158 159
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fi
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HOW FINANCE WORKS
Raising financing
DEBT FACTORING PROCESS
To get money immediately, a company sells unpaid invoices (accounts receivable)
to a third party, known as a “factor.” The factor advances the company a major
portion of the amount, retains the rest until the account is paid, then charges a fee.
Company negotiates
an agreement in which
its unpaid receivables
(invoices) are sold at a
discount to a “factor.”
Company sends invoices
out to customers, and
copies these to the
factor. Customer now
owes payment to factor.
Factor pays company
an agreed percentage
of the invoices (typically
80–90 percent) within
a few days of receipt.
Customer pays
factor the invoice
amount after 30 days
(or more if terms of
payment are longer).
Factor pays remaining
invoice amount to
company, minus a fee
(usually 2–5 percent of
the invoice amount).
Long-term financing
Putting effective measures in place to provide ongoing
funds is essential for a company’s long-term growth.
Company
Shares
Raise capital by issuing shares to finance
growth. The company then retains less
profit, as it pays dividends to shareholders,
who also benefit from any capital gains in
the company’s value (see pp.164–165).
Borrowing
Secure long-term loans from banks and
other financial institutions, usually on
better terms than a bank line of credit.
Finance leases
Sell expensive assets such as computers to
finance companies to release capital, and
then lease them back.
Rent-to-own agreements
Pay for expensive assets, such as vehicles,
in installments. Overall cost may be higher,
but capital is not tied up.
$
$
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$ $
US_158-159_External_finance.indd 159 09/11/2016 11:02
How it works
The process by which an
organization goes public (also
known as flotation) marks the end
of its life as a private company, after
which it is no longer owned by a
small number of shareholders or
company members. A company
may choose to go public when it
needs capital to finance growth.
Going public usually happens over
several months; the company
makes legal and financial
preparations before the final stage,
when it releases company shares
for sale, either to selected investors
or to the general public, or to a
combination of both. Each share
represents a “stake” in the
company, and the money that
the company receives from the
sale of shares becomes capital,
or wealth, which it now owns.
When a company changes from private to public, it offers shares for
sale to members of the public. This process is known as going public
and enables the company to raise money for growth.
Going public
I
n
t
r
o
d
u
c
t
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o
n
P
l
a
c
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g
I
n
i
t
i
a
l
p
u
b
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o
f
f
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i
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g
(
I
P
O
)
A company joins a new stock exchange
without raising capital, but by trading
its existing shares. To do this, over
25percent of the shares must already
be in public hands (on other stock
exchanges) and no one shareholder
can own a majority of shares.
Select groups of institutional investors
are invited to buy shares. This involves
fewer costs than undertaking a full
public share offering (see below)
but the amount of capital that can
potentially be raised is limited since
there are fewer shareholders.
Institutional and private investors are
invited to subscribe to or buy from
the first round of shares that the
company issues. This is the most
expensive way to go public, but
allows for a company to raise large
amounts of capital.
Ways to list on a stock exchange
There are three primary ways to take a company public,
each of which has different associated costs. The type of
public offering that a company chooses will be determined by
its size and how much capital it needs to raise.
Underestimation If the
initial valuation of shares by
the underwriters is too cautious,
then the company will fail to
realize the true value of its stock
Overestimation If underwriters
overestimate the value of shares
newly on the market (new issue),
it may flop due to lack of demand
Volatility Share prices in the first
few days of an IPO may fluctuate
dramatically due to political or
economic events
WARNING
US_160-161_Flotation_1.indd 160 21/11/2014 16:39
160 161
When a well-known private company undertakes an IPO, there is fierce competition between
investors to buy its shares, and record-breaking activity can ensue. This graph shows the
largest IPOs until 2014, based on proceeds from shares sold on the first day they went public.
how finance works
Raising financing
TEN LARGEST IPOS IN HISTORY
Stock exchange
A financial market
in which company
securities (stocks and
shares) are bought
and sold according to
current market rates.
See pp.170–171.
$10 BILLION (BN)
$20 BILLION (BN)
Bank of China 2006, Hong
Kong Stock Exchange
(Chinese bank)
OAO Rosneft 2006, Moscow
and London stock exchanges
(Russian oil company)
Facebook 2012, New York
Stock Exchange
(American social networking site)
General Motors 2010,
New York Stock Exchange
(American car manufacturer)
Deutsche Telekom AG 1996, Frankfurt,
New York, and Tokyo stock exchanges
(German telecoms company)
NTT Group 1998, Tokyo Stock Exchange
(Japanese telecoms group)
Visa 2008, New York Stock Exchange
(American financial services corp.)
Enel SpA 1999, New York and
Milan stock exchanges
(Italian utility company)
Agricultural Bank of China 2010,
Shanghai Stock Exchange
(Chinese bank)
$16BN
$15.8BN
$12.48BN
$11.1BN
$10.65BN
$19.2BN
$18.4BN
$17.9BN
$16.58BN
INITIAL PUBLIC OFFERING (IPO)
VALUE (USD)
$25BN
Alibaba Group 2014, New York Stock Exchange
(Chinese e-commerce group)
the typical minimum annual growth
potential of public companies in the US
20%
$0
US_160-161_Flotation_1.indd 161 21/11/2014 16:39
160 161
When a well-known private company undertakes an IPO, there is fierce competition between
investors to buy its shares, and record-breaking activity can ensue. This graph shows the
largest IPOs until 2014, based on proceeds from shares sold on the first day they went public.
how finance works
Raising financing
TEN LARGEST IPOS IN HISTORY
Stock exchange
A financial market
in which company
securities (stocks and
shares) are bought
and sold according to
current market rates.
