Business Accounting & Finance: A Detailed Analysis of the Ferrari IPO

This report provides a comprehensive analysis of the Ferrari IPO, examining the advantages and limitations of going public, the motivations behind Ferrari's decision to launch an IPO, and the reasons for listing on the New York Stock Exchange. It evaluates the primary and secondary shares sold, expl...Read More

Business Accounting &
Finance

TABLE OF CONTENTS
1..................................................................................................................................................3
a. Explaining generic advantages and limitations of going as public....................................3
b. Things that motivated Ferrari in going for public..............................................................3
c. Reason behind listing of Ferrari on New York exchange..................................................3
d. Evaluating the secondary and the primary shares sold in Ferrari IPO...............................4
2..................................................................................................................................................4
Explaining IPO over-allotment option and stating reason of choosing this option by Ferrari
in its IPO................................................................................................................................4
3..................................................................................................................................................4
a. Presenting the key tasks that are been executed by underwriter in IPO process................4
b. Explaining the primary considerations that are been taken into account while selecting or
choosing an underwriter.........................................................................................................5
c. The main motivations for syndication................................................................................5
d. Compensation was paid to the underwriters of Ferrari......................................................5
e. Price-stabilization’ activities conducted by the underwriter..............................................6
4..................................................................................................................................................6
‘Book-building’ of an IPO and the price range used by Ferrari............................................6
5..................................................................................................................................................7
Pricing of the Ferrari IPO.......................................................................................................7
6..................................................................................................................................................7
Explaining IPO lock up agreements along with the description of Ferrari’s IPO lock up
agreement...............................................................................................................................7
7..................................................................................................................................................7
Comparing the performance of Ferrari IPO...........................................................................7
8..................................................................................................................................................8
Evolution of capital structure of Ferrari after IPO.................................................................8
REFERENCES.........................................................................................................................10

1.
a. Explaining generic advantages and limitations of going as public
The major advantage of going as public through IPO is an ability of raising the large
capital quickly by way of reaching larger number of the investors. Company could use that
cash for conducting further research, expansion and infrastructure. In addition to this, by
issuing the shares, an entity could be able to generate publicity which in turn helps in
increasing business opportunities. Going public also helps the firm in building their prestige
or reputation across the world as it list the company name on the major stock exchange which
is counted as the main motivator for company o go for IPO route (Nassr and Wehinger,
2016). Moreover, IPO helps the corporations in attracting new talent y offering them with
perks such as stock options.
The major limitation to go for public by using an IPO route is time and the expense
that is involved in going through this process. It is found as very long and time consuming
process that could be of 6 months to 9 months or even longer. At this time, management team
of the company is likely to focus on IPO that could cause the other business areas to suffer.
Further, it cost higher amount of money for going through IPO that is from underwriting fees,
financial service to the filling fees.
b. Things that motivated Ferrari in going for public
The company has a large proportion of debt in which much of are at floating rate. The
credit spreads on the high yield had widened so cost of the rolling over the debt has been
increased (Gagliardo, 2017). This motivated Ferrari to go for public in order to pay down its
debt by getting huge funds through IPO.
c. Reason behind listing of Ferrari on New York exchange
The chairman of Ferrari and CEO of its respective parent company, Fiat Chrysler
Automobiles (FCA) announced prior to the listing year that FCA would be seen as spinning
off the Ferrari Company into the separately traded firm. As independent firm, shares of the
Ferrari (under aptly named ticker symbol that is RACE) would listed on New York Stock
Exchange, with eventual listing in the Milan (Pacheco-Blanco and et.al., 2018). The plan of
Marchionne’s was to sell 10% of the Ferrari’s shares in an IPO and money or funds raised in
an offering would entirely go to the FCA.

