2

Equity Capital Markets Products

The objective of this chapter is to provide a good understanding of equity capital markets products such as rights issues and accelerated book-buildings. Convertibles and mandatory convertibles are covered in Chapter 3. A second aim is to help bank professionals to understand the main products provided by the bank equity capital markets (ECM) team. The ECM team specializes in the origination and execution of equity capital markets transactions.

2.1 MAIN EQUITY CAPITAL MARKETS PRODUCTS

This section briefly describes the main equity capital markets products.

2.1.1 Capital Increase Products

In challenging economic environments even fundamentally sound companies experience capital structure pressures. Stringent covenants and operating performance challenges oblige them to raise capital. Companies are generally reluctant to issue new equity because it is notably more expensive than debt. However, from time to time companies need to raise capital to finance acquisitions, to finance further growth or to lower leverage. Capital increase products aim at placing new shares of the company with institutional and/or retail investors. There are a number of alternatives for raising equity capital, but no set rules for identifying the optimal one. The cycle in which the company is, has a large influence on the capital increase product chosen, as shown in Figure 2.1. The main capital increase products are initial public offerings, rights issues, accelerated book-buildings (ABB) and hybrid issues.

Pre-emptive vs. Non-pre-emptive Capital Increase

A pre-emptive capital increase is an issue of new shares with subscription rights for current shareholders. Existing shareholders remain protected from dilution risk as they have a proportional take-up right.

A non-pre-emptive capital increase is an issue of new shares without subscription rights for current shareholders. Existing shareholders are exposed to dilution.

2.1.2 Secondary Placement Products

Core shareholders sometimes need to sell their investment in a company. In these transactions the company does not receive the proceeds of the placement. Two of the main secondary placement products are IPOs and ABBs. In an IPO, shares of a previously unlisted company are offered to stock market investors. After the IPO the company shares publicly trade on the stock market. Typically the sellers into an IPO are the company founders and/or private equity firms looking to cash in their original investment. In an ABB, shareholders holding a significant block of shares sell it to investors in a quick placement transaction.

2.1.3 Equity-linked Products

Sometimes companies want to monetize their stake in other companies without selling the stake issuing equity-linked products, such as mandatory exchangeable and exchangeable bonds. If the company issues equity-linked products, the instruments are called mandatory convertible and convertible bonds. Equity-linked instruments are covered in Chapter 3.

2.2 INITIAL PUBLIC OFFERINGS

2.2.1 Product Description

Initial public offerings (IPOs) are a product for privately owned companies aiming to list their shares on a public stock market (i.e., in an exchange). In an IPO, new and/or existing shares are offered to institutional investors, retail investors and to the company's employees. A listing enables the company to attract capital and realize its growth ambitions, while providing liquidity for its shareholders. For example, a private equity firm may have acquired a company via a leveraged buy-out (LBO). After years of partially repaying the debt, the private equity firm may decide to crystallize its investment by going public. Another example would be a private company's founders selling to the market part of their holdings to diversify their wealth. A third example would be a company selling new shares to fund its expansion plans. A final example would be a holding entity selling to the market part of its privately owned subsidiary to finance expansion plan requirements. IPOs provide investors the opportunity to diversify and invest in a company that was previously unavailable to them. The IPO process is also called a “going public” process.

Generally, the sale of shares in an IPO uses one of the following methods to establish an offer price and to allocate the offered shares:

• In a book-building process, also called the “traditional” method, the offer price is decided by the participating banks in conjunction with the offeror (i.e., the seller of the shares) based on the interest from institutional investors and the expected behavior of the shares once the trading for these shares starts. The allotment of the offered shares among the institutional investors is at the discretion of the participating banks based on multiple factors. Therefore, once the offer price is set, investors who bid at least that price may not be awarded shares in the offering.
• In a Dutch auction process, the offer price and the allotment of shares are determined automatically. The offeror sets the total number of shares being offered and sometimes a potential price range. Institutional and retail investors then submit a conditional order for the quantity of shares they wish to receive and the highest price they would be willing to pay. The offeror allocates the shares, starting with the highest bidder, until it has allocated all the shares being offered. The offer price is then set at the lowest bid it accepts. The price all awarded bidders pay is the offer price, even if they had bid higher. Therefore, once the offer price is set, investors who bid at least that price know that they are awarded shares in the offering.

Primary vs. Secondary Offerings vs. Follow-on Offering

In a primary offering, a company issues new shares. The number of shares outstanding increases. The proceeds go to the company. A follow-on offering is an issuance of stock subsequent to a company's IPO.

In a secondary offering, some shareholders offer existing listed shares. The proceeds go to the selling shareholders, not to the company. The number of shares outstanding does not change.

Some IPOs combine a primary offering and a secondary offering. For example, Google's IPO included both a sell-down by existing shareholders and a capital-raising by the company.

2.2.2 Benefits of Going Public

Going public can bring many benefits for a company, for example:

2.2.3 Drawbacks of Going Public

Going public also has drawbacks, for example:

2.2.4 The IPO Process

Going public through an IPO is a unique and challenging process. The process of taking a company public takes between three and five months, during which a considerable amount of management time and attention is required. The IPO process is a complex situation for the company's organization, involving many parties and requiring rigorous time management. The IPO process can be divided into four phases, as shown in Figure 2.2.

The process starts with the preparation of the company for the IPO. The second phase entails the preparation of the offering to be marketed. In a third phase the offering is marketed to institutional and retail investors. In a final phase the offering is placed with the new shareholders.

In order to gain a comprehensive picture of the mechanics of an IPO, each of the main tasks in each phase is covered in detail next, in chronological order. However, it is important to understand that several of the tasks involved need to be implemented concurrently.

