ShmoopTube
Where Monty Python meets your 10th grade teacher.
Search Thousands of Shmoop Videos
Principles of Finance: Unit 1, Sharing the Pie (Types of Stock): Authorized, Issue, Stock Options 16 Views
Share It!
Description:
It's time to see what's new... with Wu. And to find out the differences between authorized stock, issued stock, and stock options. Yeah. Let's take stock of stock.
Transcript
- 00:00
principles of finance a la shmoop. the key players: bankers underwriters, The
- 00:06
Syndicate. an IPO is like an elaborate 17th century dance [renaissance festival shown]
- 00:12
there are many roles and everyone has to play their part or that stately minuet
- 00:16
starts to look like a mosh pit. so let's take a look at those roles using
- 00:20
the sauce company as an example. investment bankers advise companies on
Full Transcript
- 00:25
the best way to raise capital, the proposed selling price, how much to sell
- 00:30
and similar useful information, like you know which tie goes with which shirt. [man holds up shirts]
- 00:34
well this is the Midwife who actually brings the offering to life. usually
- 00:39
played by the investment banker but that's not always the case. White shoe
- 00:42
believes that the investment banking firm silver slacks, could likely sell all
- 00:46
of the shares on their own. this bank knows everyone but handing all the [celebrity faces shown]
- 00:51
Commission's for the IPO to one bank is likely bad long-term risk for management.
- 00:57
like what happens if the management of that bank leaves and starts their own
- 01:00
hedge fund or something. So that's not what the client Mr. Wu wants he wants a
- 01:05
few sellers of stock for the IPO involved so that each bank can check on
- 01:10
each other and so that areas of influence are shared . it's like getting a [chart of banks shown]
- 01:14
few opinions on brain cancer --it's just a good practice for something that's such
- 01:18
a big deal as an IPO if this were all about buying a new printer five minutes
- 01:22
on CNET wouldn't want likely do the trick. [printer ad shown]
- 01:25
except in Chicago where it was headed by Al Capone, the syndicate is a group of
- 01:30
underwriters like a group of investment banks with a bunch of sales people who
- 01:34
handle issues that are too large for any one underwriter to manage- which is
- 01:38
pretty much all issues these days. there will be one or more lead underwriters [flow chart]
- 01:43
who assemble the syndicate like they call their buddies at Merrill Lynch and
- 01:46
JP Morgan and Morgan Stanley and the others, with lower levels of syndicate
- 01:50
members who actually sell some portion of the issue like a small powerful
- 01:55
underwriter in the Midwest, or a powerful underwriter in Texas who knows everybody
- 02:00
in the oil business. well if you're a lead underwriter life
- 02:03
is good because you get to parcel out the securities to the other members. More
- 02:08
bragging rights more power more money. well the other syndicate members will
- 02:11
also be invest banks and/or broker-dealers but usually
- 02:15
smaller ones. much of their existence is spent sucking up to the big boys at the
- 02:19
crumbs of the bigger offerings. well syndicate members are selected
- 02:22
based on some competitive advantage that would enhance the overall sale of the
- 02:26
IPO maybe an issue is tech related and some syndicate members have really close
- 02:31
connections with hedge funds or other mutual funds that specialize in [picture of computer tech]
- 02:35
investing in technology. others have ties with a geographic region .still others
- 02:40
appeal more to retail investors than institutions and so on. like they know
- 02:45
everyone who was a cardiologist who went to Bernie's Bar Mitzvah. well the
- 02:48
syndicate is formed with a syndicate letter that spells out the details. there [documents]
- 02:52
are two deal platforms under which syndicates form. they are either
- 02:55
negotiated or competitive. in a negotiated deal the underwriter
- 03:00
negotiates directly with the issuer. the company selling securities and
- 03:04
everything is spelled out --that is like goldman sachs might negotiate with the [white board illustration]
- 03:08
sauce company on pretty much every deal term that's there. well negotiated is the
- 03:13
most common platform. the other flavor is a competitive bid style of underwriting.