d. Evaluating the secondary and the primary shares sold in Ferrari IPO
Primary shares are stated as the shares which are offered for the first time to public
which is called as the initial public offering. Company made an IPO for common shares of
Ferrari N.V. selling around 17,175,000 shares that equates to approximately 9% of the
Ferrari’s share capital. This offering intended to be as the part of the series of the transactions
in order to separate Ferrari from the FCA.
Secondary shares are referred as offering the shares to the existing shareholders where
the company seeks for supporting the healthy secondary market for the purpose of promoting
their brand value, facilitating sale of the new car, benefitting our clients etc (Dambra and
et.al., 2018). the dealers of the firm facilitated inspection service for the clients who seeks for
selling their cars that includes detailed checks on car and certification on which client could
rely, authenticity of car, conformity to the original technical type of specifications and state
of the repair. Furthermore, it offers maintenance and restoration services to classic Ferrari
customers.
2.
Explaining IPO over-allotment option and stating reason of choosing this option by Ferrari in
its IPO
Green shoe option refers to an option allows the firm for intervening within a market
to stabilize its share price during the 30 day stabilization period immediately after the listing.
This option is exercised by Ferrari at the time of making the public issue. Issuer firm make
use of green she option during the IPO for ensuring that price of the share on stock exchange
do not fall below issue price after issuance of shares (Bajo and et.al., 2016). Thus the main
reason behind choosing this option by the firm was to ensure that the opening price of its
shares results to success.
3.
a. Presenting the key tasks that are been executed by underwriter in IPO process
Underwriter seems as an investment bank employed as the IPO specialists which
ensures that in an IPO process, an enterprise satisfies all the regulatory requirements like
filing with appropriate bodies, depositing all the fees & making available all the necessary
financial data to public. They contacts larger number of prospective buyers of the stock like
insurance company, mutual funds corporations who are having large sum of the money to

invest in (Kecskés, 2019). Underwriter takes pulse of the prospective buyers and thereafter
recommends an IPO price to firm. This means as the price at which shares would be sold and
excessive price might leave firm with an unsold stock, whereas the price which is too low
would mean to foregone revenue from stock safe.
b. Explaining the primary considerations that are been taken into account while selecting or
choosing an underwriter
Before choosing underwriter, company must consider key aspects that are as follows-
Understanding business- In this the firm assess that an underwriter is having full
knowledge about the business of the company and its strategy along with the information
regarding an industry within which it operates.
Ability in positioning an entity’s story – This means that do an underwriter states the
story of the company in such manner so as to get strong valuation and the market reception.
Experience and reputation – With respect to this, company should analyze the total
number of the IPOs conducted by underwriter within the industry for last 3 years and the
information relating to success of such deals.
c. The main motivations for syndication
Syndicate underwriters is the group of investment banks and brokers and dealers
formed for the temporary purpose, who have come for the purpose of selling the new shares
to the investors. The syndicate underwriter is led by the lead underwriter which is just for the
security purpose (Dereeper and Schwienbacher, 2018). The main motivation behind engaging
the syndicate underwriter is to manage the risk as each of the member is allotted the specific
number of shares to be sold out. When the issue is large for a firm to handle, then the
syndicate is formed so that the resources of all the firms can be utilized to orchestrate the
issuance along with spreading the risk.
d. Compensation was paid to the underwriters of Ferrari
The common shares sold by the underwriters to the public will be offered at the initial
offering price and any of the shares sold by the underwriters to the security dealers would be
held at the discount of up to $0.936 per share (1.8%) from the initial offering price. The
company has estimate that the total expenses of the offering payable by them which includes
legal, accounting, and printing costs, along with filing fees, will be approximately $10
million and the underwriters have agreed to reimburse the company and the selling

