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6 Characteristics of a strong LBO candidate


6. Strong asset base

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  • strong asset base pledged as collateral against a loan benefits lenders by increasing the likelihood of principal recovery in the event of bankruptcy (and liquidation)
  • targets asset base is particularly important in the leveraged loan market, where the value of the assets helps dictate the amount of bank debt available
  • strong asset base also tends to signify high barriers to entry because of the substantial capital investment required
  • company with little or no assets can still be an attractive LBO candidate provided it generates sufficient cash flow
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3 Price-setting Mechanism (3)


Overview


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In general the IPO process takes place over four to six months. There are different mechanisms to price an equity offering:


  1. Open Price (book-building)
  2. Fixed Price
  3. Auction


In institutional trances, the most used mechanism still remains open-price approach. Retailers prefer hybrid approaches, combining fixed-price retail offers with book-building

  • Sequential: price is set priorate opening of retail offer, thus investors know exactly the price to pay
  • Simultaneous: Institutional and retail offers run at the same time, thus not sure which price will pay
  • Mid-way: during book-building, maximum price is announced, thus do not know what to pay but maximum
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2 Fees


Conclusion

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  • Analyze the role played by investment banks in equity offerings and the structure and distribution of the fee paid by the issuer
  • crucial variable: offering price
  • related to the wealth of the issuer and its shareholders, the return for investors, the functions performed by the syndicate
  • information asymmetry and the resulting difficulties in prices, investment banking fees are much higher in IPOs than they are in SEOs or in bond offerings
  • extensive research focuses on IPO underpricing, related to price-setting mechanisms
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TESTE DEIN WISSEN

5 M&A Negotiations


1. Evaluate final bids


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  • the sell-side advisor works together with the seller and its legal counsel to conduct a thorough analysis of the price, structure and conditionality of the final bids
  • purchase price is assessed within the context of the first round bids and the targets recent financial performance, as well as the valuation work performed by the sell-side advisors
  • the deemed binding nature of each final bis, or lack thereof, is also carefully weighed in assessing its strength
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2 Offering structure


1.Which shares

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1. Which shares

Primary offering: newly issued shares are sold, proceeds go to company

Secondary offering: existing shares are for sale, proceeds go to sharesholders


- Financial markets tend to prefer primary offerings in general, as proceeds finance the company rather than end up shareholders pockets

- secondary offerings may concern potential tail investors, as shares of good performing firm are rather unlikely for sale


To generate cash, IPOs mostly are a combination of primary and secondary offerings, however no fixed rule

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TESTE DEIN WISSEN

2 Equity offerings: IPOs structure and process


Definition IPOs


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Initial public offerings (IPOs) are defined as the first sale of company's shares to the public and the listing of shares on the stock exchange

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2 Why do firms go public? 

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In general: cash & privatization reasons


Firms perspective:

  • Mean for equity capital infusion e.g. to fund new projects, improve credit standing
  • Exit strategy for private equity firms as a way to cash out investments
  • Non-Cash reasons


Shareholders perspective:

  • way to generate liquidity
  • Dealing with succession of first entrepreneurial generation, is second not available or willing to manage firm
  • Selling of company to take it private


Non-Cash reasons:

1. Acquisition currency

- enhance payment alternatives -> to buy another company via stocks, there are three prerequisites to be met:

1. Shares of acquiring firm need to be listed

2. Public valuation needed

3. Shares can be liquidated at any moment


2. Positive image and reputation


3. Management compensation

providing performance-based incentive to management


Drawbacks of IPOs:

  • Burden of disclose requirements: "living in a fish bowl" as open to screening of authorities, analysts, institutional investors
  • Compliance costs:
  • Direct cost: fees paid to lawyers, consultants, accountants, investment banks (depending on country and IPO size, around 2-7% of amount raised)
  • Indirect cost: subtle arising when underpricing is an issues
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TESTE DEIN WISSEN

2 The Syndicate Functions (4)


Certification

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TESTE DEIN WISSEN
  • the certification hypothesis suggests that reputable underwriters are associated with reduced uncertainty and thus better pricing
  • underpricing is usually associated with the degree of information asymmetry between the issuer and investors
  • the reputation of an investment bank is damaged if it is involved in mispriced IPOs
  • thus book-runner and other banks involved in the managing group have an incentive to correctly price the offering, reducing underpricing
  • reputation is usually proxied by two alternative measures, market share are used to build lease tables, and investment banks gives crucial importance to their rankings in league tables, a second, alternative measure is the Carter-Manaster ranks
Lösung ausblenden
TESTE DEIN WISSEN

