavesoldanadditional500,000sharestoangelinvestors.Youarenowconsideringraisingevenmorecapitalfromaventurecapitalist.Theventurecapitalisthasagreedtoinvest$6millionwithapost-moneyvaluationof$10millionforthefirm.Assumingthatthisistheventurecapitalist’sfirstinvestmentinyourcompany,whatpercentageofthefirmwillsheendupowning?Whatpercentagewillyouown?Whatisthevalueofyourshares?TextbookExample23.1(2of2)SolutionBecausetheV

Cwillinvest$6millionoutofthe$10millionpost-moneyvaluation,herownershippercentageisFromEq.23.1,thepre-moneyvaluationisAsthereare2millionpre-moneysharesoutstanding,thisimpliesasharepriceofThus,theV

Cwillreceive3millionsharesforherinvestment,andafterthisfundinground,therewillbeatotalof5,000,000sharesoutstanding.Youwillownofthefirm,andthepost-transactionvaluationofyoursharesis$3million.AlternativeExample23.1(1of4)ProblemAssumeYoufoundedyourownfirmtwoyearsago.Youinitiallycontributed$50,000ofyourmoneyandinreturnreceived1,000,000sharesofstock.Sincethen,youhavesoldanadditional750,000sharestoangelinvestors.Youarenowconsideringraisingevenmorecapitalfromaventurecapitalist.AlternativeExample23.1(2of4)ProblemAssumeTheventurecapitalistwouldinvest$2millionandwouldreceive2,000,000newlyissuedshares.AlternativeExample23.1(3of4)ProblemWhatisthepost-moneyvaluation?Assumingthatthisistheventurecapitalist’sfirstinvestmentinyourcompany,whatpercentageofthefirmwillheendupowning?Whatpercentagewillyouown?Whatisthevalueofyourshares?AlternativeExample23.1(4of4)SolutionYourshares1,000,00026.67%Angelinvestor’sshares750,00020.00%Venturecapitalist’sshares2,000,00053.33%Totalsharesoutstanding3,750,000100.00%Theventurecapitalistispaying$1pershare.Thus,thepost-moneyvaluationis$3,750,000.Youwillown26.67%ofthefirm,andthepost-moneyvaluationofyoursharesis$1,000,000.VentureCapitalFinancingTermsLiquidationPreferenceSeniorityParticipationRightsAnti-DilutionProtectionDownRoundBoardMembershipTextbookExample23.2(1of3)ProblemSupposethatinadditiontocommonshares,yourfirmraised$6millioninSeriesAfinancingwitha1xliquidationpreference,noparticipationrights,anda$20millionpost-moneyvaluation,and$10millioninSeriesBfinancingwitha3xliquidationpreference,noparticipationrights,anda$40millionpost-moneyvaluation,withSeriesBseniortoSeriesA.IfyousellthefirmaftertheSeriesBfinancing,whatistheminimumsalepricesuchthatcommonshareholderswillreceiveanything?Whatistheminimumsalepricesuchthatallinvestorswillconverttheirshares?TextbookExample23.2(2of3)SolutionSeriesBhasaliquidationpreferenceofandSeriesAhasaliquidationpreferenceofmillion.Therefore,forasalepriceof$30millionorless,onlySeriesBwillbepaid,andanyadditionalamountupto$36millionwillbepaidtoSeriesA.Commonshareholderswillreceivenothingunlessthesharepriceexceeds$36million.TextbookExample23.2(3of3)BecausetheSeriesBinvestorswillreceiveupto3xtheirinvestmentfromtheirliquidationpreference,theywillnotbewillingtoconverttheirsharestocommon(andforfeittheirliquidationpreference)unlessthevalueofthefirmhasatleasttripledfromthetimeoftheirinvestment,orasalepriceofAtthatprice,becauseSeriesBinvestorsownofthefirm,theywillreceivemillionascommonshareholdersandsoarejustwillingtoconvert.SeriesAinvestorsownoftheremainingshares,andsoreceivemillion(andsowillalsoconvert),andtheremainingmilliongoestocommonshareholders.AlternativeExample23.2(1of3)ProblemAssumeInadditiontocommonshares,yourfirmraised$10millioninSeriesAfinancingwitha2xliquidationpreference,noparticipationrights,anda$25millionpost-moneyvaluation.WhatistheminimumsalepricesuchthattheSeriesAinvestorswillconverttheirshares?AlternativeExample23.2(2of3)SolutionSeriesAinvestorshavealiquidationpreferenceof2x$10million=$20millionSeriesAinvestorsownofthefirm.BecausetheSeriesAinvestorswillreceiveupto2xtheirinvestmentfromtheirliquidationpreference,theywillnotbewillingtoconverttheirsharestocommonunlessthevalueofthefirmhasatleastdoubledfrom$25millionto$50million.AlternativeExample23.2(3of3)Solution

