In-Depth Finance Exam: Public Offerings, Underpricing and Acquisitions

This document presents solutions to a finance exam covering topics such as public offerings, underpricing, and acquisitions. It discusses the differences between seasoned and unseasoned IPOs, the reasons behind IPO underpricing, and the underperformance anomaly. The solutions also analyze right issues, venture capital reputation, and corporate governance in relation to IPO performance. Furthermore, it explores different forms of acquisitions, theories of mergers, and strategies for dealing with hostile takeovers. The analysis includes calculations to determine the benefits of different acquisition scenarios for shareholders and recommendations based on these calculations. Finally, the document refers to research findings on cross-border acquisitions and the impact of cultural differences on their success.

FINANCE EXAM

TABLE OF CONTENTS
QUESTION 1..................................................................................................................................3
a)..................................................................................................................................................3
b)..................................................................................................................................................3
c)..................................................................................................................................................4
d)..................................................................................................................................................4
e)..................................................................................................................................................5
QUESTION 2..................................................................................................................................5
a)..................................................................................................................................................5
(b).................................................................................................................................................6
(c).................................................................................................................................................6
(d).................................................................................................................................................7
e)..................................................................................................................................................7
REFERENCES................................................................................................................................9
APPENDIX....................................................................................................................................11
QUESTION 1................................................................................................................................11
QUESTION 2................................................................................................................................12
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2

QUESTION 1
a)
Public offering is concerned with offering shares or debt securities to the public for the
first time in ha attempt to raise capital. On the basis of this, it can be identified that it is issued in
both unseasonable & seasonal manners. The unseasoned initial public offering is done by private
group of mangers a between the marker. In this type of offering attention is paid on connecting
with shareholders for raising fund in unfrequented time when awareness providing is given much
emphasis (Bask and Nätter, 2021). The one of the significant benefit that can be derived through
this type of offering is greater public awareness, obtaining the publicity and credibility, etc. On
the other side, has few limitations as well which are diverting company's executive attention
away from their core business.
Seasonal initial public offering is associated with the existing company that is public-ally
traded and have decided to raise additional capital by selling shares of its stocks. In this type of
offerings company receives number of advantages and disadvantages (Souitaris and et.al., 2020).
The benefits comprise increasing the number of shares, increased fund capacity, increased ability
to declined debt. In against to this, changing company capital structure, decreasing of earning per
share, higher requirement of financial reporting, etc which affect smooth processing of company.
b)
Under pricing is practice of listing an initial public offering that the price below then its
real value in the stock market. It is considered to be under-priced when a new stock closes its
first day of the trading above the set IPO price. In the initial public offering under-priced is
considered to be common due to the market nature.
According to Prasad (2018) there are number of reasons for which under-priced occur
while initial public offering as investors and employees who have stock options can benefit from
firm. The investors who exercise options before firm going for the initial offering. In addition to
this, pay tax on spread between the exercise price and fair market value. In against to this,
Hussein, Zhou and Deng (2020) depicted that there is negative value of under-price occur due to
the intrinsic value and pricing error. The main reason that can be articulated that there are under
estimated demand in the market for this company stock.
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c)
It is basically appearing to be h overpriced as third anomaly in the pricing of common
stock (Har nd Visvanathan, 2018). The underperformance of initial offering is related with being
failure to accomplish the objective of raising fund from the investors. The main reason behind
this is related with risky nature which indices divergence of opinion of declining over time
(Gandolfi and et.al., 2018). The particular theory indicates that firm with under performance are
those with short operating history, low sales, prestige underwriters, etc. on the basis of this it can
be identified that it leads to result In having high volatility, under-pricing at time of issuance,
listing or regional exchanges, etc.
d)
i. The right issue is being referred to as inviting the existing shareholders to purchase new
shares within the company itself. This is a kind of issue which is provided to the existing
shareholders in order to arrange for more finance within the company (Bahri, 2018). In
case the company is planning for expansion of a corporation or any other reason for
which they require huge amount of capital then instead of using the debt option the
company can go for right issue.
