ShmoopTube
Where Monty Python meets your 10th grade teacher.
Search Thousands of Shmoop Videos
Principles of Finance Videos 156 videos
Okay, so you want to be a company financial manager. It's basically up to you to make money for the shareholders. It would also be swell if you mad...
How is a company... born? Can it be performed via C-section? Is there a midwife present? Do its parents get in a fight over what to name it? In thi...
What is an income statement, and why do we need it in our lives? Well, let's take a look at an income statement for Year 1 of the Sauce Company, an...
Principles of Finance: Unit 1, The IPO Process 122 Views
Share It!
Description:
We'll walk you through the IPO process, using the example of our good friends at the Sauce Company. Well, they're acquaintances, really.
Transcript
- 00:00
Principles of finance ah la shmoop aipo process All right
- 00:05
So for our good friends already in bernie it's aipo
- 00:07
time here are the basic steps involved when i po
- 00:10
process and how they'd impact the sauce Company number one
- 00:14
the company decides to go public It hires the underwriters
Full Transcript
- 00:19
who are the midwife's for this birthing process The underwriters
- 00:23
buy the shares that the company wants to sell and
- 00:26
then like five minutes later resells them to the public
- 00:29
technically that's how they actually go public Easy This part's
- 00:32
done The sauce company has hired silver slacks and they
- 00:36
have an agreement in place to get the magic of
- 00:38
the sauce company to the portfolios of america and the
- 00:42
world for an appropriate amount of money Of course they
- 00:45
take a spread All right Process Item number two The
- 00:48
underwriters advise the company on matters that are relevant to
- 00:51
the whole process such as legal requirements pricing timing and
- 00:55
quantity of shares or ownership of the company to sell
- 00:59
on the offering Like are they going to sell five
- 01:01
percent Ten percent twenty percent of the company to the
- 01:03
public All right well we're good here to silver slacks
- 01:06
Is telling already in bernie all about what they must
- 01:08
dio and what the laws forbid them to do right
- 01:11
next number three due diligence and we have a whole
- 01:13
video on this anymore do means appropriate or proper The
- 01:18
underwriters reputation here is on the line so the sauce
- 01:21
company must turn its head and cough It'll be subject
- 01:24
to a detailed investigation of the company's financial picture its
- 01:27
product it's prospects its customers its financial health everything It
- 01:31
will also do a fair amount of investigation of the
- 01:34
company's management as well Just make sure that they don't
- 01:37
have any history of legal in proprieties you know like
- 01:41
a felony they didn't disclose Okay so this is a
- 01:43
work in process with the sauce Silver slacks analysts will
- 01:47
spend a lot of time poking around the sauce company
- 01:49
for the next few months Get used to it All
- 01:51
right Process number four documentation Assuming that the due diligence
- 01:56
doesn't reveal any major show stopping problem Yes And you
- 02:00
know they're almost always minor issues that must be resolved
- 02:03
while the next step is to get the lawyers involved
- 02:06
and start dotting all the legal i's and crossing the
- 02:09
legal tease the company can choose its own lawyers for
- 02:12
this process but in most cases the underwriter will gently
- 02:16
recommend that the company used lawyers that the underwriter has
- 02:19
worked with in the i asked that they typically come
- 02:21
from the sec or worked there or at least know
- 02:24
the drill The company can reject this gentle recommendation but
- 02:27
in most cases the underwriter will threaten walk away if
- 02:29
they don't go with lawyers they kind of know in
- 02:31
respect Usually the underwriter wins this battle next number five
- 02:35
the main activity of the lawyers is to prepare the
- 02:38
prospectus or the offering statement think about it like a
- 02:41
marketing memorandum Well this is required by the sec In
- 02:45
most instances the prospectus is a long exceedingly boring document
- 02:49
that describes in excruciating detail what the company does its
- 02:53
management and its prior financial history It doesn't have to
- 02:56
be omg long but one of the lawyers can't justify
- 02:59
their enormous fees if they don't make it long The
- 03:02
main faces of any prospectus is disclosure Investors must be
- 03:06
afforded sufficient information so that they can make an informed
