Business Accounting and Finance: Detailed Ferrari IPO Analysis

This report provides a comprehensive analysis of Ferrari's Initial Public Offering (IPO) in 2015. It examines the motivations behind the IPO, including the need to raise capital, separate from FCA, and reward management. The report delves into the benefits and drawbacks of going public, the choice of listing on the New York Stock Exchange (NYSE), and the roles of primary and secondary shares. It also explores the over-allotment (Greenshoe) option, the central role of underwriting investment banks, and the book-building process. The report analyzes the pricing of the IPO, including the factors considered and the valuation methods used. Additionally, it discusses IPO lock-up agreements, the performance of Ferrari post-IPO, and the evolution of its capital structure. The report highlights the key tasks executed by the underwriter, the considerations when selecting underwriters, and the motivations for syndication. It also examines the compensation paid to the underwriters, price stabilization activities, and the overall success of the IPO, including the high oversubscription rate. This report offers valuable insights into the financial strategies and outcomes of Ferrari's IPO.

BUSINESS ACCOUNTING AND
FINANCE

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUTION..............................................................................................................................1
QUESTION.....................................................................................................................................1
i) IPO marks strategic milestone for the company......................................................................1
ii) What is the IPO over –allotment (Greenshoe) option? Did Ferrari include such options in
IPO?.............................................................................................................................................2
iii) Underwriting investment bank takes the central role in IPO process....................................3
iv) Book building of IPO.............................................................................................................4
v) Pricing of Ferrari IPO..............................................................................................................5
vi) What are IPO lock-up agreements?........................................................................................5
vii) Performance of Ferrari..........................................................................................................6
viii) Evolution of Capital structure of Ferrari..............................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUTION
Accounting and finance are two differential functions of the business. Accounting is
concerned with the recording of financial information and transactions for reporting and
informational purposes. Finance refers to the money required for carrying out the business
operations. This helps the business in making investments and monetary decisions that are
essential for the growth of the business. There are number of sources available to the business for
raising capital in which most common source is equity capital. Equity funds are raised by making
public offer where the people are invited to purchase the shares of company. These public
offerings are known as initial public offering and follow ion public offering. Present report is
based over the case study of IPO of Ferrari 2015. Report will cover the different facts and
outcomes related with the IPO made by the company in year 2015.
QUESTION
i) IPO marks strategic milestone for the company.
a) Generic benefits and drawbacks of going public.
Benefits
It gives increased access to the capital for company for meeting its cash requirements.
This will increase the public awareness by making the company public and making their
products known to newer group of potential customers. This will also increase market share of
the company for products and services.
Drawbacks
It increases the compliance requirements of the business which is regulated by Securities
exchange board. Raising the share capital will increase the sharing in profits. Cost of complying
with the requirements is high. They have to face added pressure of market for giving the
adequate returns to investors.
b) What has motivated Ferrari to go public?
Ferrari was required to make large amount of cash payments to FCA through sales of IPO
shares. Company has separated itself from FCA for which it is required to make the payments by
selling 17.175 billion shares. Company wanted to motivate and reward the management and
technical talents by giving them direct ownership in company (González, Téllez and Trujillo,
2019). It was also essential for promoting and extending the brand among the luxury brands.
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c) Why Ferrari chose to list on New York Stock Exchange?
The Ferrari wanted to have access over the American market. For attracting the American
investors it was essential to choose the NYSE. It is one of the important market for Ferrari for
selling its products. Company wanted to trade in US dollars as being the major market because
of which it was listed in New York Stock Exchange. It will authorise US dollar Ferrari
certificates for trading in US markets
d) What do you say about primary and secondary shares sold in Ferrari IPO?
The primary shares sold in IPO are mainly for the payment to FCA. Proceeds’s arising
from the primary shares goes to issuer where the proceeds of pre existing shares go to the
shareholders. in the IPO of Ferrari it also made the distribution as primary and secondary shares.
Following the spin off resulting from the FCA sold 90% of the shares that will be traded publicly
and the remaining 10% will be held by the Ferrari family. In this the 10% shares retained by the
Ferrari family are secondary shares and the remaining 80% held for public trade are primary
shares.
ii) What is the IPO over –allotment (Greenshoe) option? Did Ferrari include such options in
IPO?
Green shoe options refer to the over allotment options. In context of the IPO there is
provision regarding the underwriting agreements which grants underwriters right of selling the
investors more shares than what was planned initially by issuer where the demand for the
securities of company is higher than that was expected. Greenshoe option gives additional
stability to prices of the securities issued as the underwriters could increase the supply and also
smooth out the price fluctuations. This method of price stability is accepted and permitted the
securities exchange commission (Honjo and Nagaoka, 2018). It allows the underwriters for sell
around 15% more of the securities than original issue amount set by issuer for 30 days after IPO
where the demand warrants such action. This option provides buying power for covering the shot
position when prices fall, without risks of having to purchase the securities if price rises.