At$50million,SeriesAinvestorsarewillingtoconvert,andcommonshareholderswillreceivetheremaining$30million.TheSeriesAinvestorsshareisAt$50million,SeriesAinvestorsarewillingtoconvertandcommonshareholderswillreceivetheremaining$30million.ExitinganInvestmentinaPrivateCompanyExitStrategyItdetailshowinvestorswilleventuallyrealizethereturnfromtheirinvestmentInJuly1997,thepost-moneyvaluationofexistingpreferredstockwas$8.99pershare.However,becauseRealNetworkswasstillaprivatecompany,investorscouldnotliquidatetheirinvestmentbysellingtheirstockinthepublicstockmarkets.23.2TheInitialPublicOfferingInitialPublicOffering(I

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O)Theprocessofsellingstocktothepublicforthefirsttime.AdvantagesandDisadvantagesofGoingPublic(1of2)AdvantagesGreaterliquidityPrivateequityinvestorsgettheabilitytodiversify.BetteraccesstocapitalPubliccompaniestypicallyhaveaccesstomuchlargeramountsofcapitalthroughthepublicmarkets.AdvantagesandDisadvantagesofGoingPublic(2of2)DisadvantagesTheequityholdersbecomemorewidelydispersed.Thismakesitdifficulttomonitormanagement.Thefirmmustsatisfyalloftherequirementsofpubliccompanies.S

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Cfilings,Sarbanes-Oxley,etc.Table23.3LargestU.S.IPOsCompanyNameOfferDateExchangeIndustryUnderwriterDealSize(in$million)AlibabaGroupHolding09/18/2014NYSETechnologyCreditSuisse$21,767Visa03/18/2008NYSEFinancialJ.P.Morgan$17,864ENELSpA11/01/1999NYSEUtilitiesMerrillLynch$16,452Facebook05/17/2012NasdaqTechnologyMorganStanley$16,007GeneralMotors11/17/2010NYSECapitalGoods&ServicesMorganStanley$15,774DeutscheTelekom11/17/1996NYSECommunicationsGoldmanSachs$13,034AT&TWirelessGroup04/26/2000NYSECommunicationsGoldmanSachs$10,620KraftFoods06/12/2001NYSEConsumerCreditSuisse$8,680FranceTelecom10/17/1997NYSECommunicationsMerrillLynch$7,289TelstraCorporation11/17/1997NYSECommunicationsCreditSuisse$5,646Swisscom10/04/1998NYSECommunicationsWarburgDillonRead$5,582UnitedParcelService11/09/1999NYSETransportationMorganStanley$5,470Source:RenaissanceCapitalI

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OHomeTypesofOfferings(1of5)UnderwriterAninvestmentbankingfirmthatmanagesasecurityissuanceanddesignsitsstructure.TypesofOfferings(2of5)PrimaryandSecondaryOfferingsPrimaryOfferingNewsharesavailableinapublicofferingthatraisenewcapitalSecondaryOfferingSharessoldbyexistingshareholdersinanequityofferingTypesofOfferings(3of5)Best-Efforts,FirmCommitment,andAuctionI