2.2.5 Phase 1: Preparation of the Company

After probably years of internal debating, the private company's shareholders finally make the decision to take the company public. In a first phase the company needs to take the steps to get it ready to launch the IPO. The steps to be followed in this stage are typically:

2.2.6 Phase 2: Preparation of the Offering

In a second stage, different groups are established to prepare all the elements that will be used later in the marketing stage. The steps to be followed are typically:

The Fee Structure

The syndicate members’ remuneration is based on fees. Each IPO is likely to have a different fee structure. The objective of the fee structure is to give each syndicate participant a moderate fixed stake in the transaction, leaving most of their potential compensation in the form of upside that they can only earn if they perform well in generating orders. By way of an example, let's use the following fee structure:

	Percentage of offer size	Percentage of total fees
Management fee, divided into:	0.55%	20%
Global coordinators/bookrunners praecipium 50%
Management fee 50%
Underwriting fee	0.55%	20%
Sales commission, divided into:	1.65%	60%
Institutional placement 90%
Retail placement 10%
Total	2.75%	100%

The total level of fees is called the “gross spread”. In this IPO, the gross spread amounted to 2.75% of the offering value. The gross spread was divided into:

• A management fee. This is a fee received for managing the transaction. In our example, the management fee represents 0.55% of the offering value, or 20% of the gross spread. In this example, half of the management fee is established as praecipium, equally divided among the global coordinators/bookrunners, and half as management fee, divided among lead/co-managers pro-rata to their underwriting commitments
• An underwriting fee. This is a fee received for bearing the risk of underwriting and the cost of aftermarket stabilization. This fee is divided among the underwriters, pro-rata to their underwriting commitments. In our example the underwriting fee represents 0.55% of the offering value, or 20% of the gross spread.
• A selling commission, also called “selling concession”. This fee compensates and motivates the selling forces of the syndicate banks for their selling effort. In our example the selling commission represents 1.65% of the offering value, or 60% of the gross spread. The selling commission is divided between the banks placing the institutional tranche (90% of the commission, in our example) and the banks placing the retail tranche (10% of the commission, in our example). The selling commission to the banks placing the institutional tranche is allocated among the banks on the basis of designations, by orders directed to be allocated. In other words, each allocated institutional investor designates the sales commission to their manager of choice based on their assessment of the quality of service offered by each bank. This arrangement provides a direct correlation between marketing effort and compensation, motivating the syndicate banks to use their full resources in the marketing effort. This compensation is usually capped to the global coordinators/bookrunners to provide added incentive to the rest of the syndicate banks.

Sometimes, in addition to the gross spread, there is an incentive fee. It tries to incentive participating banks to perform. This fee is payable at the sole discretion of the company/selling shareholders. The incentive fee is usually a small part of the overall fees, commonly less than 0.5% of the offering size. Although in most IPOs the incentive fee is available to all the banks of the syndicate group, in some IPOs only the global coordinators/bookrunners are entitled to receive it. Even though the payment of the incentive fee is discretionary, it is typically paid if some pre-agreed objectives are met, for example:

• The overall success of the IPO.
• The offer price being within a specific range.
• The conclusion of the IPO before a specific deadline.
• The selling effort of the banks.
• And/or, the reception of the IPO in the market.

Selection of Syndicate and Underwriters

The placement syndicate is the group of banks that will be responsible for marketing and selling the offer to institutional and retail investors. Most of the banks participating in the syndicate also underwrite the deal. The company/selling shareholders enter into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, the company/selling shareholders agree to sell to the underwriters, and each underwriter severally agrees to purchase, all the shares being offered at a price equal to the offering price less the fees. The underwriting agreement also provides that if any underwriter defaults, the purchase commitments of the non-defaulting underwriters may also be increased or the offering may be terminated.

A successful execution requires a perfect coordination between all the banks syndicating the deal. The roles of the banks participating in an offering are grouped into different tiers depending on their degree of responsibility in placing the offering. The main groups in an offering are the following (see Figure 2.7):

• The global coordinators are the banks that run the deal. A large deal is usually placed in several countries. They are responsible for overseeing the entire offering and coordinating the underwriting and placing activities of the rest of the banks participating in the offering. They assist with the preparation of the offering, provide the most significant research publication, arrange the pre-marketing schedule and provide advice on the price range for publication in the prospectus. The global coordinators arrange and coordinate presentations, conference calls and one-on-one meetings during the offering with key institutional accounts to facilitate the success of the transaction. The global coordinators lead the syndicate group and contribute most orders. They provide continuous feedback to the company on institutional investors’ attitude towards the offering. They also conduct the post-IPO stabilization.
• The joint bookrunners are the banks that have a secondary but also a key role in the offering, taking a significant underwriting commitment. They participate, with the global coordinators, in the pre-marketing, book-building (the joint bookrunners provide a substantial amount of orders), pricing and allocation of the offering. The joint bookrunners also publish equity research. The global coordinators and the joint bookrunners syndicate a part of the offering with other banks to lower their risk. Typically the selection of the bookrunners is based on the following criteria:

  i. Their relevant underwriting experience, including their presence in relevant offerings in the industry, their valuation record, their number of sales professionals, geographical location and ranking, and their number of participations in large offerings.

  ii. Their trading and distribution capacity, including the volume of trading of other stocks and their trading market share of industry peers.

  iii. Their ability to act as bookrunner, including their previous experience as bookrunner and their reputation to work well with other banks.

  iv. Their relationship with the company and relevant shareholders.

  v. Their relationship with the global coordinators.

  vi. The quality of their research, including the size of their research team, their ranking in research and their industry knowledge.

• The joint co-bookrunners and the joint lead managers have a middle tier role. They are usually a few banks. They are invited into the process after the preparation phase is finished. They have some influence in the syndicate and may contribute some orders. Usually, these are banks with a strong presence in specific countries and are chosen to enhance the distribution of the offering in those countries. They participate in the roadshow and usually publish equity research.
• The co-lead managers and the co-managers have a junior role in the offering. They are appointed to take some underwriting risk. They have limited influence in the offering decisions. Frequently, no distribution is expected from these banks. The co-lead managers and the co-managers focus on generating niche orders, possibly from smaller institutional investors.
• The sub-underwriters are commonly not part of the syndicate. They are appointed after the deal is launched to share underwriting risk.

The number of banks in a syndicate depends on the size of the offering and whether it includes a retail tranche. For large IPOs a typical syndicate structure includes:

• Two to three global coordinators.
• Between two and six joint bookrunners.
• Around three joint co-bookrunners/co-lead managers.
• A substantial number of co-lead managers/co-managers.

2.2.7 Phase 3: Marketing of the Offering

Marketing to Investors

The marketing to institutional investors is a three-stage process, as highlighted in Figure 2.8. Firstly, a few selected investors are approached in what is called the pre-marketing stage. Secondly, all the targeted institutional investors are marketed in a roadshow. Finally, investors are approached during the book-building period to take their bids.

Retail investors are accessed through publicity campaigns and directly by the retail branches of their banks.