Ferrari did not include such option in the IPO. The option was not included and the company
has an oversubscription of around 10 times. The IPO was oversubscribed which sows that the
shares were in great demand. Including the option would have provided mor stability to the
prices to the issue. High prices would have given them the message of imprudence to investment
communities and higher risks of losing subsequent upsurges in the prices.
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iii) Underwriting investment bank takes the central role in IPO process.
a) Key tasks executed by the underwriter?
Underwriter is the party that evaluates and undertakes the risks of other party for fee.
They may charge the fees either as commission, premium, spreads or the interest. Underwriters
in the IPO will serve as intermediary between companies seeking issue of shares in the IPO.
Underwriters help company to prepare for IPO, considering issues like money to raise, securities
to issue and agreement between underwriters and company. It takes the risks of company issuing
shares under agreement to buy shares in case shares are not subscribed by the people. They
create draft show for potential institutional investors.
b) What are the primary considerations when selecting the underwriters?
It is essential for company to select the type of underwriter to select for their business.
they are required to consider the complexity and size of structure. The underwriter should have
an understanding about the business. Company is required to analyse the ratings and reputation
of the underwriters in the market. They should have an experience in the underwriting field. For
this they are required to consider past three years data and success of the deals. Quality of the
underwriters ‘team they must have the required knowledge and qualification regarding the
business. Company is also choose the underwriters by reviewing the process of IPO that would
be undertaken by the company. Choosing underwriters efficiently is important as in the event of
under subscription they will be buying the shares. They must be capable of promoting the shares
of company for public subscription.
c) What are the main motivations for syndication?
Underwriting syndicate is the temporary group of the investment bankers and brokers
who join together for selling the new offerings of the securities issued to the investors.
Underwriter syndicate is formed by lead underwriter for the security issue. This is generally
formed when the issue of shares is big for the single underwriter to handle (Gounopoulos and
et.al., 2020). Syndication helps them to pool their resources for orchestrating the issue and
spreading out risks. They are compensated through underwriting spread that is difference
between the price paid to issuer and prices that are received from the investors and brokers when
issue goes public.
In the case of Ferrari also underwriters started to syndicate with the investments bankers that
agreed for buying the proportion of offerings at offer price minus underwriting discount.
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Underwriters formed a syndicate as the offer was big and it wanted to promote the share among
number of potential investors. This promoted the shares of company. Dealers were selling shares
under bet effort basis.
d) Compensation paid to the underwriters of Ferrari and comparison with that of US
underwriters?
Every company is required to pay the compensation as commission or premium for
undertaking the risks of the issue. In the present case Ferrari had underwritten the issue with the
underwriters that formed underwriter syndicate. The compensation was paid to the lead
underwriter. It paid the underwriting commission of $1.56 per share and $26793000 in
aggregate. The underwriting of issue was essential as the IPO of company was very big for
saving the company in case of under subscription.
As compared with US Underwriter Ferrari had underwritten the shares at comparatively
lower commission and discount. Commission and premium charged by the US underwriters are
more than the underwriters of company. Choosing underwriters of US would have increased the
cost of issue. Underwriting agreement contains the terms regarding the underwriter’s
compensation. The tern of agreement between the underwriters and company were not legally
binding.
e) Price stabilisation activities and underwriters in price stabilisation of Ferrari IPO.
Price stabilisation refers to the stabilizing bid for buying the stock by underwriter for
stabilising and supporting secondary market sensitivity of prices of securities after the IPO. It is
conducted when prices of the newly issued shares of the company are shaking or are faltering in
trading. These activities are conducted for ensuring that trading prices of the shares do no below
the IPO prices that is crucial for company who do not want to take risk of the negative perception
after IPO. This is done by buying shares that are oversold & shorted for creating extra demand
for the company shares (Yalçin and Ünlü, 2018). Underwriters in the IPO of Ferrari engaged
themselves in the price stability activities for the company by offering shares below offer price.
iv) Book building of IPO
Book Building is basically a process used in Initial Public Offer (IPO) for efficient price
discovery. It is a mechanism where, during the period for which the IPO is open, bids are
collected from investors at various prices, which are above or equal to the floor price. It has been
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analyzed from the case study that in order to attract the investors Ferrari is been engaged in
making use of red hiring process. The underwriters were also been involved in doing and
implementing the book building activities (Boone, Floros and Johnson, 2016). The IPO shares
of Ferrari was been solved by underwriter in discounted price for the offering that was full.
Reallowance and concession was also been fixed for the IPO shares of Ferrari. They were also
engaged in analyzing the demand of investors so that adequate price offering could be set up by
the underwriters of the Ferrari.
