Stock Offerings and Investor Monitoring
Stock Offerings and Investor Monitoring
Stock Offerings and Investor Monitoring
INVESTOR MONITORING
Team 01
PRIVATE
EQUITY
Private Equity
When a firm starts, its owner invests money in this firm. the founders may
also invite their friends and family. These funds are Private equity because
it is privately held and can’t sell their share to the public.
Financing by VC Funds
The private firm needs a large number of investments for its business. So
they obtain their funds from Venture Capital(VC) funds. A VC fund receives
money from wealthy investors and a pension fund for a long period of time.
Usually 5 to 10 years.
Financing by VC Funds (Contd.)
Company Acquiring
Alternatively, VC funds may cash out if the company is acquired by another firm.
Sometimes, a business can’t run in the long run. So at that moment, another firm
acquires that firm. In the meantime, the VC fund cashed out its funds and exited.
Thus, a VC fund serves as a bridge for financing the business until it either goes
public or is acquired.
Financing by Private Equity Funds
Private companies can get funds from Private Equity Funds. These funds are
from Institutional investors such as Pension funds or insurance companies.
There are some restrictions applied for investing a minimum amount of
funds such as $1 million. And the investor can’t withdraw this amount before
a certain period such as 5 years.
The difference between VC funds and Private equity funds is
Private equity funds purchase a majority stake in the company or the
entire company, whereas VC funds only invest in the company and get a
percentage of the profit of that company.
Private equity funds invest a larger amount than typical VC funds.
Financing by Private Equity Funds(Contd.)
For this large number of stakes, private equity funds can take control of the
company. And its managers usually take a percentage of the profit in return
for managing funds. The private equity funds usually charge an annual fee
to the investors such as 2 percent.
Private equity funds usually borrow heavily to finance their investment. For
this reason, they can purchase larger companies or to buy more
businesses. They can earn from their investment and their financial
leverage magnifies this return.
Use of Financial Leverage by Private Equity Funds
(Contd.)
If they fail to generate profit, this loss also be enhanced because of their
high degrees of leverage. Private equity funds heavily rely on financial
leverage. So, they want to invest more in companies when they can easily
obtain debt in financial markets.
Financing By Crowdfunding
Besides Public equity funds and VC funds, new firms usually raise
crowdfunding. Crowdfunding is basically, where individual investors invest
a large amount. Crowdfunding is very important for small businesses.
Financing By Crowdfunding (Contd.)
Founders can obtain large equity financing to support the firm’s growth or pay
off some of their debt. They may also hope to “cash out” by selling their own
original equity investment to others.
1)Ownership and Voting Rights
When a firm engages in a public offering, it issues (sells) many shares of
stock in the primary market in exchange for cash. This endeavor changes
the firm’s ownership structure by increasing the number of owners.
A public stock offering can appeal to many individual investors who want to
become shareholders so that they can earn a good return on their
investment if the firm performs well. They may also receive dividends on a
quarterly basis from the firms in which they invest. However, investors who
purchase shares of stock are also susceptible to large losses, as the stock
values of even the most respected firms have declined substantially in
some periods.
Common Stock:
The ownership of common stock entitles shareholders to a number of
rights. Usually, only the owners of common stock are permitted to vote
on certain key matters concerning the firm, such as the election of the
board of directors, authorization to issue new shares of common stock,
approval of amendments to the corporate charter,and adoption of by
laws.
Preferred stock involves lower risk than corporate bonds as dividends can
be skipped without facing immediate default. However, omitting dividends
may hinder the firm's ability to attract new capital until prior dividends are
paid, as it signals financial instability to investors.
Unlike bonds, preferred stock dividends are not tax-deductible for the
issuing firm, and to attract investors, higher dividend rates may be
necessary. Despite these drawbacks, preferred stock represents a
permanent source of financing with no maturity date, offering stability in
the firm's capital structure.
2) Participation of Financial Institutions in Stock Markets
In addition to participating in
stock markets by investing
funds, financial institutions
sometimes issue their own
stock as a means of raising
funds. Many stock market
transactions involve two
financial institutions. For
example, an insurance
company may purchase the
newly issued stock of a
commercial bank.
2) Participation of Financial Institutions in Stock Markets
Investors often disagree on how to value a stock, such that some investors
may believe a stock is undervalued whereas others believe it is overvalued.
This difference in opinions allows for market trading, because it means
that at any given time some investors will want to buy a stock, while other
investors who previously purchased the stock will want to sell it in the
secondary market.
Stock Price Dynamics in the Secondary Market(Cont’d)
Stock prices change when the demand for shares either exceeds or falls
short of the available supply. Positive news regarding a company's
anticipated performance typically leads investors to believe that the stock
is undervalued at its current price. Consequently, demand for the stock
increases, causing its price to rise in the secondary market.
Repurchase previously
issued stocks
Secondary Stock Offerings is a new stock offering by a specific firm
whose stock is already publicly traded.
Purpose: Typically done to support growth, expansion, or other corporate initiatives.
Regulatory Process: Requires filing with the Securities and Exchange Commission (SEC)
and often involves hiring a securities firm for guidance.
The Sarbanes-Oxley Act was enacted in 2002 for the proper disclosure of
financial statements so that investors can monitor the financial condition
of the firm effectively. This method helps to improve the reporting time as
well as prevents potential conflicts of interest.
Shareholder Activisim
The shareholder have three options when they are displeased by the
managers. Such as: to do nothing or to sell the stocks or engage in
shareholder activism. The way by which shareholders can influence
corporations’ behavior by exercising rights is shareholder activism.
Shareholder Activisim(Contd.)
Communication with the firm: When shareholders convey their concerns
to other investors, this places more pressure on the managers or the board.
Since institutional investors directly communicate with high-level
managers, they can easily share their ideas. When institutional investors
communicate as a team, the firms become more responsive. Then
Institutional Shareholder Service(ISS) organizes conference calls with the
higher executives to talk about the overall management of the firm.
The shareholders can elect one or more directors (who share their views) if
they gain enough votes. That means the shareholders will have some
control in decision-making.
For executing this method effectively, the Institutional Shareholder
Services recommend voting a certain way so that the shareholders can
exercise power over the management decisions.
MARKET FOR
CORPORATE
CONTROL
Market for Corporate Control
When control and ownership of a company change hands through various market
transactions its called a market for Corporate control
4)Proxy Contests: Activist investors or other companies may try to gain control by
influencing the shareholders' voting process during annual meetings. They may seek to
replace current board members with individuals who support the acquisition.
2)Heavy Borrowing: The acquirer borrows a large portion of the purchase price, often
from banks or by issuing high-yield bonds (sometimes known as "junk bonds").
Use of LBOs to Achieve Corporate Control (Cont’d)
3)Leveraging the Target's Assets: The target company's own assets and cash flows are
used as collateral for the loans, minimizing the acquirer's direct financial investment.
4)Gaining Control: The acquirer purchases enough shares to gain control of the
company, often targeting a majority stake. This may involve taking the company
private if it was originally public.
The power of corporate control to eliminate agency problems is limited by barriers that
can make it more costly for a potential acquiring firm to acquire another firm whose
managers are not serving the firm’s shareholders. Some of the more common barriers
to corporate control are identified next.
2)Poison Pills: Poison pills are defensive measures enacted by a firm's board of
directors, granting shareholders or managers special rights in specific circumstances,
without shareholder approval. For instance, a poison pill might offer existing
shareholders the option to purchase additional shares at a discount in response to a
takeover attempt, making it costlier and more challenging for potential acquirers to
succeed.