The Roadshow

Immediately after the publication of the preliminary prospectus, senior management of the company, representatives of the global coordinators/bookrunners and the communication agency undertake a tour of institutional investors to promote the offering. The roadshow typically takes between one and two weeks. It offers a key opportunity to management to present the equity story of the company and the investment opportunity to institutional investors. The roadshow is conducted simultaneously by two or three teams, one covering the United States, another covering Europe and sometimes a third team covering Asia. Sometimes the teams combine to pitch certain key investors. The senior management of the company has to be well prepared to answer all sorts of questions from well-informed investors. Prior to the event, investors typically have taken a careful look at the preliminary prospectus and at the analysts’ research. There are three different types of events with investors on the roadshow:

• Group presentations allow the company to articulate its equity story to a good number, sometimes more than a hundred, of institutional investors. The presentations are generally conducted during a meal.
• One-on-one meetings are typically held with key investors in cities throughout the continent covered. The investors invited to the meetings are capable of placing very large orders, and are expected to generate the majority of the quality orders. The one-on-one meetings are arranged with a single or a small group of portfolio managers and buyside analysts. The meetings give participating investors the opportunity to question management on key issues of concern.
• Conference calls are conducted on an as-needed basis with selected investors who cannot attend the group presentations and one-on-one meetings. They can be organized as group calls as well as one-on-one calls.

2.2.8 Phase 4: Placement of the Offering

Allocation Mechanics

Once the offer price has been set, the shares have to be allocated to the institutional and retail investors. Sometimes the shares allocated to institutional and retail are not matched by their respective demands, making it necessary to allocate shares from one tranche to the other. A placing lower than the total demand stimulates negotiation in the secondary market. Normally, not all institutional investors’ bids are treated equally. Instead, institutional investors’ allocations are based on a couple of factors aimed at ensuring healthy aftermarket share behavior.

The first factor is the investor's profile. This includes analyzing, among others, the following information regarding the investor:

• Sector/country investment history.
• IPO investment history (the allocation would try to avoid speculative investors and to benefit long-term investors).
• Frequency of participation in other IPOs.
• Size of indication of interest.
• Interest shown at roadshow events.
• Willingness to buy in the secondary market.

The second factor is the investor's order profile. This includes analyzing, among others, the following information regarding each order:

• Bid price.
• Size of the order.
• Price sensitivity (the allocation would favor less price-sensitive investors).
• Timing of indication of interest (the allocation would favor earlier investors).

The retail investors’ allocation policy is usually an automatic process once the number of shares to be allocated to retail investors has been decided.

Greenshoe or Overallotment Option

The “greenshoe” or “overallotment” option is used to create aftermarket support for the shares. It is usually a 30-day option granted after the listing to the global coordinators/ bookrunners to purchase additional shares from the company/selling shareholders at the offer price. The greenshoe typically represents 10–15% of the offer size.

The greenshoe allows the global coordinators/bookrunners to create a protected “short” position, which will enhance the aftermarket support of the shares. During the allocation process, the global coordinators/bookrunners often allocate more than 100% of the shares offered, creating a short position. This short position is covered by the greenshoe option. Figure 2.10 summarizes the decision-making process followed by the banks as holders of the greenshoe option, assuming an option representing 15% of the offering.

• If the global coordinators/bookrunners expect aftermarket demand for the stock to be strong, they will typically allocate 115% of the issue, with the expectation that they will exercise the greenshoe option. If they are right (i.e., the stock price has a strong performance in the aftermarket), the banks will buy the shares from the company/selling shareholders through the greenshoe. The bought shares will, in turn, be delivered to the overallocated investors. As a result, the company/selling shareholders raise 15% additional proceeds.
• If the global coordinators/bookrunners expect aftermarket demand to be weak, they will try to allocate more than 115% of the issue. The shares exceeding the greenshoe option represent a “naked short” position in the stock, entirely at the risk of the global coordinators/bookrunners. If they are right (i.e., the stock price has a weak performance in the aftermarket), the banks will not exercise the greenshoe option, buying the shares directly in the market instead. The bought shares will, in turn, be delivered to the over-allocated investors. This buying provides support to the stock price. The company/selling shareholders do not raise additional proceeds.

Lock-up Period

In most IPOs there is a lock-up period for the company, selling shareholders and key management. This period usually lasts between 4 and 12 months, starting immediately after the offering.

The Investor Relations Team

After the IPO, the company will need to proactively market the company to investors. The investor relations team is the link between the investors and the company. The main aim of the team is to allow the company to present its story to the market on a frequent and consistent basis. The team responds to queries from institutional and individual investors who own the company's shares. The team is also in charge of submitting periodic financial information to the regulators and main information agencies. In addition, the investor relations team organizes marketing events to keep analysts and investors abreast of corporate events. These events are mainly quarterly earnings conference calls, results roadshows and one-on-one meetings with key investors. In addition, the investor relations team keeps the company's top managers abreast of market developments, breaking news, trading activity, movements of the stock price, and investors’ concerns and recommendations. The team is very small, commonly less than ten professionals. The head of the team should have direct access to the company's top management.

2.2.9 Key Success Factors Affecting an IPO

2.2.10 Key Risk Factors Affecting an IPO

The following table summarizes the main challenges faced by an IPO and how to overcome them:

2.2.11 Case Study: Visa's IPO

As an example, let us review one of the largest IPOs in US history. In 2008, during difficult market conditions, Visa Inc. aimed to list on the New York Stock Exchange in a landmark offering to global investors. Visa Inc. operated the world's largest retail electronic payments network in the world. It had the largest number of branded credit and debit cards in circulation. Visa facilitated global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. Visa provided financial institutions, its primary customers, with product platforms encompassing consumer credit, debit, prepaid and commercial payments. VisaNet, its secure, centralized, global processing platform, enabled Visa to provide financial institutions and merchants with a wide range of product platforms, transaction processing and related value-added services.

On 11 October 2006, Visa announced that some of its businesses would be merged and become a publicly traded company. Under the IPO restructuring, Visa Canada, Visa International and Visa USA were merged into the new public company, Visa Inc. Visa's Western Europe operation became a separate company, owned by its member banks that will also have a minority stake in Visa Inc.

