Fin 501 Strategic Corporate Finance

FIN501 Strategic Corporate Finance

Module One

Case Assignment

Introduction:

The goal of most aspiring entrepreneurs and their investors is to “go public.” This process allows the company to gain the much needed capital to hopefully fulfill that entrepreneur’s expectation of that company or, as in some cases during the dot com boom, make the quick million dollars and exit the business totally. There are usually substantial gains that are normally associated with the Initial Public Offerings (IPO) of a company, however, some companies ultimately feel cheated when the deal is complete. Since 1980, the opening day price increase after the initial offer has averaged 18.8% rise. (Ritter 2002) The increase in price benefits early investors but represents market value not captured by the corporation. As of recent, there are companies that have chosen to rebel against the traditional IPO system. The alternative method currently gaining in popularity is IPO auctions or otherwise known as the “Dutch Auction”. Most of the IPO auctions have been small companies entering a small market base until the recent IPO auction of the Google Corporation, the online giant of the search engine industry. It announced its intention in April 2004 to auction its shares to the public.

IPO Considerations:

There are two major considerations to take into account when a company is contemplating or the Chief Financial Advisor is suggesting going forward with an Initial Public Offering. The first is how to do it most effectively, and, secondly, whether to do it at all. The second is the threshold question that the Chief Financial Advisor must answer. The question is answered easily by determining if an IPO is the cheapest and the most efficient way to raise capital or use another method without going public. The long range implications of becoming a public company must be justified by the capital gained.

There are, however, significant disadvantages to going public that must be addressed. The largest of these issues is the time frame it takes for an IPO to evolve or develop: the issuer (company) and the underwriter require at least sixty to ninety days to prepare all required documentation that needs to be filed with the Securities and Exchange Commission. The Securities and Exchange Commission then needs additional time to verify and validate documentation and determine a date for the IPO to take place. Many corporations undergo the time-consuming and expensive process, only to see the efforts become futile at the last instant because there best window of opportunity for there IPO has passed. This opportunity could be detrimental to the corporation do to the expense of the traditional IPO. This would be significant if the issuer had counted on the revenue generated from the IPO to continue daily operations. This is mostly due to the significant transaction costs that are associated to the traditional IPO. Underwriters can receive up to 15 percent of the price of the offering with legal and accounting expenses pushing the total costs up to 25 percent. Again, the long range implications of going public must be evaluated; a public company can easily be taken over by their competition in a hostile tender.

Traditional or Non-Traditional IPO:

Once the decision to go public has been made the choice of which method to use will be on the burden of the Chief Financial Officer. The decision to use the traditional IPO is highly encouraged by the investment banks that typically own the IPO system on Wall Street. The investment banks have found a niche in the traditional IPO that is incredibly lucrative which makes it in their best interest to protect the traditional method and