Why do Financial Markets Exist Anyway?

Raising Money to Grow a Business

Lesson 3 Investment Banks and Going Public1Going Public

Aim:Why is going public such an important event for a growing company?

Do Now: Identify three billionaires that you know have started companies. Chances are theyre companies have gone public. If not, a big public company probably bought them out!

2How Companies Expand

Do Now answers: Mark Zuckerberg, Facebook. Founded in 2004, public in 2012.Bill Gates, Microsoft. Founded 1975, public in 1986.Brian Acton, WhatsApp. Founded 2009, bought by Facebook 2014 for $19 billion.

Ice cream and restaurant.Opening new Frizzles around the world for the past five years.One of the most popular ice cream restaurants in the United States and Europe.20% market share.25,000 employees in multiple locations in the United States and Europe.Headquartered in New York, NY.Looking to expand to China or Russia.Needs $500 million in order to expand.Financial statements indicate a healthy, profitable company.Frizzle, Inc.

Is Frizzle ready to go conduct an Initial Public Offering (IPO)? Lets seeIts restaurants have proven themselves to be profitable in the U.S and EuropeIt has a substantial opportunity to grow into new geographic marketsIt is in need of a substantial amount of moneyIf the answers are Yes, Frizzle is a good candidate and should work with an investment bank.

Frizzle Inc.

Assists a company in facilitating the process by:Advising on alternatives in raising capital. It may be best for Frizzle to issue bonds instead of stock!Managing the issuance of the security (ie: investment) that is chosen (bonds or stock)Helping the company determine the characteristics of the stock or bond offering (Example: if issuing bonds, how long their term should be)Role of an Investment Bank

Assists a company in facilitating the process by:Determining the right price of the stock or bond - For stock, the share price; for a bond, the coupon rateIf the stock is priced too high, investors will not want to buy itIf the bonds coupon rate is too low, investors will not want to buy itIn both instances, incorrect pricing results in Frizzle not raising the money it seeks! An investment bank can prevent these mistakes.Role of an Investment Bank

Assists a company in facilitating the process by:If a bond is being issued, assisting in the assignment of credit ratingIn a bought deal, the investment bank buys the stocks and bonds from the issuer and then resells them into the marketplace. This is potentially risky for the investment bank because it now the task of make sure all of the stocks or bonds are successfully resold.Role of an Investment BankNew company that has never issued stock to anyone but the foundersIPO (Initial Public Offering) Company intends to sell stock to outsiders for the first timeCompany is valued by Investment BankersOpening price (per share) is decidedInvestors are now able to buy Frizzle stockFrizzle is listed on an exchange (NASDAQ)

Frizzle, Inc.

Afterwards, the Tombstone commemorates the successful IPO.Once the offering of new shares has been completed, a tombstone is created to commemorate the event. It contains all the essential information, such as the corporation that issued the stock, the number of shares issued, the price per share, the total dollars raised, and the investment banks that coordinated the offering.10

What company raised money? How much money was raised? On what date? How many shares were issued and at what price? Which investment banks lead this offering?11

The investment banks pay to place them in financial publications like the Wall Street Journal. It is basically advertising by showing their ability to successfully raise money!12Lesson Summary 1 of 2

What are some of the characteristics of a company that is ready to go public?An Initial Public Offering (IPO) is associated with what issuing stock or bonds?What services does an investment banker provide?What document does an investment bank produce so let everyone know that it has conducted another successful IPO?

It is has several years of being a profitable company, it has tremendous opportunities for expansion and growth., and to achieve that growth it needs a lot of money.Stock!Helping to determine if it is better for the company to issue stocks or bonds, and after that decision is made, the right price to offer them at.The tombstone.13Lesson Summary 2 of 2

When an investment bank guarantees the price at which a stock or bond will be sold by basically purchasing everything being issued, what type of arrangement is this?Why is going public such an important event for a growing company?

Bought deal.It represents a company crossing over into big-time world of finance. With a significant amount of money raised, the company may be able to really accelerate its growth. If it ever needs to raise more money, it will already have a successful track record.14Web Challenge #1

Challenge: Search Google or Bing images using ipo tombstone. Find the largest offering in terms of dollar raised, the most recent offering and the investment banks who appear most often.

15Web Challenge #2

Q: Are IPOs always success stories?A: No. Sometimes theres an excitement about a company that leads investors to pay a lot at the IPO. Later, when the company fails to deliver, the stock price drifts lower.Challenge: Find three examples of an IPO success (where the stock is trading higher one year after it went public) and three that were failures. What commonalities can you find among the successes? The failures?

16Web Challenge #3

Q: Sometimes a company goes public and its shares soar 50% or more on the first day of trading as the initial investors who were able to secure IPO shares at the IPO price sell them at a big profit the very first day to eager investors caught up in the excitement.Research how investment banks dole out IPO shares, especially of companies whose IPOs are highly anticipated. Hint: The average investor cannot get IPO shares.

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