- 03:10
decision and note this is not anyone recommending buying or
- 03:13
selling a stock it's simply informing them according to the
- 03:16
rules of how everyone else gets informed with lawyers for
- 03:19
the sauce company will prepare the prospectus in conjunction with
- 03:22
silver slacks which will provide the relevant financial info along
- 03:25
with the auditors All right next item number six disclosure
- 03:29
Well a big part of the prospectus will be devoted
- 03:32
to disclosing risks Lawyers sue people for a living They
- 03:36
sure don't like to be on the receiving end so
- 03:38
they try to protect themselves by disclosing any possible risk
- 03:42
that would result in an investor losing money and then
- 03:45
suing them for lack of disclosure The risk disclosure piece
- 03:49
of a prospectus can run many pages in length and
- 03:52
it basically just covers your well your hind quarters when
- 03:56
and or if you do get suit Alright Number seven
- 03:58
the sec review After preparing the prospectus it is sent
- 04:02
to the sec tio you know kind of read through
- 04:05
it Bear in mind the sec isn't in the business
- 04:07
of deciding how folks should invest their money Rather they
- 04:10
just determine if there's been sufficient disclosure especially regarding the
- 04:14
risks with the sec will send back the prospectus to
- 04:17
lawyers with their comments Some of those comments will be
- 04:19
nit picky stuff like you need a comma here while
- 04:22
others will be more substantial like esso all that offshore
- 04:26
revenue Where did it come from Right next number eight
- 04:30
approved preliminary prospectus while lawyers will send the revised prospectus
- 04:35
back to the sec where it might generate yet more
- 04:38
comments Two o three o for o but if the
- 04:41
sec is satisfied they will send the prospectus back with
- 04:43
a letter to the effect that it has approved it
- 04:45
as a preliminary prospectus also known in the trade as
- 04:49
a red herring because there must be language on the
- 04:52
face of the document Colored red is surprise surprise indicating
- 04:55
that this is not a final prospectus It turns black
- 04:59
when it is all right Number nine marketing Once the
- 05:01
red herring is in effect the underwriter can start drumming
- 05:04
up interest in the company The securities act of nineteen
- 05:08
thirty three requires at least twenty days to elapse beginning
- 05:11
with the date that the red herring is effective until
- 05:14
it can actually sell securities That is the company as
- 05:17
have the red herring out there for three weeks basically
- 05:19
Allowing investors to really look at it digest it Think
- 05:22
about it and all that stuff before it can actually
- 05:24
sell securities to the public Well silver slacks will start
- 05:27
the roadshow process This process works exactly as it sounds
- 05:32
The underwriter and assorted senior management of the sauce company
- 05:35
most definitely including mr wu will travel around the country
- 05:38
in the world wearing coats and ties Handing out saw
- 05:41
samples to present the story Two groups of potential investors
- 05:44
like mutual funds and hedge funds and pension funds and
- 05:47
other kinds of funds Alright next number ten holding period
- 05:51
it's Not about cuddling after lovemaking Although it could be
- 05:54
well after twenty days And assuming that the s e
- 05:56
c hasn't issued any further comments by pio is ready
- 05:59
to go Why twenty days Well maybe there were lawsuits
- 06:02
waiting to crawl out of the woodwork Maybe there were
- 06:04
claims by others that the sauce was in fact their
- 06:07
idea not bobby's Maybe a distributor felt wronged by the
- 06:11
company and was just alerted to the company going public
- 06:14
And they wanted to finally be paid Not an issue
- 06:17
with the sauce company But you can imagine unscrupulous companies
- 06:20
Eighty years ago selling toe uneducated farmers and well those
- 06:24
companies could have gotten away with murder If there wasn't
- 06:26
time for the wrong to step forward ideally carrying a
- 06:30
pitchfork Well that was the intent of the law anyway
- 06:32
to create time and awareness for there to be fairness
- 06:34
So you got a twenty days Alright Number eleven go
- 06:37
team By this time the underwriter will have assembled the
- 06:40
selling syndicate which is a group of other broker dealers
- 06:43
who commit to selling some or all of the underwriting
- 06:47
number twelve dates times and deliver bols But will the
- 06:50
