Issuing Public Offering
Issuing Public Offering
Financial Markets the world over are classified into two types of markets; the primary and secondary markets. The primary market is a market for new securities issued by the corporations to raise capital, on the other hand secondary markets deal in trade of securities previously issued by corporations, transactions in the secondary market typically do not involve the corporations whose financial assets are traded between two investors. The most popular method of going public is the IPO or the Initial Public Offering method.
The IPO involves a financial intermediary such as an investment bank, which underwrites the new securities i. . buys the securities form the corporation and then resells it to investors. The investment bank assumes the risk of distributing the securities. However this process is only viable for large organization with strong liquidity position because it is extremely expensive, time consuming and risky (Underwriters can back out at the last moment). Alternately the corporation could use the Direct Public Offering (DPO) process, this is similar to the IPO process except that the corporation itself acts as the underwriter. The corporation registers its securities with the regulating body itself and sells it to investors directly.
The process is considerably less costly however it is quite labor intensive. Other less conventional routes to the public securities market include utilizing the Exchange Act Registration of 1934. The organization can sell its shares privately to investors and register under the act, thereby listing the securities on the NASDAQ Over the Counter Bulletin Board (OTC-BB). The OTC-BB is not a stock exchange but allows brokers and investors to quote and trade the stock. The company (private) could also acquire major shares of a public company and become publicly listed.
Ideally the public company has no assets, liabilities or operations, such firms are referred as public shells. Once the merger is consummated, the merged entity could change its name and management at the discretion of the private company. Another method o get publicly listed is through a registered spin off. Under this method the private corporation issues its common stocks to a publicly traded company, the stock sale is registered with the Securities Exchange Commission and these are distributed to the existing shareholders of the publicly traded corporation.
This result in two companies with pubic shareholders, the spin off company can later list itself independently. Once the company goes public i. e. its securities are listed on the Securities Exchange Markets like the NYSE or NASDAQ, any future transaction of these securities becomes a secondary market transaction and prices are determined by the market dynamics. Equity or Debt Securities Before we decide on how to acquire the funds we must understand the effects of the anticipated recession on the financial market. A recession would be characterized by low level of economic activity.
During a recession the demand for money will fall in the face of increased interest rates, which imply higher cost of money. The Federal Reserve on the other hand will try to stimulate the economy by loosening the money supply and driving interest rates down. Therefore there is a tendency for interest rates to decline especially in the short term. If I were the financial manager of the company, I would issue short-term callable bonds to finance the project. Once the economy goes into recession the interest rates would tend to decrease; this will make the bond trade in the secondary market for a premium value.
Since the bonds are callable the company can call them at the quoted price. The decrease in interest rates will make the stock market more lucrative for investors as they could get higher returns on their investment in the stock market. Since the investors will pull the money out of the bond market and inject it in the stock market, it will lead to an increase in demand for stocks, pushing the prices of stocks upwards. As the prices of stocks would increase the company could sell its stock for higher par value in the market and generate additional funds.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 8 November 2016
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