See pp.170–171.
$10 BILLION (BN)
$20 BILLION (BN)
Bank of China 2006, Hong
Kong Stock Exchange
(Chinese bank)
OAO Rosneft 2006, Moscow
and London stock exchanges
(Russian oil company)
Facebook 2012, New York
Stock Exchange
(American social networking site)
General Motors 2010,
New York Stock Exchange
(American car manufacturer)
Deutsche Telekom AG 1996, Frankfurt,
New York, and Tokyo stock exchanges
(German telecoms company)
NTT Group 1998, Tokyo Stock Exchange
(Japanese telecoms group)
Visa 2008, New York Stock Exchange
(American financial services corp.)
Enel SpA 1999, New York and
Milan stock exchanges
(Italian utility company)
Agricultural Bank of China 2010,
Shanghai Stock Exchange
(Chinese bank)
$16BN
$15.8BN
$12.48BN
$11.1BN
$10.65BN
$19.2BN
$18.4BN
$17.9BN
$16.58BN
INITIAL PUBLIC OFFERING (IPO)
VALUE (USD)
$25BN
Alibaba Group 2014, New York Stock Exchange
(Chinese e-commerce group)
the typical minimum annual growth
potential of public companies in the US
20%
$0
US_160-161_Flotation_1.indd 161 21/11/2014 16:39
GOING PUBLIC
The IPO process
Before a company can issue shares, it has to
be listed on a stock exchange where trading
(the buying and selling of shares) can take
place. The company must then fulfill the
criteria necessary to secure investors. This
process is lengthy, subject to strict financial
regulations, and is extremely expensive to
undertake. Only once all stages of the process
are complete can the share offering be
officially declared on a stock exchange.
WORLD’S TOP 10 STOCK EXCHANGES
The largest exchanges manage shares
belonging to some of the world’s
most lucrative businesses and, as a
result, substantial sums of money
flow through them. The following
exchanges are listed in order of the
size of market capitalization—in other
words, by the total monetary value of
shares issued by the companies listed
on each exchange.
A closer look at IPOs
An Initial Public Offering (IPO)
is the first time that shares in
the company are offered for public
sale. It is the most common way for
a private company to go public if
it needs a large injection of capital
to fund major expansion. There are
other reasons for going public—for
example if a government wants to
privatize a state-owned company,
such as a national railroad, or if the
members of a large family-owned
enterprise want to sell their stake.
File a prospectus
This document contains information
about the offering, the business, and its
financial history, and proposed plans.
Details are still subject to change.
Appoint underwriters
These financial professionals will be
responsible for buying and selling
the shares to the public.
Meet the
qualifications
The specific
requirements are set
by the stock exchange
where the company
plans to list. Listing
conditions vary
between exchanges,
but typically demand:
Pretax earnings
above a certain
level
Three years of
audited financial
statements
Ability to pay the
annual listing fee
1. New York Stock Exchange
2. NASDAQ OMX, New York
3. Tokyo Stock Exchange
4. Euronext (Pan-European)
5. London Stock Exchange
21
3
6. Shanghai Stock Exchange
7. Hong Kong Stock Exchange
8. Toronto Stock Exchange
9. Deutsche Borse
10. SIX Swiss Exchange
US_162-163_Flotation_2.indd 162 21/11/2014 16:24
162 163
how finance works
Raising financing
Set the final offer price
After ascertaining market conditions
and the anticipated demand, the
company decides the price and the
number of shares to issue. It is then
ready to launch the offering.
Sell on the stock market
The IPO is officially declared a few days
after potential investors receive the final
prospectus. The declaration is made on
a set day after the exchange has closed,
and the shares are available for trading
the following day.
Large cap Listed company with
market capitalization of more
than $10 billion
Mid cap Listed company with
market capitalization of between
$2 billion and $10 billion
Small cap Listed company with
market capitalization of between
$250 million and $2 billion
NEED TO KNOW
Promote the share offering
Company representatives, as well as
the underwriters, visit national and
international destinations to pitch
to potential investors.
64
5
$
$
$
$
$
$
–
7 9
+
8
$16.6 trillion
the total market capitalization
of companies listed on the
New York Stock Exchange*
* as of October 2014
US_162-163_Flotation_2.indd 163 21/11/2014 16:24
162 163
how finance works
Raising financing
Set the final offer price
After ascertaining market conditions
and the anticipated demand, the
company decides the price and the
number of shares to issue. It is then
ready to launch the offering.
Sell on the stock market
The IPO is officially declared a few days
after potential investors receive the final
prospectus. The declaration is made on
a set day after the exchange has closed,
and the shares are available for trading
the following day.
Large cap Listed company with
market capitalization of more
than $10 billion
Mid cap Listed company with
market capitalization of between
$2 billion and $10 billion
Small cap Listed company with
market capitalization of between
$250 million and $2 billion
NEED TO KNOW
Promote the share offering
Company representatives, as well as
the underwriters, visit national and
international destinations to pitch
to potential investors.
64
5
$
$
$
$
$
$
–
7 9
+
8
$16.6 trillion
the total market capitalization
of companies listed on the
New York Stock Exchange*
* as of October 2014
US_162-163_Flotation_2.indd 163 21/11/2014 16:24
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