Contemporary Issues
Contemporary Issues in Finance
You are a research assistant to the Board of the FTSE100 listed company. Write a report for your Board of Directors outlining the current trends in seasoned equity issues. Explain what financing options (particularly seasoned equity issuance) the company has if it wishes to undertake the purchase of a rival.
There have been changes in the last 20 years or so in the way British listed companies issued equity, and there was only one method which was used until the late 1980s and it was the rights issue and the other methods were used such as open offers and placings, in a placing the new shared are placed by private negotiation with a number of investors, or accelerated book building. In this method an open offer combines a placing via negotiation with an offer to the existing shareholders in proportion to their existing holdings. This method is the most used for larger issues in relation to issuer size, which is worth 5% or more of the existing equity. The method of rights issues is declining because of a decline in family firms and the rise of investing institutions. Because higher proportions of new investors are required to provide equity, rights issues becoming more expensive issue method and Eckbo (2008) claims that the rights issues are mainly used by smaller firms and in smaller markets where there are only few shareholders who are willing to provide equity but in UK the rights issues are still used mainly by the largest firms.
Even though rights issues method is declining Smith (1977) claims that rights issues are cheaper than other forms of raising new equity capital. By late 70s, most US Industrial companies had abandoned rights issues and switched to firm commitment offers due to marketing and underwriting costs. Only 2.5% of US industrials used rights from 1980-2008. This has remained the dominant method in US. In most of Europe, rights issues still dominate.
There are two methods that exist in the UK for
You are a research assistant to the Board of the FTSE100 listed company. Write a report for your Board of Directors outlining the current trends in seasoned equity issues. Explain what financing options (particularly seasoned equity issuance) the company has if it wishes to undertake the purchase of a rival.
There have been changes in the last 20 years or so in the way British listed companies issued equity, and there was only one method which was used until the late 1980s and it was the rights issue and the other methods were used such as open offers and placings, in a placing the new shared are placed by private negotiation with a number of investors, or accelerated book building. In this method an open offer combines a placing via negotiation with an offer to the existing shareholders in proportion to their existing holdings. This method is the most used for larger issues in relation to issuer size, which is worth 5% or more of the existing equity. The method of rights issues is declining because of a decline in family firms and the rise of investing institutions. Because higher proportions of new investors are required to provide equity, rights issues becoming more expensive issue method and Eckbo (2008) claims that the rights issues are mainly used by smaller firms and in smaller markets where there are only few shareholders who are willing to provide equity but in UK the rights issues are still used mainly by the largest firms.
Even though rights issues method is declining Smith (1977) claims that rights issues are cheaper than other forms of raising new equity capital. By late 70s, most US Industrial companies had abandoned rights issues and switched to firm commitment offers due to marketing and underwriting costs. Only 2.5% of US industrials used rights from 1980-2008. This has remained the dominant method in US. In most of Europe, rights issues still dominate.
There are two methods that exist in the UK for
References: Armitage, S. (2010). Block buying and choice of issue method in UK seasoned equity offers. Journal of Business Finance & Accounting, 37(3‐4), 422-448. Balachandran, B., Faff, R., Theobald, M., & Velayutham, E. (2009). Seasoned Equity Offerings, Quality Signalling and Private Benefits of Control. Working Paper: ssrn. com/abstract= 1118180. Eckbo, B. E. (2008). Equity issues and the disappearing rights offer phenomenon. Journal of Applied Corporate Finance, 20(4), 72-85. Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of financial economics, 13(2), 187-221. Wruck, K. H. (1989). Equity ownership concentration and firm value: Evidence from private equity financings. Journal of Financial Economics, 23(1), 3-28. Slovin, M. B., Sushka, M. E., & Lai, K. W. (2000). Alternative flotation methods, adverse selection, and ownership structure: evidence from seasoned equity issuance in the UK. Journal of Financial Economics, 57(2), 157-190.