Posted: 12/17/2006 3:19:50 PM EDT
Ok, so they want the source of the IPO funds and the application of the funds? The company we are doing this on is Google which funded their own IPO and the funds were applied to the IPO process. What am I missing? |
I can help you with the red part  ... If I were taking the class, I could probably help more. Can you provide more info (what is the class, etc). That might help some |
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Source of funds: Issuance of stock through capital markets. Apllications of funds: In googles scenario, I beleive they used it for technology, r&d, and expansion of staffintg. Lastly big fat bonuses. I'm at work and typing this on my phone, I will expand more when I get home tonight. |
Translation: Where did the money come from and what did they do with it?
I think you are confused here. The IPO is by definition "the public" investing in the company. Your instructor may be looking for more specifics (institutional investors vs private investors, etc). The other half of the answer comes from figuring out "What did Google do with the money they raised?" |
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How about more context here? What are the other items like "a" through "c" and "e" & beyond"? It's a bit confusing, because the predecessor to the "cash flow statement" that appears along with the income statement and balance sheet USED TO be called the "Statement of Source and Application of Funds" (or something close to that). It included some things that confounded people using the FS, so eventually they switched to 'Cash Flow Statement' which is not so difficult to make sense of. I would push the instructor to actually define the term in question. Some of them think they're doing you a favor by being vague and ambiguous, and in some cases it's true. Often you have to decide things while only having part of the picture. |
OK I am not typing on a phone keyboard now. Let me tell you, in generic form, how a company goes public and maybe from there you can get what you need. But first, in order to find out what Google did with the money, you can request a prospectus from their investor relations group. Within the propectus, the use of funds would be delineated. What I am about to write is actual underwriting process that I have been a part of within an investment bank that I have worked for. This is not from any book and may not match to what you are studying. This is real life experience. A company will need capital to get up and running. Typically from the owners/partnerships own pocket. Once the company grows, they have 4 choices in funding growth. Typically companies go through all 4 in their life time. Those for are: 1) Bank Loan: This avenue is typically good for companies that have tangible assets and receivables on the books that can secure the loan. Internet companies and companies that deal with intangible assets may not qualify for a large loan. 2) Venture Capital: Most companies that will access this avenue are the ones that have intangible assets. Let's say for example Google or a hedge fund or a software company where they are relying on selling software or a intellectual concept etc. 3) Issuing Private equity or private debt: This is typical unregistered security cause they limited to accredited investors or insiders and issued only within the state of domicile of the company. And they are typically capped in the amount of issuance. 4) Registered Security Issuance: This requires an SEC registration. An Investment banking firm to underwrite the offering. The compnay will also need to disclose financials. Typically they would need to show 3yrs worth of audited financial. Audited both internally and by an outside auditor. If the financial does not come out clean it does not get registered, no IPO. The IPO process will run as such: 1) Meeting with investment banker, accounting firm and securities attorney. They will go over financials of the company. Fee structure. Target amount that the company is looking for. 2) Investment banker prepares SEC filings. Meet with attorneys and company. Gets propectus drafted. Number of share to be issued and the number of percentage it would represent ownership of the company. Pricing is also discussed. This could take months. 3) While the filing is going on, investment banker meets with company and strategies on pricing again, and also ideal time of market release. The investment banker also sets up the underwriting sysdicate. This is a group of investment bankers that will help the lead inv bank bring the issue out. They also hash out the type of exposure each will have on the issue. (too long to explain, ask your prof.) Each member of syndicate then gets their own selling group(the of brokerage firm that will sell the issue to thier clients.) The inv bank group will then begin to gather interest from its clients. 4) Once the registration is finalized with the SEC and the Blue Sky approvals come back from the states it going to be sold in. They then figure which exchange to list it, this is typically pretty much set based on the company asset size. If the asset size is large enough, they may be able to choose between NASDAQ, AMEX or possibly NYSE. Even in NASDAQ, there are different levels. 5) The inv bank group will then begin to sell to the clients that said they would buy. If it is an issue that everyone wants, they typically give allotments to the best clients they have. Which is typically institutional clients. 6) On release date, it begins to trade on the exchange free to trade for everyone. If the issue sold out during pre-sale period. Be assured the market price will shoot up. 7) It will take roughly 5+ business days for the company to access fund derived from the sale of stocks. This is typically in the account of the lead inv banker. Typically it is invested in overnight commercial paper or some other short-term security. The company can then start drawing the money and using it. In my expereince, most companies will invest it in a laddered portfolio based on when they predict they will need funds. So they may take out a 3rd of it to expand staffing, equipment and put in marketing, as well as r&D. They may buy a 1 year bond for a 3rd of the proceeds, cause in a years time they will need a 3rd of to expand to the new site. The other 3rd may be used for longer term investments earmarked for further expansion or stock buyback etc. Google = Look at their propectus. Look at their history and see how they got their initial financing prior to the IPO. I would bet it is through venture capital. |