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Principles of Finance: Unit 1, Pros and Cons of IPOs, The Secondary & Primary Market 25 Views
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What are the pros and cons of IPOs, and of the secondary and primary market? Why might a company want to go public, and what's the best way to go about... doing that? Well, our good friends at the Sauce Company will have to decide how much control they're comfortable giving up, how their decisions will affect investors, their stock prices, etc.
Transcript
- 00:00
principles of Finance a la shmoop. pros and cons of IPOs, the secondary and
- 00:07
the primary market. ah the IPO. investing holy grail. well an IPO is an initial
- 00:15
public offering. in it the company agrees to conform to higher standards of [white board definitions]
- 00:20
operation mainly in the form of reporting and accounting compliance and
- 00:25
in return the company gets to sell stock to the public and list its shares on an
Full Transcript
- 00:30
exchange like Nasdaq or the American Stock Exchange or the NYSC you know just
- 00:35
like the big boys. why would the sauce company want to do that well two reasons.
- 00:42
really one is that it gives the original investors Artie Bernie Reid a purple key [man gives power point]
- 00:47
the opportunity to cash out or get liquid. liquidity vocab word time -refers
- 00:54
to investors easy and quick means with which to turn their equity shares
- 00:59
into the cold hard stuff or cash. like if you're very liquid you hold a
- 01:03
lot of cash. mr. market the stock market puts a valuation on the company in the
- 01:09
form of pricing its shares- it's a valuation that is typically
- 01:12
higher than professional private equity or venture investors would give it, and
- 01:16
well with that IPO move come the burdens of being a public company- more scrutiny
- 01:23
more stringent reporting requirements more bureaucrats more filings more [power point presentation continues]
- 01:28
accountability, just well more. well all of these are a cost to any public
- 01:33
company. and the big debate revolves around whether the positives outweigh
- 01:37
the negatives ,right because being public carries a lot of burden to it. there's a
- 01:41
lot of spirited debate within the sauce company around the question why go [scale pictured]
- 01:44
public at all? well Bernie notes that he likes having the freedom to experiment
- 01:49
and spend money trying new applications for the sauce. could it be a know a hair
- 01:55
conditioner ?or what about a pet laxative? and
- 02:00
don't ask how he came up with that idea. well he's talking about branching out [cat leaves litter box]
- 02:04
into scented candles as well. it seems that the early trials have been a huge
- 02:08
hit in Thailand. well if the sauce company is public he worries that he
- 02:13
will not have the ability to make mistakes experimenting because well the
- 02:17
company will be focused solely on hitting their quarterly profitability
- 02:21
numbers, so that Wall Street will be happy and they'll carry a high stock [smiling man in a suit]
- 02:24
price. well Artie ruefully points out that the venture guys will sell them out
- 02:28
dumping their shares just in time for the sauce company to miss a quarter by a
- 02:33
few pennies a share and then well they watch their stock price get cut in half
- 02:37
overnight. so the founders really don't want to take the company public. the [chart shown]
- 02:41
debate gets heated enough that Artyom Bertina find their own legal counsel to
- 02:44
outline their choices. they wanted to use uncle hy but well he realized this was
- 02:49
way out of his league. so he found them a lawyer from the August firm Dewey
- 02:53
Cheatham and Howe. well Hine Goldberg a partner at the firm points out that [lawyer firm shown]
- 02:57
since the company doesn't need the money well they already have 40 million
- 03:01
dollars in cash on the books no debt and a very high free cash flow coming into
- 03:06
the company each month ,well the only reason for doing an IPO would be to let
- 03:10
others sell stock. high notes the huge success of off marketplaces that have [man smiles holding stock]
- 03:16
emerged through which companies like Facebook and Google and Twitter and a
- 03:20
bunch of other high-growth Silicon Valley companies have transacted in the
- 03:23
billions of dollars. they could simply list their securities on a second market
- 03:28
or the actual company called the second market and hope for the best!
- 03:32
well unfortunately the VCS do not believe that second market marketplaces
- 03:36
alone will give them the liquidity they need to sell so many shares. so the VCS [logo of second market shown]
- 03:41
are determined to go public and really they're kind of miffed because that was
- 03:45
the handshake they made when they invested in the first place. that the
- 03:48
company would go public if it could. well it appears that they have a stalemate
- 03:52
until mr. Wu weighs in .he's at a crossroads in his career. because he's
- 03:57
done such a spectacular job at running the sauce company while he's now being [man answers phone]
- 04:01
highly recruited to come in and run huge public companies as CEO. well he only has
- 04:06
six more months to vest in his stock options that were granted originally,
- 04:10
and if the sauce company decides not to go public, well he can just quietly
- 04:13
finish best and give notice in a few months and we'll move on to his next gig.
- 04:17
he'll profit handsomely from his options which he bought out and owns the shares [three men play musical instruments]
- 04:21
of now, and with his vesting he'll have converted them entirely into the common
- 04:26
stock that he bought out. got it? he can surely find buyers for his small stake
- 04:30
on the second market in well just move on. but if mr. Wu goes well it's a huge
- 04:35
headache for everyone. arty and Bernina have grown to respect
- 04:39
and like him as has the board and the other thousand employees now inside the
- 04:43
company but most importantly so has Bubbie. [men frown]
- 04:46
she got to know mr. Wu's mother who was about her age and while they had been
- 04:50
experimenting with a blend of Eastern European cooking and just eastern
- 04:54
cooking kreplach dim sum which has fast become Bobby's favorite dish. well since
- 04:59
the heart and soul the company is bubbie anyway when she speaks no the rest of [women smile sitting at a table]
- 05:02
the room gets quiet fast, and she wants Wu to stay so she asked him to describe
- 05:07
his vision for the future of the company Wu then details his longer-term strategy
- 05:11
which is to take the company public and then acquire or roll up other smaller
- 05:16
brands contiguous to the sauce arena. salad dressings snack foods other
- 05:21
cooking elixirs all branded under this new hot brand the sauce to buyers who [salad dressing and vegetable oil shown]
- 05:27
pray to the goddess Bubbe who's smiling face at this point from seventeen while
- 05:31
going on 20 years ago actually adorns every bottle. bubbie loves this idea! so
- 05:35
it was said so it shall be done. Aarti and Bernie stare at their laps as
- 05:39
they vote okay quietly when the board resolution is passed to go public. yep [young men frown]
- 05:45
what a good couple of minions.
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