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OsBest-EffortsBasisForsmallerI

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Os,asituationinwhichtheunderwriterdoesnotguaranteethatthestockwillbesold,butinsteadtriestosellthesockforthebestpossibleprice.Oftensuchdealshaveanall-or-noneclause:eitherallofthesharesaresoldontheI

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Oorthedealiscalledoff.TypesofOfferings(4of5)Best-Efforts,FirmCommitment,andAuctionI

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OsFirmCommitmentAnagreementbetweenanunderwriterandanissuingfirminwhichtheunderwriterguaranteesthatitwillsellallofthestockattheofferprice.TypesofOfferings(5of5)Best-Efforts,FirmCommitment,andAuctionI

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OsAuctionI

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OAmethodofsellingnewissuesdirectlytothepublicRatherthansettingapriceitselfandthenallocatingsharestobuyers,theunderwriterinanauctionI

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Otakesbidsfrominvestorsandthensetsthepricethatclearsthemarket.TextbookExample23.3(1of3)AuctionI

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OPricingProblemFlemingEducationalSoftware,Inc.,isselling500,000sharesofstockinanauctionI

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O.Attheendofthebiddingperiod,Fleming’sinvestmentbankhasreceivedthefollowingbids:Price($)NumberofSharesBid8.0025,0007.75100,0007.5075,0007.25150,0007.00150,0006.75275,0006.50125,000Whatwilltheofferpriceofthesharesbe?TextbookExample23.3(2of3)SolutionFirst,wecomputethetotalnumberofsharesdemandedatoraboveanygivenprice:Price($)CumulativeDemand8.0025,0007.75125,0007.50200,0007.25350,0007.00500,0006.75775,0006.50900,000TextbookExample23.3(3of3)Forexample,thecompanyhasreceivedbidsforatotalof125,000sharesat$7.75pershareorhigher(25,000+100,000=125,000).Flemingisofferingatotalof500,000shares.Thewinningauctionpricewouldbe$7pershare,becauseinvestorshaveplacedordersforatotalof500,000sharesatapriceof$7orhigher.Allinvestorswhoplacedbidsofatleastthispricewillbeabletobuythestockfor$7pershare,eveniftheirinitialbidwashigher.Inthisexample,thecumulativedemandatthewinningpriceexactlyequalsthesupply.Iftotaldemandatthispriceweregreaterthanthesupply,allauctionparticipantswhobidpriceshigherthanthewinningpricewouldreceivetheirfullbid(atthewinningprice).Shareswouldbeawardedonaproratabasistobidderswhobidexactlythewinningprice.AlternativeExample23.3(1of3)ProblemAshton,Inc.,isselling900,000sharesofstockinanauctionI

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O.Attheendofthebiddingperiod,Ashton’sinvestmentbankhasreceivedthefollowingbids.PriceNumberofSharesBid$10.00175,000$9.75200,000$9.50275,000$9.25275,000$9.00300,000AlternativeExample23.3(2of3)ProblemWhatwillbetheofferpriceoftheshares?AlternativeExample23.3(3of3)SolutionThewinningauctionpricewouldbe$9.25.Price($)NumberofSharesBid$10.00175,000$9.75375,000$9.50650,000$9.25925,000$9.0001,225,000TheMechanicsofanIPO(1of12)UnderwritersandtheSyndicateLeadUnderwriterTheprimaryinvestmentbankingfirmresponsibleformanagingasecurityissuanceSyndicateAgroupofunderwriterswhojointlyunderwriteanddistributeasecurityissuanceTable23.4TopGlobalIPOUnderwriters,Rankedby2017ProceedsSource:/Content/Files/4Q2017_Global_Equity_Capital_Markets_Review.pdf,2017TheMechanicsofanIPO(2of12)S

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CFilingsRegistrationStatementAlegaldocumentthatprovidesfinancialandotherinformationaboutacompanytoinvestorspriortoasecurityissuance.PreliminaryProspectus(RedHerring)PartoftheregistrationstatementpreparedbyacompanypriortoanI