On 3 October 2007, Visa completed its corporate restructuring with the formation of Visa Inc. The new company was the first step towards Visa's IPO. The second step came on 9 November 2007, when the new Visa Inc. submitted its USD 10 billion IPO filing with the US Securities and Exchange Commission and publicly announced the deal. JP Morgan and Goldman Sachs acted as global coordinators. The principal shareholders of Visa Inc. prior to the IPO were:

• JP Morgan Chase: 23.3%
• Visa Europe: 19.6%
• Bank of America: 11.5%
• National City: 8.0%
• Citigroup: 5.5%
• US Bancorp: 5.1%
• Wells Fargo: 5.1%

On 25 February 2008, Visa announced it would go ahead with the IPO. Besides the two global coordinators, another six banks were selected to participate in the deal as bookrunners. The law firm Davis Polk & Wardwell served as counsel to the underwriters, while the law firm White & Case LLP served as counsel to Visa Inc. The accounting/financial advisor was the company auditor, KPMG. The underwriters had a 30-day greenshoe option to purchase up to 40.6 million additional shares, 10% of the initial offering size, to cover any overallotments.

In total, 45 investment banks were selected to participate in the deal in several capacities, most notably as underwriters. The eight global coordinators/bookrunners underwrote 85.7% of the offering. Thus, only 14.3% of the offering was underwritten by the remaining 37 banks. The following table summarizes the underwriting commitments by the global coordinators/bookrunners:

Bank	Underwriting commitment (shares)	Percentage of total
Goldman Sachs	102.7 million	25.3%
JP Morgan	102.7 million	25.3%
UBS	30.4 million	7.5%
Bank of America	27.9 million	6.9%
Wachovia	26.3 million	6.5%
Citigroup	20.1 million	5.0%
HSBC	18.6 million	4.6%
Merrill Lynch	18.6 million	4.6%
Total	347.3 million	85.7%

The IPO roadshow comprised three teams traveling across three continents to visit 10 countries and 24 cities. There were 36 group investor meetings across the United States, Europe, the Middle East and Asia for a total of over 1,700 investors.

On 18 March 2008 the IPO took place. Visa sold 406 million shares at USD 44 per share (USD 2 above the high end of the expected USD 37–42 pricing range), raising USD 17.9 billion before fees in the largest initial public offering in US history at that time. The gross spread amounted to 2.80% of the deal value. The following table summarizes the main data of Visa Inc.'s IPO:

Visa Inc. IPO – Main Terms
Common stock offered	406,000,000 shares of class A common stock
Greenshoe	40,600,000 shares (10% of the initial offering size)
Global coordinators/ bookrunners	Global coordinators/bookrunners: JP Morgan and Goldman Sachs Rest of bookrunners: Bank of America, Citigroup, HSBC, Merrill Lynch, UBS and Wachovia Securities
Total banks in syndicate	45 banks (8 bookrunners, 15 lead managers and 22 co-managers)
Counsel to the underwriters	Davis Polk & Wardwell
Counsel to the offeror	White & Case LLP
Initial price range	USD 37–42 (midpoint USD 39.50)
Offer price	USD 44.00
Deal value (excl. greenshoe)	USD 17,864,000,000
Deal value (incl. greenshoe)	USD 19,650,400,000
Disclosed gross spread	2.80% of deal value (45% selling concession, 27.5% management fees and 27.5% underwriting fees), or USD 550.2 million (including greenshoe)
Total proceeds after fees	USD
Trade date	19 March 2008

On 20 March 2008, the IPO underwriters exercised their overallotment option, purchasing an additional 40.6 million shares, bringing Visa's total IPO share count to 446.6 million, and bringing the total proceeds to USD 19.7 billion, before fees. The gross spread totaled USD 550.2 million, or 2.80% of the deal value. The offerors also incurred other expenses, including registration, filing and listing fees, printing fees and legal and accounting expenses, totaling USD 45.5 million.

The shares began trading on 19 March 2008 on the New York Stock Exchange under the ticker symbol “V”. At the opening, the shares were trading at USD 59.50, 35% higher than the offering price. The delivery of the shares took place on 25 March 2008. There was a 180-day lock-up provision, expiring on 14 September 2008. Figure 2.11 summarizes the deal main dates.

2.3 CASE STUDY: GOOGLE'S DUTCH AUCTION IPO

In the previous section, a real example of a book-building method IPO was covered. In this section, a real example of a Dutch auction method IPO is covered. Few companies have chosen this method to go public.

Unlike the standard method, whereby offer prices are set by the global coordinators/bookrunners using a negotiated book-building process, in a Dutch auction method the offer price is set automatically based on the bids received. The Dutch method got its name from the famous Dutch tulip bulb mania that occurred in the Netherlands in the 17th century. In a Dutch auction process, the offeror (i.e., the seller of the shares) sets the total number of shares being offered and sometimes a potential price range. Investors then submit a conditional order for the quantity of shares they wish to receive and the highest price they are willing to pay. The offeror allocates the shares, starting with the highest bidder, until it has allocated all the shares being offered. The offer price is then set at the lowest bid it accepts. Therefore, the price all awarded bidders pay is the offer price, even if they had bid higher. If there are more bids than shares available, allotment is on a pro-rata basis among the bidders with smaller bids. As a result, once the offer price is set, investors who bid at least that price know that they are awarded shares in the offering.

The Dutch auction process was employed by Google to price and distribute its IPO. Critics charge that, in two respects, it was not a pure Dutch auction. First, after the bidding started, Google reduced the total number of shares being offered and also reduced the target offer price range to USD 85–95 from USD 108–135. Second, Dutch auctions are supposed to have a fixed number of shares and Google cut the size of the offering by 24%, giving successful bidders only 76% of the shares they requested. The following table summarizes the main data of Google's IPO (see also Figure 2.12):

Google IPO – Main Terms
Common stock offered	19,605,053 shares of common stock
Greenshoe	2,940,758 shares (15% of the initial offering size)
Deal shares (incl. greenshoe)	22,545,811
Lead managers	Credit Suisse and Morgan Stanley
Total banks in syndicate	10 banks (2 lead managers and 8 co-managers)
Counsel to the underwriters	Simpson Thatcher & Bartlett
Counsel to the offeror	Wilson Sonsini Goodrich & Rosati
Auditor	Ernst & Young
Initial price range	USD 108–135. Changed later to USD 85–95
Offer price	USD 85.00
Deal value (excl. greenshoe)	USD 1,666,429,505
Deal value (incl. greenshoe)	USD 1,916,393,935
Disclosed gross spread	2.80% of deal value (0% selling concession, 70% management fees and 30% underwriting fees), or USD 53.7 million (including greenshoe)
Total proceeds after fees	USD 1,862.7 million
Trade date	19 August 2004

The initial target price range given by Google was USD 108–135. Based on the weak demand from investors, Google's target price range was changed to USD 85–95. At the end, Google set the offering price to USD 85, the lower price of the range, in the face of a deteriorating stock market and the skepticism from institutional investors.

