Corporate finance comprises various important functions, of which M&A (Mergers and Acquisitions) advisory and capital raising are key. This guide will take a deep dive into the capital raising aspect, with a particular focus on underwriting from a banker’s perspective.
Key Points and Processes
1. Functions of Corporate Finance
There are two essential functions in corporate finance:
a. M&A Advisory: Deals with negotiation, structuring, and valuation in investment banking or corporate development.
b. Capital Raising (Underwriting): Includes IPOs, follow-on offerings, and advisory services. It involves investment banks, corporate development groups, and accounting firms.
2. Three Main Components of Advisory Services
These components assist in raising capital:
a. Planning Phase: Identifies the investment’s themes and rationale, gauging investor interest.
b. Assessing Timing and Demand: Considers market conditions, investor risk appetite, and whether it’s a hot or cold market.
c. Issue Structure: Decides between domestic or international, retail or institutional.
3. Types of Underwriting Commitments
a. Firm Commitment: Underwriter buys the entire issue, responsible for shares.
b. Best Efforts: Most common; no promise on deal performance.
c. All or None: The entire issue must be sold, or the deal is pulled.
4. Mechanics of Capital Raising (Underwriting Process)
a. Book Building Process: A range of prices is set, leading to a more firm price.
b. Clearing Price: Final price is set based on orders from institutional investors.
c. Order Allocation: If oversubscribed, some investors may get less than asked for.
d. Roadshow Process: Management meets institutional investors; critical areas include management structure, key risks, long-term strategy, use of proceeds, industry trends.
e. Pricing and Offering: Focuses on price stability, a buoyant aftermarket, a deep investor base, and market access.
f. Cost Associated with Flotation: Balancing price with risk and returns.
g. IPO Pricing Process: Determines full value, deducts IPO discount, sets a pricing range.
- Investment Banks: They provide advisory services and are involved in IPOs and offerings.
- Corporate Development Groups: They participate actively in capital raising processes.
- Accounting Firms: They provide support services for transactions.
- Financial Modeling and Business Valuation Courses: Educational resources for understanding business valuation.
Underwriting and capital-raising services are multifaceted processes requiring careful planning, execution, and understanding of the market. From initial planning to pricing and offering, each stage has its unique challenges and complexities. Whether you’re an investor, a corporate banker, or someone interested in the corporate finance world, understanding these processes is crucial in making informed decisions.