underwriters determine the date to sell The red herring language
- 06:54
is removed from the prospectus and its gentlemen Start your
- 06:58
engines time So when the sauce company first officially hired
- 07:02
silver flax teo you know deal with all of this
- 07:05
While the various terms and contractual language was outlined it
- 07:09
is a nothing Bankers have more lawyers than companies do
- 07:12
but sauce company will outline and they will have negotiated
- 07:15
the spread that silver slacks will take how their fees
- 07:19
will be paid What happens if the aipo doesn't happen
- 07:22
for something that is clearly silver slacks Vault you know
- 07:25
Like it's discovered that one of their employees leaked to
- 07:27
the press that an i p o is happening before
- 07:29
it was in registration And that guy is now apartment
- 07:33
shopping in nairobi Because that's What happens when you leak
- 07:36
at an investment bank Kidding in practice and outline will
- 07:39
cover who gets what Here is well the lead manager
- 07:42
on the i p o deal gets paid the most
- 07:44
The syndicate partners who helps sell get less and subsequent
- 07:48
agents brought on board to sell any remaining cheryl's Well
- 07:51
just get a little tiny bit a tiny commission but
- 07:54
there is a spread here in that if the sauce
- 07:56
company is hoping to sell four million shares at twenty
- 07:59
bucks each to the public the underwriting group will be
- 08:01
buying them for less maybe nineteen dollars Well that buck
- 08:05
spread gives four million dollars in total gross spread to
- 08:09
schmeer around the partners on the deal Maybe there are
- 08:11
some incremental fees the company must pay as well But
- 08:15
it is the seventy six million dollars that will be
- 08:18
the underwriting proceeds that the sauce company will keep Not
- 08:21
the notional eighty million got it The lead manager of
- 08:24
the syndicate silver slacks keeps fifteen percent or so of
- 08:28
the spread off the top Then the underwriter that assumes
- 08:31
the risk of re selling keeps about twenty five percent
- 08:33
and the line players who actually do the direct selling
- 08:36
of the shares to the portfolio managers at the funds
- 08:39
while those guys keep roughly half or more all right
- 08:42
Well the sauce company will file the registration statement officially
- 08:46
with the sec and in the states in which it
- 08:48
will sell Those securities have to sell it state well
- 08:51
It will have to comply with blue sky laws which
- 08:54
for that group of you with goldfish like attention spans
- 08:57
to review our state regulations coined in kansas by a
- 09:01
judge who was trying to protect uneducated farmers from speculating
- 09:05
in business enterprise is worth no more than a few
- 09:09
feet of blue sky famous phrase no it those laws
- 09:13
were generally about disclosure and they require the seller of
- 09:16
the securities toe have lots of it As we've noted
- 09:19
silver slacks is committed to this i po as an
- 09:22
exercise in raising equity capital selling stock but it could
- 09:26
have been a debt offering or about a does in
- 09:29
Other ways of selling stock including strategic alignments or big
- 09:32
investments by a big company like general foods putting money
- 09:35
into the sauce company Instead this would have been called
- 09:38
a private placement by a strategic investor The shares would
- 09:42
have different structures Because general foods is considered you know
- 09:46
a big boy in the eyes of the government It
- 09:48
doesn't necessarily need the same handholding protections as john q
- 09:52
Public and private placements generally come outside of the long
- 09:56
arms of the nineteen thirty three act but mr wu
- 09:59
has grand plans and believes he will want to tap
- 10:01
the public markets for money for a decade So having
- 10:04
a liquid market out there of his securities trading all
- 10:07
day long in the public is key and general foods
- 10:10
while there are competitors so why would he want to
- 10:12
give them any special private investor window into how great
- 10:16
their businesses silver slacks and rest of syndicator committing to
- 10:19
pay nineteen bucks a share regardless of whether they can
- 10:22
resell some all or none of those shares And well
- 10:25
that's the aipo process in a nutshell kind of makes
- 10:27
you want to join the wu tang clan doesn't it
- 10:30
Sorry mister will you know we were going to do 00:10:32.776 --> [endTime] that Whoa
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...
GED Social Studies 1.1 Civics and Government