Calculation attached in appendix
With the evaluation of the calculation for the right issue it is advisable to the company
that they must go for the option to which involves providing shares at 30% discount which is the
first option. Thus using this option will be more beneficial to the company as they will be able to
pay to the shareholders for the right issue. In case of the second option of providing shares at
15% discount and paying 3% underwriting fees has the value of right equals to 1114 which is
more than the option one which is 984. It is recommended to the company that they must go for
the option one that is providing the discount of 30% and avoiding need for underwriting.
ii. In case the wealth maximising shareholders is holding 100 shares within the company
then they will get the following
Calculation attached in appendix
With the evaluation of both the options from investors point of you the option to is better.
This is pertaining to the fact that in option to the investor is getting more benefit. On the other
hand, an option to the company has to pay more and due to this they have selected option one.
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e)
The main findings of the paper relating to venture capital reputation post IPO
performance and corporate governance it can be found out that analysing these factors is very
essential. With the valuation of the article it was evaluated that venture capital is associated with
the forms repetition and with IPO that is in me shall public offering as well. It was also evaluated
that term there is a significant positive association of venture capital backed IPO with long run
forms performance measure (Krishnan and et.al., 2011). This is particularly because of the
reason that venture capital is thought to be safe and when the IPO are backed with the venture
capitalist then this builds trust of the investors and the invest within the IPO. The major
implication of the articles finding was that the companies presenting the IPO must back up with
venture capital to attract more of the investors.
QUESTION 2
a)
Acquisition:
It refers to the concept under which company will make a purchase of shares of another
company. this purchase and acquisition would be made on the basis of purchasing of partial and
all the shares (Leahy and Carey, 2020).
Forms of Acquisition:
Horizontal acquisition:
This is made performed when one company will acquire another company belonging to same
business or industry or sector i.e. a competitor.
Vertical acquisition:
As per this acquisition the company will make acquisition of supplier of input or company to
whom it make sell of its product or distributor of the product.
Conglomerate acquisition:
As per this acquisition the company would make acquiring of complete different type of business
belonging to different industry and sector.
Congeneric acquisition:
This will occur when the company sharing similarity will perform the acquisition.
Theories of merger:
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Market power theory:
As pert the concept of market power theory the firm make merger because of the raised market
power. This means that the company make merger because they want to make rise their power in
the market (Salop, 2017).
Diversification theory:
As per the concept of this theory the firm make merger because of the concept of reducing the
risk of business. This means with the concept of this theory the reason of the merger is related
with the reduction of the risk of the business.
Synergy concept:
As per the concept of synergy theory the merger would lead to play an important role because as
per this theory the value of the combined firm would be high while making it compared it with
the individual firm (Basri and Arafah, 2020).
(b)
In the given case, the share price of the Pear Plc is $140 each and share price of the Sense Plc is
$35.50 each. Here, Pear Plc will provide 30% premium to the shareholders of Sense Plc which
provide the benefits to the shareholders of Sense Plc. These benefits are calculated in the form of
share price per shareholders which are as follows:
Calculation attached in appendix
After the above calculation, it is identified and assessed that the proposed acquisition of the
Sense Plc by the Pear plc is beneficial for the shareholders of the company. It is because before
the acquisition, the share price of each shareholder is $35.50 while on the other side the share
price of each shareholder of the Sense Plc will become $46.15. This arises the benefits of $10.65
per share. That's why it is advisable to the shareholders of the Sense Plc. To sell their holdings to
the Pear Plc. Here, Pear Plc will give $46.15 million cash to the 1 million shareholders of
company.
(c)
The total shares of the Sense Plc is 1 million shares with each share price of $35.50. While on
the other side, the total shares of Pear Plc is 75 million shares with each share price of $140.
Calculation of total shares received by each shareholder of Sense Plc from Pear Plc is as follows:
1 million shares of Sense Plc will get 1 million shares of Pear Plc having the share price of the
$140
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Calculation attached in appendix
This merger is also beneficial for the shareholders of the Sense plc because their share price is
increasing after the acquisition. Thus, it is advisable to the Sense Plc shareholders to sell its
holding to the Pear Plc.