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Othatiscirculatedtoinvestorsbeforethestockisoffered.TheMechanicsofanIPO(3of12)S

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CFilingsFinalProspectusPartofthefinalregistrationstatementpreparedbyacompanypriortoanI

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Othatcontainsallthedetailsoftheoffering,includingthenumberofsharesofferedandtheofferpriceFigure23.3TheCoverPageofRealNetworks’I

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OProspectusSource:/edgar.shtmlTheMechanicsofanIPO(4of12)ValuationTherearetwowaystovalueacompany:Computethepresentvalueoftheestimatedfuturecashflows.Estimatethevaluebyexaminingcomparables(recentI

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Os).TheMechanicsofanIPO(5of12)ValuationRoadShowDuringanI

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O,whenacompany’sseniormanagementanditsunderwriterstravelaroundpromotingthecompanyandexplainingtheirrationaleforanofferpricetotheunderwriters’largestcustomers,mainlyinstitutionalinvestorssuchasmutualfundsandpensionfunds.TheMechanicsofanIPO(6of12)ValuationBookBuildingAprocessusedbyunderwritersforcomingupwithanofferpricebasedoncustomers’expressionsofinterest.TextbookExample23.4(1of2)ValuinganI

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OUsingComparablesProblemWagner,Inc.isaprivatefirmthatmanufacturesspecialtyindustriallasers.Wagnerforecastsrevenuesof$320millionandearningsbeforeinterestandtaxes(E

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T)of$15millionthisyear.WagnerhasfiledaregistrationstatementwiththeS

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CforitsI

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O.Wagner’sinvestmentbankershaveassembledthefollowinginformationbasedondataforothercompanieswithsimilargrowthprospectsinthesameindustrythathaverecentlygonepublic.Ineachcase,themultiplesarebasedontheI

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Oprice.CompanyEnterpriseValue/EBITEnterpriseValue/SalesRayProductsCorp.18.8times1.2timesByce-Frasier,Inc.19.5times0.7timesFireIndustries25.3times0.8timesMean21.2times0.9timesWagnercurrentlyhas20millionsharesoutstanding,$10millionincashandnodebt.Wagnerplanstoraise$80millioninitsI

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O.EstimatetheI

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OpricerangeforWagnerusingthesemultiples.TextbookExample23.4(2of2)SolutionGivenE

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Tof$15million,andapplyingtheaveragemultipleabove,weestimateWagner’scurrententerprisevaluetobeAddingexistingcash,anddividingbycurrentsharesoutstanding,weestimateasharepriceof(Notethatwecanevaluateboththecashandsharesonapre-I

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Obasis.)Similarly,usingtheenterprisevalue/Salesmultiple,givenitsrevenuesof$325million,Wagner’sestimateenterprisevalueisimplyingasharepriceofBasedontheseestimates,theunderwritersmightestablishaninitialpricerangeforWagnerstockof$13to$17persharetotakeontheroadshow.AlternativeExample23.4(1of2)ProblemR

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XHouseisaprivatecompanyconsideringgoingpublic.R

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XHousehasassetsof$585millionandliabilitiesof$415million.Thefirm’scashflowfromoperationswas$137millionforthepreviousyear.AftertheI

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XHousewillhave118millionsharesoutstanding.Theindustryaveragecashflowpersharemultipleis3.0,andtheaveragebookvaluepershareis2.3.Basedonthesemultiples,estimatetheI

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XHouse.AlternativeExample23.4(2of2)SolutionR

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XHouse’sbookvalueofequityisthedifferencebetweenthevalueoftheassets($585million)andthevalueoftheliabilities($415million),or$170million.With118millionsharesoutstanding,bookvaluepershareis$170Giventheindustryaverageof2.3,theestimatedI

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OpricewouldbeThefirm’scashflowfromoperationswas$137million,thuscashflowpershareisGiventheindustryaveragemultipleof3.0,theestimatedI

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OpricewouldbeTheMechanicsofanIPO(7of12)PricingtheDealandManagingRiskSpreadThefeeacompanypaystoitsunderwritersthatisapercentageoftheissuepriceofashareofstockForRealNetworks,thefinalofferpricewas$12.50pershare,andthecompanypaidtheunderwritersaspreadof$0.875pershare,exactly7%oftheissueprice.Becausethiswasafirmcommitmentdeal,theunderwritersboughtthestockfromRealNetworksfor$11.625pershareandthenresoldittotheircustomersfor$12.50pershare.