It has also been analyzed from the case study that exact terms and agreements for the IPO
was not been defined underwriters of Ferrari. It has also been analyzed that the final offering was
been based on the demand of investors and also the conditions of the market. It has also been
analyzed that final offering was been done after the negotiation. The price stabilization activities
were also been conducted by the underwriters of the Ferrari. The price was been set up looking
upon the market conditions. This has also helped underwriters in negotiating the prices. Current
report provides the detail that current IPO of Ferrari was set so high that the deal was considered
to be ten times oversubscribed. FITBID has placed is IPO as 21 times more than EBITDA. It has
also been analyses that Ferrari by this may also face consequences related to be an independent
entity.
v) Pricing of Ferrari IPO
The pricing of the IPO is an important decision which is to be done with the utmost care
and diligence. The investors of the company are focused over the pricing of the issue. Ferrari
shares were to increase from 172 million to 189 million. For trading in US dollars it issued
Ferrari certificates. It reviewed the comparable price multiples that played important role in
valuation of IPO. The companies were pricing their IPO at EBITDA (Rasheed, 2019). Pricing of
the Ferrari was made on the comparable prices and the interest report that showed the demand
for Ferrari shares that will make the issue 10 times oversubscribed due to large demand of Ferrari
shares.
vi) What are IPO lock-up agreements?
Lockup agreement can be considered as that agreement which temporary prevents the
company from selling its sharing that has been followed by IPO. In this the insiders do not allow
employees to sell up their share (Dambra, Schonberger and Wasley, 2018). It can be for the
particular period of time. This is a legally binding contract which has been shared by
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underwriters and insiders. The lock up expiry date can allow number of employees to trade their
share. This is only done when the agreement expires.
The case study has provided the details that underwriters had prepared a letter of intent in
which the terms and conditions have been mentioned related to the underwriting agreement. It
has also been analyzed that Ferrari has not signed the letter of intent until and unless the price
offering was been provided to them. In this they were restricted to sell the share. It has also been
analyses that underwriter can cancel the agreement any time before when they wish. If the firm is
been involved in withdrawing the letter of intent, they have to bear expenses of the underwriters.
It has also been analyses that selling of securities will require registration.
vii) Performance of Ferrari
i ) Short terms
The price of shares on the first day was $52 in the short term it could be analysed that the
shares are trading at adequate returns in comparison to the past empirical growth of the shares in
IPO. The shares in the short run showed fluctuation taking the trend downward towards the end
of 2015. Performance of the shares was not good that made the underwriters to perform price
stabilisation activities. On the short term basis it has shown constant decline till February 2016.
The shares of the company were highly oversubscribed.
ii) Long term
In the long run it could be analysed that the shares of the company had showed a
continuous growth with slight fluctuations. The shares prices showed sever fluctuation during the
month of August 2017 to January 2019. In January the shares prices hit the considerable low
mark after the continuous decline from August 2018. The performance of the company has
showing growing trend since February 2019. On the overall trend on the long term basis the
share prices have grown this shows the performance of the company is becoming more efficient.
This shows that the wealth of the shareholders is maximised in the company.
viii) Evolution of Capital structure of Ferrari
Over the time the capital structure of the company has evolved continuously. The capital
structure theories provide about the adequate mix of debt and equity so that the cost of capital of
the company. It could be reviewed from the annual report of the company that it having capital
structure with debt lower than the equity capital (Mhagama and Topak, 2019). This shows that
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company has lower financial risks as compared with others. The structures has evolved therefore
the cost of capital of the company is also lower which saves the cost of company.
CONCLUSION
From the above report it could be concluded that process of IPO is a process through which
company raise capital. Ferrari in the IPO got the oversubscription of shares. There was high
demand of the company shares that helped the company in pricing its issue. The issue was
underwritten by the underwriters syndicate on commission basis.
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REFERENCES
Books and Journals
Dambra, M., Schonberger, B. and Wasley, C., 2018. Voluntary disclosure and firm visibility:
Evidence from firms pursuing an initial public offering.
Boone, A.L., Floros, I.V. and Johnson, S.A., 2016. Redacting proprietary information at the
initial public offering. Journal of Financial Economics. 120(1). pp.102-123.
González, M., Téllez, D. and Trujillo, M.A., 2019. Governance, sentiment analysis, and initial
public offering underpricing. Corporate Governance: An International
Review.27(3).pp.226-244.
Honjo, Y. and Nagaoka, S., 2018. Initial public offering and financing of biotechnology start-
ups: Evidence from Japan. Research Policy. 47(1). pp.180-193.
Gounopoulos, D. and et.al., 2020. The impact of governmental intervention on the association
between initial public offering and future stock issuance. British Journal of Management.
Yalçin, N. and Ünlü, U., 2018. A multi-criteria performance analysis of Initial Public Offering
(IPO) firms using CRITIC and VIKOR methods. Technological and Economic
development of Economy.24(2). pp.534-560.
Rasheed, A., 2019. Initial Public Offering Valuation Dynamics, Evidence from Pakistani Capital
Market (Doctoral dissertation, COMSATS University, Islamabad.).
Mhagama, F.L. and Topak, M.S., 2019. The Relationship Between Initial Public Offering and
Firm Performance: A Research on Borsa Istanbul (BIST).
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