Ferrari IPO| Assignment Sample

I. An IPO as a Strategic Milestone for a Company

 

a. Explain the generic benefits and drawbacks of going public

The Initial Public Offering (IPO) is considered as the aim of numerous investors, companies. However, IPO is the noteworthy aim of having the potential fringes that also have many of the benefits and risks that are related to going public. Therefore an IPO might not be considered appropriate for the Ferrari Company. However, it was believed by many people that if such kind of successful companies will go public, then there are also many of the other secluded companies that might thrive in the industry (Holthausen, 2012).

Advantages

There are the following advantages of going public, which are:

  • Fundraising - It is the biggest benefit of the preliminary public that offers money. In the wake of 2016, the proceeded median that could obtain from the offerings of the initial public offerings were almost $94.5 million. For instance, the biggest IPO has been netted to $1.4 billion. Moreover, the proceeds from the IPO have justified many of the companies to go public without considering any of the associated benefits that could especially consider the new investment opportunities that are available due to new capital. These funds can help provide the benefits that could be helpful to finance the R and D, hire the new employees, decrease the debt, fund capital expenditures, and acquire the new technology. Moreover, the provided money has provided by the IPO and is considered significant and transforms the growth of the company (Governance, 2018).

  • The opportunity of Exit - As the company has different stakeholders contributed heavy amounts of money, their time, and the relevant resources having the considerable to create the company successful company. The founders and the associated investors could often go of many of the years without seeing that if there is any significant financial return on their contribution.  However, the initial stage that has to be incorporated and goes without any significant financial return on the contribution. In this regard, the IPO is considered an important opportunity of exit for the stakeholders. Moreover, it is of vital importance that the founders and the associated investors receive the liquidity from IPO.

Drawbacks

Following are the drawbacks of going public is as follows:

  • Additional Regulatory Requirements and the Disclosures – it is no like the private companies that they need to file their financial statement with the SEC for every year. Such statements could be prepared and accepted; the accounting principles are audited by the certified public accounting firm. Such regulations related to SEC are considered as the company that could establish the financial control 

  • Market Pressure - It is difficult for the company to leadership that who are used to view the doings and what they feel is considered as the best company. In this regard, the founders have the extended-term view of having the vision of the company that will look like the years, and from the present, it will greatly affect the world. Once the company has gone public, it could help to scrutinize its goals (Governance, 2018).

  • Potential Loss of the customers - The major associated disadvantage is that the founder lost control of their own company. Still, some ways ensure that the founders could retain the majority of the decision making power in the company.

b. What may have motivated Ferrari (Ticker symbol ‘RACE’) to go public?

As Ferrari has announced and proposed that it is going public and started to the roadshow and the clients showed that they had drawn the products in the large parts due to having their exclusivity. The company retains due to its limited number of cars. However, in 1969 Fiat Chrysler has bought the fifty percent stake in the company and which increase to 90 percent in 1988. For the Fiat Chrysler, the IPO has raised the needed cash that could help provide the pare debt to the largest automaker. The reason is to expand the business and to other luxury cars having the high margins. Fiat Chrysler Automobile has retained the eighty percent shares in Ferrari and to distribute the stock of the Ferrari to the shareholders in the coming year. By remaining 10 percent, the aim is to make the Ferrari into an independent brand by selling off a 10 percent stake that will be sold in IPO in the year 2015.

c. Why do you think Ferrari chose to list on New York Stock Exchange?

The company has chosen that the price is initially publically offered at $52 and the range, the company announced to list the 10 percent of its shares on the New York Stock Exchange. The reason is due to having secure trading. The other reason is that NYSE uses the hybrid model which uses the human and technology both in its trade and the Ferrari is on the same platform that it uses both human efforts and the use of technology in its business. The other reason is that Ferrari is not dealing with any dealer. Still, instead, it chooses the auction and enables the individual to make the transaction between each other through auction. 

d. What can you say about the primary and secondary shares sold in the Ferrari IPO?

Primary shares that have been vended in the IPO are the new shared in the stock. While the secondary shares mainly mention the shares that are preexisted and go to shareholders (Shrieves, 2001). However, the secondary shares that are sold in Ferrari IPO are shares that have been sold to another investor and do not receive any cash. Still, they directly buy and sell to other parties, which is contrary to the primary shares. But in the case of the Ferrari IPO, it is a primary share containing because it issues stock for the first time to the public.