TheMechanicsofanIPO(8of12)PricingtheDealandManagingRiskWhenanunderwriterprovidesafirmcommitment,itispotentiallyexposingitselftotheriskthatthebankingfirmmighthavetosellthesharesatlessthantheofferpriceandtakealoss.However,researchshowsthatabout75%ofI

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sexperienceanincreaseinsharepriceonthefirstday(only9%experienceadecrease).TheMechanicsofanIPO(9of12)PricingtheDealandManagingRiskOver-AllotmentAllocation(greenshoeProvision)InanI

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O,anoptionthatallowstheunderwritertoissuemorestock,usuallyamountingto15%oftheoriginaloffersize,attheI

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Oofferprice.TheMechanicsofanIPO(10of12)PricingtheDealandManagingRiskRealNetworksI

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Ohadagreenshoeprovision.Theprospectusspecifiedthat3millionsharewouldbeofferedat$12.50pershare.Inaddition,thegreenshoeprovisionallowedfortheissueofanadditional450,000sharesat$12.50pershare.TheMechanicsofanIPO(11of12)PricingtheDealandManagingRiskUnderwritersinitiallymarketboththeinitialallotmentandtheallotmentinthegreenshoeprovisionbyshortsellingthegreenshoeallotment.Iftheissueisasuccess,theunderwriterexercisesthegreenshoeoption,therebycoveringitsshortposition.Iftheissueisnotasuccess,theunderwritercoverstheshortpositionbyrepurchasingthegreenshoeallotmentintheaftermarket,therebysupportingtheprice.TheMechanicsofanIPO(12of12)PricingtheDealandManagingRiskLockupArestrictionthatpreventsexistingshareholdersfromsellingtheirsharesforsomeperiod,usually180days,afteranI

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O23.3IPOPuzzles(1of4)UnderpricingGenerally,underwriterssettheissuepricesothattheaveragefirst-dayreturnispositive.Asmentionedpreviously,researchhasfoundthatabout75%offirst-dayreturnsarepositive.Theaveragefirst-dayreturnintheUnitedStatesis17%.IPOPuzzles(2of4)UnderpricingTheunderwritersbenefitfromtheunderpricingbecauseitallowsthemtomanagetheirrisk.Thepre-I

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Oshareholdersbearthecostofunderpricing.Ineffect,theseownersaresellingstockintheirfirmforlessthantheycouldgetintheaftermarket.23.4InternationalComparisonofFirst-DayIPOReturnsIPOPuzzles(3of4)UnderpricingAlthoughI

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Oreturnsareattractive,allinvestorscannotearnthesereturns.WhenanI

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Ogoeswell,thedemandforthestockexceedsthesupply.Thustheallocationofsharesforeachinvestorisrationed.WhenanI

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Odoesnotgowell,demandattheissuepriceisweak,soallinitialordersarefilledcompletely.Thus,thetypicalinvestorwillhavetheirinvestmentin“good”I

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srationedwhilefullyinvestingin“bad”I

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s.IPOPuzzles(4of4)UnderpricingWinner’sCurseReferstoasituationincompetitivebiddingwhenthehighbidder,byvirtueofbeingthehighbidder,hasverylikelyoverestimatedthevalueoftheitembeingbidon.You“win”(getallthesharesyourequested)whendemandforthesharesbyothersislowandtheI

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Oismorelikelytoperformpoorly.TextbookExampl