On 20 August 2004, the underwriters exercised their greenshoe, acquiring an additional 2.9 million shares. As a result, the offerors raised USD 1.86 billion after paying a gross spread of 2.80% of the deal.

The underwriting commitment of the syndicate is shown in the following table:

Bank	Underwriting commitment (shares)	Percentage of total
Credit Suisse	7.1 million	36.2%
Morgan Stanley	7.1 million	36.2%
Goldman Sachs	1.2 million	6.1%
Allen & Co.	1.1 million	5.6%
Lehman Brothers	1.0 million	5.1%
Citigroup	0.8 million	4.1%
JP Morgan	0.5 million	2.6%
UBS	0.4 million	2.0%
WR Hambrecht	0.3 million	1.5%
Thomas Weisel	0.1 million	0.5%
Total	19.6 million	100%

A Dutch auction has several advantages over a book-building IPO:

• The offer price and the allotment of shares are established in a transparent way.
• It enables retail investors to participate in the pricing of the offering.
• It enables retail investors to have the same chance of buying shares as institutional investors.
• It is in theory cheaper. Lower fees are paid to the participating banks as their role is smaller. However, if we compare the gross spread paid to Visa Inc.'s IPO with the gross spread of Google's IPO we can see that they were similar.
• In theory, it reduces the volatility of the stock price in the aftermarket. The price is in theory a mechanism that results in an efficient price that perfectly equates supply and demand.

But also, a Dutch auction has several disadvantages over a book-building IPO:

• The outcome is more uncertain. The absence of a pre-marketing to key institutional investors to assess demand results in a much less precise preliminary price range. If demand is not there, it is discovered during the auction period, obliging the offeror to reduce the offering size late in the process. Even though Google's IPO generated great investor awareness due to its global name recognition, the offeror was forced to lower the price range due to a lack of demand at the original price range.
• Institutional investors may be less willing to invest due to the potentially less rigorous research efforts by the participating banks. Institutional investors may also become skeptical of companies using this process.
• Banks with outstanding IPO placement capabilities may be reluctant to participate due to their potentially minimized role in a Dutch auction IPO and their diminished control over the process.
• Participating banks may be less willing to allocate research and sales resources to an IPO in which their role is less relevant.
• The offer may be mispriced. The primary focus in Dutch auction IPOs is the retail investors. These investors may often lack the ability to set a bid price based on the stock's fundamentals, rather than purely on familiarity or general name recognition. Many academics argue that Google's Dutch auction method resulted in a mispriced offering because the offer price was USD 85 and it opened at USD 100, reflecting a 17.6% increase. This increase was substantially larger than similar IPOs executed in 2004. I disagree with such a conclusion, as Google name recognition was notably stronger than their peers. As we saw in the previous section, Visa Inc.'s IPO used the traditional book-building method and its shares opened 35% higher than the offering price. It is impossible to estimate what would have been the increase at the opening were a Dutch auction process to have been followed by Visa Inc.

2.4 RIGHTS ISSUES (OR RIGHTS OFFERINGS)

Product Description

A rights issue, also known as a rights offering, is the most common way to increase ordinary capital. A rights offering is a method for a listed company to raise additional funds, not by increasing debt, but by asking shareholders to invest more in the company. In a rights issue, existing shareholders are given the right to subscribe for a specific number of new shares in proportion to their existing shareholdings, at a specified price during a specified period.

Typically, once the company decides to launch a rights issue, a roadshow is organized in which the company's top management presents the objective and the general terms of the issue. Afterwards, unless the board of directors has authorization to raise capital, an extraordinary general meeting (EGM) takes place to vote on the rights issue. If the issue is approved, the company works with the placing banks to establish the final terms of the issue.

Once the final terms of the rights issue are decided, these are announced to the market. Commonly, registered shareholders at a date called the record date become qualifying shareholders, being entitled to subscribe for the rights issue. As a result, at the closing of the record date each qualifying shareholder receives one subscription right for each existing share owned.

After the record date, the qualifying shareholders need to decide whether or not to exercise their rights during a period called the subscription period. The subscription rights’ holders have the following four alternatives:

Sometimes the shareholder can apply for shares without subscription rights. New shares which are not subscribed for with subscription rights can be offered to investors. Applications to subscribe for new shares without subscription rights can be submitted by any investor. Commonly, shareholders who have subscribed for shares by virtue of subscription rights are prioritized in the allocation of these new shares. The shareholder is however not guaranteed allocation of new shares.

The company pays underwriting and advisory fees to the placing and underwriting banks. The fees are a function, among other things, of the discount, the size of the issue, the duration of the underwriting and the volatility of the stock.

2.4.2 Main Definitions of a Rights Issue

2.4.3 Advantages and Weaknesses of a Rights Issue

A rights offering features a number of advantages:

A rights offering features a number of weaknesses:

2.4.4 Rights Offerings Success Factors

The main success factors of a rights offering are the following:

2.4.5 Calculation of the TERP

The price of the existing shares automatically adjusts downwards on the ex-date to allow for the discount of the subscription price. The decrease of the stock price reflects the fact that the increased capital and reserves have been distributed over a larger number of shares. It does not represent a loss to shareholders or a cost to the company. The TERP, the theoretical ex-rights price, is the theoretical price of the stock on the ex-rights date. The TERP is calculated as follows:

where:

NE = the number of existing shares

NN = the number of new shares

PA = the stock closing price on the day immediately preceding the rights issue announcement date

PS = the subscription price

In this formula it is assumed that the new shares are entitled to any future dividend. However, sometimes the new shares are not entitled to an already declared dividend. In this case the dividend is added to the subscription price when calculating the TERP. The formula then becomes:

where:

DIV = the declared dividend per share

2.4.6 Case Study: ING's EUR 7.5 billion Rights Issue

On 26 October 2009, the Dutch bank ING announced its plans to raise EUR 7.5 billion via a rights issue. The issue was authorized by the EGM of ING shareholders on 25 November 2009. The two main decisions ING had to make before launching the rights issue were the proceeds to be raised from the issue and the discount to the TERP.