shareholder, as specified by the selling shareholder, for a portion of such expenses in an
amount up to 0.5% of the proceeds of any shares sold in the offering. The company have also
agreed to reimburse the underwriters for certain of their expenses related to the filing and
clearance of the offering by FINRA in an amount up to $10,000.
e. Price-stabilization’ activities conducted by the underwriter
After, IPO underwriters are asked to provide support for trading the stock and are
called stabilizing agent. In respect to the offerings, the underwriters are required to engage in
the activities that stabilize, maintain or else will affect the price of the shares during and after
the offering and it includes, stabilizing transactions. short sales, purchases to cover positions
created by short sales, imposition of penalty bids and syndicate covering transactions
(Boulton and Braga-Alves, 2019). In case of Ferrari, the underwriters were involved in the
price-stabilization under SEC Rule 10b. These underwriters were engaged in the price
stabilization activities for a specific period during the security distribution. As per the rule,
the underwriters can often post stabilizing bids at or below the price offered for the securities
which helps in providing price stability during the initial process of the IPO.
4.
‘Book-building’ of an IPO and the price range used by Ferrari
The book building process is the price discovery mechanism which is used in the
stock market while issuing securities for the first time (Bonaventura, Giudici and Vismara,
2018). In an IPO, it can be done either through at fixed price or if the company is unsure
about the exact price in that case a price range is decided. Thus, the investors are provided
with the price range and is asked to bid on. It is the most efficient method in pricing the
securities in an IPO.
The price range used by in the book building process of Ferrari IPO was $48 to $52
per share range. The IPO gives Ferrari a market capitalization of around $9.8 billion. The
major reason for selecting the price at the top end of the book was that after the roadshow
meetings with the interested and potential investors in both Europe and the US, it was very
clear that there is a strong demand for the 17.75 million shares that is going to be offered in
the IPO. Also, the reports indicates that the investors interest in the Ferrari IPO is so high that
it was expected that the deal is expected to be oversubscribed and after the road show in
Europe, UBS claimed that the book will be oversubscribed and this left Marchionne
wondered if the price of the stock is set within the range will leave the money on table and

also, pricing too high will leave a message of prudence to the investors which might cause
losing the subsequent upsurges in price. Thus, all these factors lead to the top book price for
the stock.
5.
Pricing of the Ferrari IPO
The pricing of the sock was set in the range of $48 to $52 per share and was opened at
the $52 per share at the top end of the book building range as it was well over subscribed
((Schill and Craddock, 2017)). But it had a disappointing first week as it slipped to 6% and
then plunged to 41% in the first fur months of IPO. The only reason was it would never grow
quickly as it is an exclusive business and are special because they are rare in number. After 4
months it was just half which was the right time to buy the stock as it would double over the
next 1 year. In early, 2016, it soared 431%.
Based on this, I would have purchased in the stock of the company thinking that even
if the IPO fails but the business is doing good which is a distinguishing factor. After year on
year it turned into a big profit.
6.
Explaining IPO lock up agreements along with the description of Ferrari’s IPO lock up
agreement
Lock-up agreement means a legally binding contract that is made between
underwriters and insiders of the firm during its IPO which prohibits them in selling any of the
company’s shares for specified period of the time (Dambra and et.al., 2018). Ferrari enter into
the contract with underwriter with an agreement for not issuing, selling or disposing off any
of the common stock that are subjected to an exception for period of 90 days following with
date of prospectus without the prior permission of USB securities LLC.
7.
Comparing the performance of Ferrari IPO
The underpricing and long-term performance of IPOs are commonly referred to as the
two anomalies of IPOS, since they are the two most extensively researched aspects of IPOs.
IPO underpricing is the phenomenon of a large positive gain to a new issue after the first
day of trading relative to the offer price.

(i) In short term, that is, first day trading the performance of Ferrari was good as it
was valued at $10.4 billion at the closing price of $55 which was up 6% and about
$600 million in a day and it was opened at a premium of 15%. On an average the
average stock gained 16% in value after the first day.
(ii) In long term performance, like 4 year, the return is at 22.6% while in case of
Ferrari after 4 years the performance is much higher and the is the indicator of
good performance.
It has been observed that companies are apparently underpricing their stocks while going
public as based on the perfect market theory, the company should not leave the money on the
table if it is large in quantity. Companies goes for this because it is under-priced which
remains for a shorter time as the investors demand will drive the price upward to its actual
market value. In long term, the performance of stocks deteriorates and the main reasons for
the under performance is the risk measurement, bad luck, being over optimism (Gandolfi and
et.al, 2018). In theory, it is said that the IPO that increases on the first day of trading was
underpriced which may be deliberately or accidently with the purpose to increase the
demand. Based on this, the major reason for drop in the performance of the Ferrari is the
high rate set at the first days which lead to decrease in demand in the later days. The
overpricing is the reason and also it is considered worse than the underpricing when the
closing price is lower than the initial price but in case of Ferrari the closing price was higher
than IPO price but was very close.
8.
Evolution of capital structure of Ferrari after IPO
Capital structure is the combination of the equity and debts that the organization uses
for the purpose of financing its business operations. Whether to use debt, equity or the
combination of two is determined by considering several factors. It is a very important
decision that is made by the company. Based on the Modigliani And Miller Approach (MM
APPROACH) method of capital structure, which states that the change in the financial
leverage will lead to change in the cost of capital (Brusov and et.al, 2018). It is based on the
two proposition which are stated below.
Proposition 1: It states that the capital structure of the company is irrelevant to the
value of the firm. on comparing the two identical firm, the value is not affected by the choice