- 03:18
think eight plumbers bidding to do the job on the new smith house being built
- 03:23
down the street. competitive bids are the world of muni bonds they're not usually
- 03:27
done for equities or complex technology companies where it's a lot more
- 03:31
relationship. here the process is relatively impersonal because all you're
- 03:35
buying is pretty safe yield-- most muni bonds pay off. and there's bad [man frowns at camera]
- 03:38
appearances of favoritism that can well be avoided if there's a competitive bid--
- 03:43
just like bidding to build the government building, right you got to
- 03:47
have all those numbers out in the public's eye so I don't think someone's
- 03:50
getting a briefcase full of cash under the table .well as for the personal part [case of cash passed between 2 men]
- 03:54
of the relationship equation, in that banker selection it's removed you don't
- 03:58
need it in a muni bond competitive bid some states even require this structure.
- 04:02
LBW low bid wins simple clean honest .the selling members so if this is a huge
- 04:08
issuing like the company selling a lot of stock like Facebook did when it went
- 04:13
public-- like tens of billions the syndicate members may recruit even
- 04:17
smaller firms to assist in the sales process the main difference between a [flow chart]
- 04:21
selling number and a syndicate number is that the selling members don't take any
- 04:24
financial risk. they assist in the sales effort and get a
- 04:28
commission for it well once the players are identified and everyone knows their
- 04:31
roles the next step is to figure out who gets what financially speaking. well this
- 04:36
is found in The Syndicate agreement in addition of financial arrangements. this
- 04:39
agreement also lays out each member's commitment in terms of shares sold that
- 04:43
is the underwriting can be set up as either an Eastern or a Western account. [flow chart]
- 04:48
Eastern accounts stipulate that each member is responsible for selling not
- 04:53
only its original allocation but also a portion of any unsold allocation from
- 04:58
other less aggressive or less successful members. that is if a member is
- 05:02
responsible for 10% of an issue then it's also responsible for 10% of any
- 05:07
unsold shares. it really forces a teamwork here on everyone because [pie chart]
- 05:11
everyone dies if they don't place the issue. Western accounts require members
- 05:15
to be responsible for selling only their own allocation. they can pick up any
- 05:19
shortfall on their own but they're not required to go pick up a matching amount
- 05:23
from there would be partners. so when the sauce company sells its stock does it [2 men at a booth]
- 05:28
sell directly to the public ? no the stock is actually sold by the underwriter the
- 05:33
underwriter will pay the sauce company stockholders a price and then it'll
- 05:37
markup that price and resell the stock to the investing public--
- 05:40
you know presumably at a higher price right ? they mark it up. well the
- 05:44
difference between what the underwriter pays and what it receives is the spread, [numbers illustrated]
- 05:48
which is the underwriters gross profit. but remember that the syndicate isn't
- 05:53
working for free. their compensation also comes from the spread. so the spread is
- 05:57
divided into the lead managers fee and then the take down. well the take down is
- 06:02
the profit that each syndicate member makes, not something that happens in the
- 06:06
octagon. it's usually easier to calculate the take down on a per share basis so if [white board illustration]
- 06:10
the spread is $1 a share in silver slacks negotiates a fee of 15 cents then
- 06:17
the take down is the difference between a buck and 15 cents or 85 cents. if there
- 06:22
are selling members well they have to be paid as well but since they unlike the
- 06:26
syndicate aren't buying and reselling the shares well, selling members are not
- 06:29
taking any risk and shouldn't be paid the same. their compensation comes from [chart shown]
- 06:34
the take down portion which is divided into the two components the concession
- 06:37
what the selling members receive and you I'll take down what's left for the
- 06:41
syndicate you can see how everything's divided up here in this handy-dandy
- 06:45
little chart. anyway those are the key players now you should be able to pick
- 06:49
them all out of a lineup ,which, depending on how epically they've conducted their [lineup shown]
- 06:52
business, well you only have to do that someday.
Up Next
GED Social Studies 1.1 Civics and Government
Related Videos
What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...
What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...
How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...