Sensitivity Analysis of the Discount to TERP

The subscription price is generally at a discount to the current stock price. The main reason is to make the offer relatively attractive to shareholders and encourage them either to exercise their rights or sell them so the share issue is “fully subscribed”. The price discount also acts as a safeguard should the market price of the company shares fall before the issue is completed. If the market share price were to fall below the rights issue price, the issue would not have much chance of being a success, since shareholders could buy the shares cheaper in the market than by exercising their subscription rights. The discount is measured comparing the subscription price with the TERP. The following table shows the discount to TERP and the number of new shares to be issued as a function of the subscription price, assuming a EUR 8.92 closing price of ING shares prior to the announcement. The subscription price determines the number of new shares to be issued. It can be seen that the lower the subscription price the larger the discount to TERP and the larger the number of new shares to be issued.

In a rights offering, the discount is irrelevant to existing shareholders. The deeper the discount the higher the rights value will be, and a shareholder's net worth is the same, assuming they take up their rights in full. There is no economic dilution as long as the existing shareholder either subscribes for new shares or sells the subscription rights.

Final Terms of ING's Rights Issue

On 27 November 2009 existing holders of common shares of ING Groep N.V. were offered rights entitling them to subscribe for new ordinary shares with the following terms:

ING Rights Issue – Final Terms
Issuer	ING Groep N.V.
Announcement date	27-November-2009
Record date	27-November-2009
Ex-date	30-November-2009
Expiration date	15-December-2009
Subscription period	From, and including, the ex-date to, and including, the expiration date
Trading period	Same as the subscription period
Subscription price	EUR 4.24
Cum-rights price	EUR 8.53
Stock price on the day prior to the announcement	EUR 8.92
Existing number of shares	2,063,147,968
Terms	6 per 7
Total shares offered	1,768,412,544
Amount to be raised	EUR 7,498.069 million
Adjustment factor	0.767878
Rank	Pari passu
Global coordinators and bookrunners	Goldman Sachs, ING Bank and JP Morgan
Underwriting	Fully underwritten by Goldman Sachs, JP Morgan and a group of other banks

The rights issue was a 6 for 7 rights issue of 1,768,412,544 new shares at an issue price of EUR 4.24 (the subscription price) through the granting of subscription rights to ING shareholders pro rata to their shareholdings. Each share held at the closing of 27 November 2009 (the record date) entitled its holder to one subscription right. Eligible rights holders could subscribe for 6 new shares for every 7 subscription rights that they held. The subscription rights could be exercised or traded from the opening of 30 November 2009 up to 15 December 2009 (the subscription and trading periods). The new shares were fully fungible and ranked pari passu with the existing shares.

Calculation of the TERP

As seen earlier, the TERP is calculated as:

where:

NE = the number of existing shares

NN = the number of new shares

PA = the closing price on the trading day immediately preceding the announcement of the final terms of the rights issue. EUR 8.92 in our case

PS = the subscription price. EUR 4.24 in our case

Instead of using the number of existing and new shares, it is easier to use the figures in the issue terms. In our case the terms were 6 per 7. Thus, NE = 7, NN = 6, PA = 8.92 and PS = 4.24. Therefore, the TERP was EUR 6.76:

The subscription price of EUR 4.24 corresponded to an implied discount of 37.3% (= 1 – 4.24/6.76) to the TERP.

Calculation of the Rights’ Theoretical Value

Theoretically, the value of the subscription rights associated with a share is equal to the difference between the TERP and the subscription price. In our case:

Adjustment to Stock Historical Prices

The price of the existing shares automatically adjusts downward on the ex-date to take into account the discount offered to subscribe for the new shares. For example, imagine that you were an ING shareholder on the record date, when the shares were trading at EUR 8.53 (the cum-rights price). In theory, the next day the shares would be trading at EUR 6.76 (the TERP). In theory your portfolio lost 21% in one day (= 1 – 6.76/8.53), but the company is worth the same. This makes no sense.

As a result, when a company implements a rights issue, an adjustment is made to historical prices prior to the ex-date to appropriately reflect the impact of the rights. The adjustment allows investors to compare historical pricing with current pricing. The adjustment is only made if PC > PS (see below for the definitions of these two variables). The adjustment factor in ING's rights issue was calculated as follows:

where:

Instead of using the number of existing and new shares, it is easier to use the numbers of the issue terms. In our case the terms were 6 per 7. Thus, NE = 7, NN = 6, PC = 8.53 and PS = 4.24. Therefore:

As a result, all the historical prices prior to the ex-date were adjusted by multiplying the historical price by the adjustment factor as shown in the following table:

Date	Closing price before adjustment	Closing price after adjustment
25-Nov-09	9.619	7.3862
26-Nov-09	8.916	6.8464
27-Nov-09	8.53	6.55
30-Nov-09	6.204	Not adjusted

Adjustment Factor and Not Entitlement to Dividends

In this adjustment formula it is assumed that the new shares are entitled to any future dividend. However, sometimes the new shares are not entitled to an already declared dividend. In this case the dividend is added to the subscription price when calculating the adjustment factor. The formula then becomes:

where:

Adjustment to Historical Dividends

In a similar way to the historical prices adjustment, historical dividends are adjusted to take into account the rights issue. Assume that the last dividend prior to the rights issue was EUR 0.26 per share. Remember that the adjustment factor was 0.767878. The adjustment to be performed to all historical dividends was:

In our example, the EUR 0.26 dividend was adjusted to EUR 0.20 (= 0.26 × 0.767878). The lower dividend simply reflects the increase in the number of shares due to the rights issue. If, for example, during the year following the rights issue ING distributes a EUR 0.20 cash dividend, this would not represent a reduction in ING's dividend distribution policy. Similarly, maintaining the dividend per share after the rights issue at EUR 0.26 represents an increase in dividend distribution policy.

Alternative Interpretation of a Rights Issue: Issue + Scrip Dividend

An alternative way to interpret a rights issue is to split it into two transactions, as follows:

The adjustment factor represents the scrip dividend of the rights issue 0.768 [= 3.32831/ (3.32831 + 1)].

2.5 RIGHTS ISSUES OF CONVERTIBLE BONDS

Rights issues of assets other than common stock are relatively uncommon. In this section, a rights issue is analyzed where shareholders are given the right to subscribe to a convertible bond.