3 Price Setting Mechanisms


Introduction

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TESTE DEIN WISSEN
  • main price-setting meachnisms in security offerings, focusing on the most common practice, i.e. the open-price approach, better known as book-building
  • the way the price is set is crucial, being the price the key variable of any offerings (both debt and equity)
  • the role of the investment bank tends to be even more crucial in IPOs, where the price is more "uncertain"
  • the IPO process. the role of the investment banks are involved in the transaction, the fee they get paid and may other aspects of an IPO depend on the kind of price-setting mechanism used
  • IPO underpricing has a negative effect on the wealth of pre-issue shareholders, so the first question should be why issuers are willing to leave "money on the table"
Lösung ausblenden
TESTE DEIN WISSEN

Investment Banking

Table of contents

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01 Overview

02 Equity offerings: IPOs structure and process

03 Price setting mechanisms

04 Debt offerings

05 M&A

06 Leveraged Buy-Outs

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TESTE DEIN WISSEN

2 The Syndicate Functions (4)


Market making

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TESTE DEIN WISSEN
  • the number of market makers trading a given security is important for its liquidity
  • if the firm going public will be listed in a quote-driven market, then the number of syndicate members positively affects the number of banks making the market
  • the book-runner is the dominant market maker,  and syndicates members play a key role, each additional joint book-runner results in 1 additional market maker
  • a large syndicate, provides several benefits
  • including as many book-runners as possible, might be limited by several factors; first, larger syndicates charge higher fees also, top-tier banks impose allocation requirements, syndicate size may be limited by the issue size
  • issuer cannot simply require a given banks involvement, as the book-runner has sort of veto power
Lösung ausblenden
TESTE DEIN WISSEN

2 Seasoned Equity and Right Offerings (SEOs)


Right offerings: right 


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TESTE DEIN WISSEN
  • Capital increase requires companies to issue new capital in form of rights to protect existing shareholders from dilution of ownership stake = shareholders entitled to purchase new shares in proportion to what they hold at time of offering at a certain ratio and discount relative to current market price
  • If shareholders does not exercise rights during subscription period (two weeks) rum placement takes place -> unexercised rights sold to new investors at current market price
  • TERP: theoretical ex-right price (price at which shares should trade at announcement of terms of right issue after detachment of rights (ex-rights date)
  • Gross discount: percentage difference between current market price and subscription price
  • Discount to TERP: percentage difference between TERP and subscription price
  • Preemption right: predominantly removed in US companies
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Q:

6 Characteristics of a strong LBO candidate


6. Strong asset base

A:
  • strong asset base pledged as collateral against a loan benefits lenders by increasing the likelihood of principal recovery in the event of bankruptcy (and liquidation)
  • targets asset base is particularly important in the leveraged loan market, where the value of the assets helps dictate the amount of bank debt available
  • strong asset base also tends to signify high barriers to entry because of the substantial capital investment required
  • company with little or no assets can still be an attractive LBO candidate provided it generates sufficient cash flow
Q:

3 Price-setting Mechanism (3)


Overview


A:

In general the IPO process takes place over four to six months. There are different mechanisms to price an equity offering:


  1. Open Price (book-building)
  2. Fixed Price
  3. Auction


In institutional trances, the most used mechanism still remains open-price approach. Retailers prefer hybrid approaches, combining fixed-price retail offers with book-building

  • Sequential: price is set priorate opening of retail offer, thus investors know exactly the price to pay
  • Simultaneous: Institutional and retail offers run at the same time, thus not sure which price will pay
  • Mid-way: during book-building, maximum price is announced, thus do not know what to pay but maximum
Q:

2 Fees


Conclusion

A:
  • Analyze the role played by investment banks in equity offerings and the structure and distribution of the fee paid by the issuer
  • crucial variable: offering price
  • related to the wealth of the issuer and its shareholders, the return for investors, the functions performed by the syndicate
  • information asymmetry and the resulting difficulties in prices, investment banking fees are much higher in IPOs than they are in SEOs or in bond offerings
  • extensive research focuses on IPO underpricing, related to price-setting mechanisms
Q:

5 M&A Negotiations


1. Evaluate final bids


A:
  • the sell-side advisor works together with the seller and its legal counsel to conduct a thorough analysis of the price, structure and conditionality of the final bids
  • purchase price is assessed within the context of the first round bids and the targets recent financial performance, as well as the valuation work performed by the sell-side advisors
  • the deemed binding nature of each final bis, or lack thereof, is also carefully weighed in assessing its strength
Q:

2 Offering structure


1.Which shares

A:

