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Principles of Finance: Unit 1, Sharing the Pie (Types of Stock): Authorized, Issue, Stock Options 16 Views
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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.
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