2.5.1 Case Study: Banco Popolare Rights Issue of a Convertible Bond

In 2010, Banco Popolare was the largest Italian cooperative bank by number of branches and the fifth largest Italian bank by total assets. On 30 January 2010, the shareholders of Banco Popolare approved in an extraordinary shareholders meeting the issuance of new convertible bonds with pre-emption rights to existing shareholders and holders of the 2000–2010 4.75% subordinated convertible bond. The transaction was aimed at reinforcing the bank's capital ratios. In addition, the issue allowed Banco Popolare to manage the timing of the sale of some non-strategic assets in a more flexible way. The transaction was structured as a rights issue of convertible bonds:

• The subscription terms for existing shareholders were one subscription right per share and one bond for every four subscription rights. Therefore, the rights issue terms were 1 for 4. A total of 640,149,751 rights were issued to existing shareholders.
• The subscription terms for the existing convertible bond holders were one subscription right per 2010 4.75% bond and 43 bonds for every 400 subscription rights. A total of 18,387,505 rights were issued to existing convertible bond holders.

The final terms for the new convertible bond were announced on 25 February 2010. The convertible bond had a notional of EUR 996.4 million, a 4-year maturity, a 4.75% coupon and an initial conversion premium of 34%. The following table shows the main terms of the convertible bond:

Banco Popolare Convertible Bond – Main Terms
Issuer	Banco Popolare Societá Cooperativa
Securities	Bonds convertible into ordinary shares of the issuer
Underlying shares	Ordinary shares of Banco Popolare
Status of the bonds	Senior unsecured
Notional	EUR 996.4 million
Nominal value of each denomination	EUR 6.25
Conversion ratio	1 share per bond
Issue date	24-March-2010
Settlement and listing date	31-March-2010
Maturity date	24-March-2014 (4 years)
Initial conversion premium	34%
Coupon	4.75%, paid annually (Act/365)
Issue price	100% of the nominal value
Redemption price	100% of the nominal value, subject to the early redemption option. The redemption amount could be paid in cash and/or in shares, at the issuer's option
Conversion period	At any time after 18 months from the issue date
Bond holder put	None
Dividend protection	Bond holders were protected against any dividends paid exceeding the threshold of: – €0.10 paid in 2010 and 2011 – €0.15 per year thereafter. Dividends above those levels led to an adjustment of the conversion ratio
Lock-up	90 days for the issuer
Joint lead managers and joint bookrunners	BNP Paribas and Mediobanca
Listing	Milan MTA

Press Release by Banco Popolare on 25 February 2010

“… The convertible bonds have been designed bearing primarily Banco Popolare's shareholding structure in mind, with the intention of offering a type of investment of interest to our shareholders, in keeping with our objective to stand close to our market territory and its economic fabric. The convertible bond issue is aimed at bringing benefits to Banco Popolare by strengthening its capital base, in order to provide an increasing support to the lending activities in favour of local businesses, and to shore up the Group's Core Tier 1 ratio expected to stand stably above 7% …”

Key Dates of the Transaction

The rights could be traded during two and a half weeks starting on 1 March 2010. The holders of the rights could exercise their rights during three and a half weeks starting also on 1 March 2010. Figure 2.13 highlights the main dates of the transaction.

Offering Results

At the end of the subscription period on 24 March 2010, a total of 160,128,993 bonds were subscribed, accounting for 98.84% of total bonds offered, corresponding to EUR 984.8 million. In particular, the following rights were left unexercised:

• 7,252,516 option rights associated with common shares (out of a total of 640,149,751 rights issued).
• 669,200 option rights associated with the 4.75% 2000–2010 convertible bonds (out of a total of 18,387,505 rights issued).

The remaining 1,885,068 bonds unsubscribed, corresponding to approximately EUR 11.6 million, were offered and sold in an auction on the Italian Stock Exchange on 31 March 2010. As a result, the final take-up after the auction was 100% of the issue.

Why Banco Popolare Issued the Convertible Bond

The new convertible bonds had a soft mandatory conversion clause (“early redemption option”) after 18 months at the issuer option and at a 10% premium. The early redemption option allowed Banco Popolare to potentially reinforce the bank's capital ratios after the initial 18 months of the life of the convertible. After 18 months from the issue date, Banco Popolare could exercise the early redemption option, as follows:

• If the share price was below the conversion price, Banco Popolare would pay 110% of the nominal value of the bonds in cash and/or shares, at the issuer's option only.
• If the share price was above the conversion price, Banco Popolare would pay in shares only the value of the underlying shares plus 10% of the nominal value of the bonds.

Therefore, if Banco Popolare needed to strengthen its regulatory capital before maturity and after the initial 18 months, the bank had the option to call the bond and reimburse investors with newly issued shares that were worth 110% of the nominal value of the bond.

Additionally, at bond maturity the bank could increase its regulatory capital, even if the conversion right was out-of-the-money, as follows:

• If the convertible bond expired out-of-the-money, Banco Popolare would reimburse the nominal value of the bond with newly issued shares, where the value of the shares corresponded to 100% of the nominal value of the bond.
• If the convertible bond expired in-the-money, the bond holders would require Banco Popolare to convert the bond into newly issued shares, in accordance with the conversion price.

Main Drawback of the Transaction

The main drawback of the convertible bond issuance was the potential issuance of a large number of shares, were Banco Popolare to redeem the convertible bond in a notably weak market environment. The convertible bond could be early redeemed through the issuance of a variable number of shares so that the aggregate value of the newly issued shares equalled 110% of the redemption amount. In theory, this would mean that upon a sharp decline of the stock price, the potential number of shares could grow dramatically.

For example, let us assume that Banco Popolare was required by the Bank of Italy to increase its regulatory capital and that Banco Popolare decided to terminate the convertible bond early. Banco Popolare would need to repay 110% of the notional amount, or EUR 1,096.0 million (1.10 × EUR 996.4 million) in shares. Let us assume that the then prevailing stock price was EUR 2.50. Therefore, Banco Popolare would need to issue 438.4 million shares (= 1,096.0 million/2.50).

The best way to solve this drawback would have been to include a cap mechanism to the number of shares which could be issued. A cap in the number of shares to be issued would have meant a floor on the stock price at which the bond could be redeemed in shares. Under a cap mechanism, the convertible bond holders bear the risk of shares being below the floor. In other words, under a cap mechanism the bond holders are effectively selling a put on the shares to the convertible bond issuer. As a result, bond holders would have required a higher coupon to be compensated for their short put position.

2.6 ACCELERATED BOOK-BUILDINGS

2.6.1 Product Description

An accelerated book-building (ABB) and its variations (block trade, ABB with backstop) allow an investor to sell a block of stock quickly. The short placement period gives the seller confidence in the selling price to be obtained. An accelerated book-building may be done for either companies that have already gone public looking to issue additional shares to raise capital or shareholders looking to sell their stock position. Also, ABBs provide investors with the opportunity to buy the stock at a discount. There are three major ABB products:

Hereafter, I will refer to these three products under the common name of ABBs.