1. Which shares

Primary offering: newly issued shares are sold, proceeds go to company

Secondary offering: existing shares are for sale, proceeds go to sharesholders


- Financial markets tend to prefer primary offerings in general, as proceeds finance the company rather than end up shareholders pockets

- secondary offerings may concern potential tail investors, as shares of good performing firm are rather unlikely for sale


To generate cash, IPOs mostly are a combination of primary and secondary offerings, however no fixed rule

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Q:

2 Equity offerings: IPOs structure and process


Definition IPOs


A:

Initial public offerings (IPOs) are defined as the first sale of company's shares to the public and the listing of shares on the stock exchange

Q:

2 Why do firms go public? 

A:

In general: cash & privatization reasons


Firms perspective:

  • Mean for equity capital infusion e.g. to fund new projects, improve credit standing
  • Exit strategy for private equity firms as a way to cash out investments
  • Non-Cash reasons


Shareholders perspective:

  • way to generate liquidity
  • Dealing with succession of first entrepreneurial generation, is second not available or willing to manage firm
  • Selling of company to take it private


Non-Cash reasons:

1. Acquisition currency

- enhance payment alternatives -> to buy another company via stocks, there are three prerequisites to be met:

1. Shares of acquiring firm need to be listed

2. Public valuation needed

3. Shares can be liquidated at any moment


2. Positive image and reputation


3. Management compensation

providing performance-based incentive to management


Drawbacks of IPOs:

  • Burden of disclose requirements: "living in a fish bowl" as open to screening of authorities, analysts, institutional investors
  • Compliance costs:
  • Direct cost: fees paid to lawyers, consultants, accountants, investment banks (depending on country and IPO size, around 2-7% of amount raised)
  • Indirect cost: subtle arising when underpricing is an issues
Q:

2 The Syndicate Functions (4)


Certification

A:
  • the certification hypothesis suggests that reputable underwriters are associated with reduced uncertainty and thus better pricing
  • underpricing is usually associated with the degree of information asymmetry between the issuer and investors
  • the reputation of an investment bank is damaged if it is involved in mispriced IPOs
  • thus book-runner and other banks involved in the managing group have an incentive to correctly price the offering, reducing underpricing
  • reputation is usually proxied by two alternative measures, market share are used to build lease tables, and investment banks gives crucial importance to their rankings in league tables, a second, alternative measure is the Carter-Manaster ranks
Q:

3 Price Setting Mechanisms


Introduction

A:
  • main price-setting meachnisms in security offerings, focusing on the most common practice, i.e. the open-price approach, better known as book-building
  • the way the price is set is crucial, being the price the key variable of any offerings (both debt and equity)
  • the role of the investment bank tends to be even more crucial in IPOs, where the price is more "uncertain"
  • the IPO process. the role of the investment banks are involved in the transaction, the fee they get paid and may other aspects of an IPO depend on the kind of price-setting mechanism used
  • IPO underpricing has a negative effect on the wealth of pre-issue shareholders, so the first question should be why issuers are willing to leave "money on the table"
Q:

Investment Banking

Table of contents

A:

01 Overview

02 Equity offerings: IPOs structure and process

03 Price setting mechanisms

04 Debt offerings

05 M&A

06 Leveraged Buy-Outs

Q:

2 The Syndicate Functions (4)


Market making

A:
  • the number of market makers trading a given security is important for its liquidity
  • if the firm going public will be listed in a quote-driven market, then the number of syndicate members positively affects the number of banks making the market
  • the book-runner is the dominant market maker,  and syndicates members play a key role, each additional joint book-runner results in 1 additional market maker
  • a large syndicate, provides several benefits
  • including as many book-runners as possible, might be limited by several factors; first, larger syndicates charge higher fees also, top-tier banks impose allocation requirements, syndicate size may be limited by the issue size
  • issuer cannot simply require a given banks involvement, as the book-runner has sort of veto power
Q:

2 Seasoned Equity and Right Offerings (SEOs)


Right offerings: right 


A:
  • Capital increase requires companies to issue new capital in form of rights to protect existing shareholders from dilution of ownership stake = shareholders entitled to purchase new shares in proportion to what they hold at time of offering at a certain ratio and discount relative to current market price
  • If shareholders does not exercise rights during subscription period (two weeks) rum placement takes place -> unexercised rights sold to new investors at current market price
  • TERP: theoretical ex-right price (price at which shares should trade at announcement of terms of right issue after detachment of rights (ex-rights date)
  • Gross discount: percentage difference between current market price and subscription price
  • Discount to TERP: percentage difference between TERP and subscription price
  • Preemption right: predominantly removed in US companies
Investment Banking

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