II. What is an IPO over-allotment (Greenshoe) option? Did Ferrari include such an option in its IPO?

The greenshoe is that selection that is termed for the over-allotment option. However, in the framework of IPO, which is the facility that is in agreement that is backing and grants the full right to the underwriter to sell to the investor and share more than the initial plan by the issuer, if the security is demanded and the issue provides higher than expected. No Ferrari has no option of over-allotment in IPO (Holthausen, 2012). The options undertaken by Green show are as follows:

  • The underwriter acts as the liaison, and act as the dealer, find the buyers of the client's newly shares.

  • Sellers and the buyers are the price setter.

  • After the determination of shares, they trade it publically, and the underwriter uses the legal ways to share at the top of the price that they had offered.

  • If the underwriter finds the possibility to fall below the offered price, the greenshoe will be utilized as a safe option.

III. The Underwriting Investment Bank as a Central Role in the IPO Process

a. What are the key tasks executed by the underwriter?

The underwriter assistances the company to make for the IPO and consider the matters such as the amount of the money that is sought to raise and the securities type that is to be issued the consent between the company and the underwriter. As the underwriter is the financial specialist and has specialization in the IPO that shows a vital role in the execution of the shares, i.e., it’s buying and selling. They are actually investment banks and employ IPO specialists. They could ensure the firms and make them satisfied that all the regulatory requirements like the filling with the suitable bodies, and to deposit the fee, make mandatory monetary data that is available for the public. Underwriter contacts the buyers of the stock.

b. What are the primary considerations when selecting an underwriter?

The primary consideration while selecting the underwriter is:

  • Understand the business. Also, the underwriter knows about the fact that what the company knows.

  • It can position the story of the company.

  • Experience and Reputation.

  • Overall team quality.

  • IPO process.

c. Often, multiple underwriters are involved. In the case of Ferrari, a syndicate of 7 underwriters was involved in the IPO. What are the main motivations for syndication?

Syndicate is the temporary alliance that has been formed by the professionals. The major motivation behind this is to handle the larger transaction, which is impossible to be executed by a single person. The other motivation is to share the risk and attract returns.

d. How much compensation was paid to the underwriters of Ferrari? Do you think it is comparable to the average compensation paid to underwriters in US IPOs?

The underwriter has to be paid for on some of the agreed commission, and they take the allotment of such part of the shares because the public has not applied for it. The paid compensation is not comparable to the underwriters in the US IPO for the fact that every company paid according to their shares, so it is not comparable.

e. What do you understand by 'price-stabilization' activities conducted by the underwriter(s)? Do you think the underwriters were involved in the price-stabilization of the Ferrari IPO?

Price stabilization is the bid that has to be undertaken by the underwriters for the sake of providing support to the secondary market.  Yes, Ferrari IPO is also involved in the price stabilizing. However, it is difficult to get any hard and fast rule under the IPO, and there is no rule on how the price should move, so by assessing this, underwriters conduct the price stabilizing activities and make the prices at a certain level. 

IV. Describe what happens during the 'book-building' of an IPO. What price range was used for the book building of the Ferrari IPO? Why do you think Ferrari priced its offering at the top end of the book-building range?

            The determining process of the price for the IPO is called book-building (GANTI, 2019). This is being done by estimating the investors’ demand for the shares. The method of book-building is extremely endorsed by all of the major stock exchanges. The general book-building process is as follows (Rawani, 2009):

  1. The hiring of the underwriter (normally investment bank) by the issuing company. The underwriter determines the share price in IPO. This price is subjective to point 3 to be finalized.

  2. Sending an invitation to large scale inventors to participate in the purchase of the shares through biding.

  3. The underwriters determine the final price by estimating the demand of the shares after considering point 2.

  4. To ensure transparency, the underwriter publicizes each bid.

  5. Shares allocation to the putative investors and bidders.

The price range used by Ferrari, in early October 2105, for IPO was between USD 48 to USD 52 per share (Ferrari, 2017).

V. Based on the information given in the case study and the IPO prospectus, discuss the pricing of the Ferrari IPO. Would you have invested in Ferrari at this price?

            At the time of IPO, Ferrari was a renowned and much-accepted company among the investors. As discussed earlier, there was a huge demand for Ferrari shares at IPO that was about 17.175 Million of the shares, which is commendable in the respective industry (Ferrari, 2017). The company was among the premium car manufacturing companies and had a huge customer base, too, along with investors' willingness to pay.