2.6.2 Advantages and Weaknesses of an ABB

An ABB features a number of advantages:

An ABB features a number of weaknesses:

2.6.3 Estimating the Discount

The discount to the prevailing stock market price is the most relevant parameter in an ABB. The discount compensates the placing bank for the risk run in a bought deal. The bank managing a block trade bears the risk of placing the block with investors at a price lower than its acquisition price from the seller. The discount is a function, among other variables, of:

2.6.4 Case Study: IPIC's Disposal of 11.8% of Barclays

In 2008, in the middle of a global credit crisis, Barclays bypassed existing shareholders when it raised capital to comply with new capital requirements. Instead of selling new stock to the British government, Barclays agreed in October 2008 to sell GBP 2.8 billion of mandatorily convertible stock and GBP 3 billion of preferred stock to International Petroleum Investment Company of Abu Dhabi (IPIC), Qatar Holding LLC and Challenger Universal Ltd, an investment vehicle set up by Qatar.

From October 2008 until May 2009, Barclays shares gained 54%. IPIC held 9.75% mandatorily convertible notes due 30 September 2009 of Barclays. IPIC intended to dispose of the ordinary shares of Barclays, for which the mandatorily convertible notes were exchangeable by means of an accelerated book-build. IPIC exercised the notes to satisfy its obligations under the book-build. IPIC appointed Credit Suisse for the disposal. Credit Suisse acted as sole bookrunner and commenced the book-building on 2 June 2009. Credit Suisse was able to place the massive 11.8% stake in Barclays at 265 pence each share, a discount of 16% to the previous closing price of 316 pence. In the opening, Barclays shares dropped to 264.75 pence, just slightly below the 265 pence placing price. IPIC continued to hold warrants for 758.4 million Barclays shares that could be exercised at 197.8 pence.

IPIC Disposal of Barclays Stock through an ABB – Main Terms
Seller	International Petroleum Investment Company of Abu Dhabi (IPIC)
Shares	Barclays plc
Number of shares	1,304.836 million
Percentage of share capital sold	11.8%
Disposal method	Accelerated book-building
Trading date	2-June-2009
Settlement date	5-June-2009
Placing price	GBP pence 265
Placing amount	GBP 3,457.815 million
Discount to previous closing price	16%
Fees	Not disclosed
Lead manager	Credit Suisse

2.7 AT THE MARKET OFFERINGS

2.7.1 Product Description

In an “at the market” (ATM) offering, blocks of stock are broken into smaller chunks and sold from time to time at the prevailing market price. Unlike a traditional ABB offering, in which all shares are sold at once to a group of investors, ATM sales dribble into the market over the course of days, weeks or even months. The method is especially useful for price-sensitive stocks or very large share sales, because unleashing a large block of shares in one day can seriously depress a stock price. The bank managing the sale is paid in per-share trading commissions rather than through a percentage underwriting fee. Usually the stock price falls on the announcement of the transaction to anticipate the upcoming sales orders.

2.7.2 Case Study: US Treasury Placement of Citigroup Shares

On 26 April 2010 the United States Department of the Treasury hired Morgan Stanley to manage the sale of part of its 27% stake in Citigroup. The US Treasury acquired the shares of Citigroup in connection with Citigroup's participation in the Troubled Asset Relief Program (TARP). TARP was established pursuant to the Emergency Economic Stabilization Act of 2008, which was enacted into law on 3 October 2008 in response to the financial crisis. On 28 October 2008, Citigroup issued to the US Treasury USD 25 billion of its perpetual preferred stock as part of the TARP Capital Purchase Program. This perpetual preferred stock was exchanged for shares of common stock in July 2009. As a result, on 26 April 2010 the US Treasury owned 7.69 billion shares of Citigroup. Additionally, the US Treasury held warrants to purchase 465.1 million shares of common stock issued by Citigroup, subject to adjustment from time to time, and USD 2.23 billion aggregate liquidation preference of trust preferred securities issued by a Citigroup trust. All these capital instruments were issued by Citigroup in exchange for USD 45 billion of aid.

On 26 April 2010, the US Treasury, Morgan Stanley and Citigroup entered into an agreement, under which the US Treasury could offer and sell up to 7.69 billion shares of common stock from time to time through Morgan Stanley as sales agent or as principal. The agented sale of shares was to be made by means of ordinary brokers’ transactions, in block transactions or as otherwise agreed with the US Treasury. The US Treasury could also enter into a separate agreement to sell shares of common stock to Morgan Stanley as principal at a price agreed at the time of sale. Citigroup would not receive any proceeds from the stock sale.

Morgan Stanley agreed to sell, on behalf of the US Treasury, shares of common stock subject to the terms and conditions of the agreement among Citigroup, the US Treasury and Morgan Stanley on a daily basis or as otherwise agreed upon by the US Treasury and Morgan Stanley. The US Treasury devised a plan in 2010 of pre-arranged written trading strategies to help insulate officials from politically driven claims that they mistimed the market and got too little profit from the sales. The manner, amount and timing of the sales under any such plan were dependent upon a number of factors. The US Treasury would provide instructions, in accordance with the plan, to Morgan Stanley with respect to the manner of distribution of the shares. Morgan Stanley agreed to use its commercially reasonable efforts to sell the shares following the instructions.

The US Treasury divided its stake into blocks, instructing Morgan Stanley to sell one block at a time. The US Treasury approved an initial sale of a block of 1.5 billion shares, representing more than 19% of its total stake. The US Treasury gave Morgan Stanley the authority to sell a second block of shares once the initial 1.5 billion shares were sold. The US Treasury received the gross proceeds of the sale of shares for which Morgan Stanley acted as sales agent or principal without deduction of any commissions or fees. Once all the blocks were sold, the US Treasury received about USD 32 billion.

Citigroup agreed to reimburse the US Treasury for all discounts, selling commissions, stock transfer taxes and transaction fees incurred in connection with the sale. Morgan Stanley was paid in per-share trading commissions rather than through a percentage underwriting fee. Each month, Morgan Stanley received from the US Treasury a commission of USD 0.003 per share sold by Morgan Stanley using electronic trading systems and USD 0.0175 per share sold by Morgan Stanley using other means. That was a steep discount from the three cents to four cents a share that brokers normally charged for similar trades at that time. Morgan Stanley also received a one-time USD 500,000 administrative fee. In total, Morgan Stanley received approximately USD 82 million in commissions.