of financial sources adopted but it rather dependent upon the expected future earnings, in
case, the information about tax is not given.
Proposition 2: It says that the financial leverage boosts the value of the firm and
reduces the cost of capital, when tax information is given.
But there is certain limitation to this fact. However, issuing more debts would mean
that company has to pay more fixed amount of interest which leads to increase in volatility of
the dividend payment as in case of poor year, the company would be obliged to payment
interest and this will affect its ability to pay dividend to its shareholders. If this risk to
shareholders increases then the company would be required to provide greater return to
compensate them and therefore, cost of equity will increase leading to increase in cost of
capital.
The capital structure of Ferrari is under a good condition. Currently, company is
looking to reduce the debt component from its capital structure as it has led to increase in the
fixed expense liability to the company. The company has launched the share repurchase
program for meeting the company’s obligations. There is a drop in the net debt of the
company from € 1158 in 2017 to € 1133.

REFERENCES
Books and Journals
Bajo, E. and et.al., 2016. Underwriter networks, investor attention, and initial public
offerings. Journal of Financial Economics. 122(2). pp.376-408.
Bonaventura, M., Giudici, G. and Vismara, S., 2018. Valuation and performance of
reallocated IPO shares. Journal of International Financial Markets, Institutions and
Money. 54 pp.15-26.
Boulton, T. J. and Braga-Alves, M. V., 2019. Price stabilization, short selling, and IPO
secondary market liquidity. The Quarterly Review of Economics and Finance.
Brusov, P. and et.al, 2018. Capital Structure: Modigliani–Miller Theory. In Modern
Corporate Finance, Investments, Taxation and Ratings (pp. 9-27). Springer, Cham.
Dambra, M. and et.al., 2018. The consequences to analyst involvement in the IPO process:
Evidence surrounding the JOBS Act. Journal of Accounting and Economics. 65(2-3).
pp.302-330.
Dereeper, S. and Schwienbacher, A., 2018. The Structure and Role of the Underwriting
Syndicate. In The Oxford Handbook of IPOs (p. 390). Oxford University Press.
Gagliardo, G., 2017. How to create value for shareholders: the Ferrari case and the impact of
its carve-out and spin-off on FCA.
Gandolfi, G. and et.al, 2018. UNDERPRICING AND LONG-TERM PERFORMANCE OF
IPOS: EVIDENCE FROM EUROPEAN INTERMEDIARY-ORIENTED
MARKETS. Economics, Management & Financial Markets. 13(3).
Kecskés, A., 2019. Price Movements of IPO Stocks during the Lock-Up Period. Public
Finance Quarterly. 64(2). pp.222-238.
Nassr, I. K. and Wehinger, G., 2016. Opportunities and limitations of public equity markets
for SMEs. OECD Journal: Financial Market Trends. 2015(1). pp.49-84.
Pacheco-Blanco, B. and et.al., 2018. Sustainable Information in Shoe Purchase Decisions:
Relevance of Data Based on Source. Sustainability. 10(4). p.1170.
Schill, M. J. and Craddock, J., 2017. Ferrari: The 2015 Initial Public Offering. Darden Case
No. UVA-F-1775.