 After considering the demand for their shares, they set a high price ranging between $48 and $52 at IPO. If I were an investor, I would be very happily investing in the IPO as it was a much-demanded investment, investors were bidding to get shares. In fact, the increase in demand increased the worth of shares too. I would have invested as the return was assured not only in the form of increased share price but the huge dividends too as the company is a premium seller and earning huge profits.

VI. What are IPO lock-up agreements? Describe the lock-up agreement of the Ferrari IPO.

It is the lock-up agreement that refers to the legal binding where the contract has been made between the insider and the underwriter of the company during the IPO that could prohibit from selling the shares for some specific period. Normally the lock-up period comprises 180 days or the six months, but it might last anywhere from 4 months to a year. Although there are no federal laws that could govern the lock-up agreement and the decision on such duration is made under the underwriter consent.

While the lock u agreement between the Ferrari IPO is that the 10percent shares have not been sell (Shrieves, 2001). However, in the context of Ferrari, FCA, official, and the directors enter into a similar lock-up agreement with the underwriters.  The securities may be at any time release to the stockholders from this lockup agreement and allow the shareholder to sell the common stock within the 90 days. 

VII. Based on a visual examination of the chart above, how does the performance of the Ferrari IPO compare with average IPO performance documented by past empirical studies?

a. In terms of the short term (1st trading day)?

            The performance of Ferrari on the 1st trading day as compared to average IPO performance was beyond the expectations. The closing price of shares was $55 that was above the predicated range of IPO. Also, the volume sold also outperformed as expectations were 17.175 million, but according to data, it was about 22.5 million shares sold on 21st October 2015, on the day of IPO.

b. Over the longer-term (4 years)?

The share performance of Ferrari over the long time horizon that is of four years is also outperforming. The maximum share price went to $149.33 in June 2018, while the minimum was $32 in October 2016. While the minimum shares traded in one day are 127,000 and the maximum, except IPO, are around 7.5 million (See Table 1). We can examine the trends in the following given graphs, too (See Fig 1 & Fig 2).

 

Table 1: Shares Performance over Four Years

Date

Share Price

Shares Volume

21-10-15

55

22498800

02-02-16

34.98

7485100

09-02-16

33.96

1653300

10-02-16

33.27

1481800

11-02-16

32

1447600

15-07-16

42.37

127000

15-08-16

48.68

149400

27-12-16

58.29

130700

14-06-18

149.33

791900

15-06-18

148.9

368200

18-06-18

147.81

306500

01-08-18

118

6443500

 

Fig 1: Share Price

 

Fig 2: Volume

 

VIII. In the light of the main theories of capital structure, provide a discussion of the evolution of the capital structure of Ferrari since its IPO.

            The capital structure of any company is a combination of its debt and equity to acquire all needed assets and to carry on all the operations to run the business (TUOVILA, 2020). The capital structure of Ferrari has developed since its IPO, which is 2015. The company is highly leveraged now as it is highly dependent on the debt, while an IPO was highly based on equity with huge shares being sold.

Also, the reason for Ferrari to become highly leveraged is the decision of the company to repurchase its shares in 2018. This might be for any long term goal. In short, the capital structure of Ferrari since its IPO is diverting towards debt as compared to equity. The capital structure since IPO was more equity intensive, but now it has developed as a debt intensive.

 

 

References

 

Ferrari, E. (2017). Ferrari: The 2015 Initial Public Offering. Darden Business Publishing.

GANTI, A. (2019). Book Building. Retrieved from https://www.investopedia.com/terms/b/bookbuilding.asp

Governance, N. (2018). , Corporate Tax, viewed 3 May 2018, .

Holthausen, R. &. (2012). 'Valuation with market multiples: How to avoid pitfalls when identifying and using comparable companies.' Journal of Applied Corporate Finance, vol. 24, no. 3, pp. 26-38.

Rawani, A. (2009). What is Book-Building? The Economic Times. Retrieved from https://economictimes.indiatimes.com/money-you/what-is-book-building/articleshow/4872829.cms?from=mdr

Shrieves, R. &. (2001). 'Free Cash Flow (FCF), Economic Value Added (EVA™), and Net Present Value (NPV): A Reconciliation of Variations of Discounted-Cash-Flow (DCF) Valuation',. The engineering economist, vol. 46, no.1, pp. 33-52.

TUOVILA, A. (2020). Capital Structure. Retrieved from https://www.investopedia.com/terms/c/capitalstructure.asp

 

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