(d)
The three defective strategies that can be adopted by the companies in order to deal with the
hostile takeover are as follows:
1. Buyback and Stock repurchase: The buyback of shares means buying own shares again
so that they cannot sell them elsewhere to buy more than 50% of the company’s
shareholdings (Kerani and Menon, 2019).
2. Staggered board: This is also one of the strategies in which the only certain numbers of
directors are re-elected by the company. The purpose behind this is reducing the returns
to the target shareholders of the company. This will help them in preventing the company
from hostile takeover.
3. Leveraged recapitalization: This is also known as capital restructuring where the
company can sale assets, issue debts and distribute the dividends among the shareholders.
This also helps in preventing the company from the hostile takeover from its competitors
(Kay, 2018).
e)
Overall, the major finding presented in the research paper states that, on the basis of study of
a sample of 800 acquisitions done cross- border, it was concluded that such acquisitions work
much better in the long run even if the cultural backgrounds are completely different of the
acquiring entity and the one acquired are starkly different (Chakrabarti, Gupta-Mukherjee and
Jayaraman, 2009). This was in stark contrast to the common belief that culturally diverse entities
cannot coexist peacefully.
Cultural differences are indeed a major influencing factor but this paper concluded that
when specific- deal variables were imposed and the fixed effects of culture at country level was
taken into account, then it can be identified that it was comparatively much easier to implement
such changes. Also in the long run durations, the cash aspect acts as a lucrative and for better
relations and there are those acquisitions as well which are done on friendly and cordial terms
thus making them a much better aspect to function upon. It was identified that after merger, the
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countries that are culturally disparate, are able to gain better and more advanced level synergies
and greater strength in the organisation due to increase resources.
Increased diligence levels, improved nature of contracts, advanced screening levels etc. all
contribute towards increased performance levels and better achievement of targets accordingly.
Results indicated that 97% of the acquisitions were friendly and economic as well
cultural differences were the majorly influencing factors in such scenarios. BHAR model was
also used for better analysis and evaluation. Different pairs were evaluated using the Hofstede
model based on similarities and dissimilarities of the countries.
Overall, the different results and their analysis using different models helps in concluding that
there are substantive indicators regarding the better performance irrespective of the differences in
cultural beliefs (Chakrabarti, Gupta-Mukherjee and Jayaraman, 2009). However, the research
leaves the question about the robustness or similar results using alternative models for evaluation
of impact of culture, unanswered. This might make the results questionable and critics can claim
results of the study as inconclusive or non- universal.
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REFERENCES
Books and Journal
Arora, N. and Singh, B., 2020. Corporate governance and underpricing of small and medium
enterprises IPOs in India. Corporate Governance: The International Journal of Business
in Society.
Bahri, S., 2018. Analisis perbedaan kinerja keuangan sebelum dan sesudah right issue (studi
pada entitas manufaktur yang terdaftar di bursa efek indonesia). Referensi: Jurnal Ilmu
Manajemen dan Akuntansi, 6(1), pp.11-25.
Bahri, S., 2018. Analisis perbedaan kinerja keuangan sebelum dan sesudah right issue (studi
pada entitas manufaktur yang terdaftar di bursa efek indonesia). Referensi: Jurnal Ilmu
Manajemen dan Akuntansi. 6(1). pp.11-25.
Bask, M. and Nätter, A.L., 2021. Latent class analysis of IPOs in the Nordics. PloS one, 16(11),
p.e0259510.
Basri, Y.Z. and Arafah, W., 2020. The effect of acquisition synergy on firm performance
moderated by firm reputation.
Chakrabarti, R., Gupta-Mukherjee, S. and Jayaraman, N., 2009. Mars–Venus marriages: Culture
and cross-border M&A. Journal of International Business Studie., 40(2) pp.216-236.
Chen, K., Lin, A. and Siregar, D., 2018. Auditor Reputation, Auditor Independence and the
Underpricing of IPOs. Journal of Applied Business & Economics. 20(6).
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).
Har, W. P. and Visvanathan, K., 2018. Secondary equity offerings long run underperformance:
Puzzle or mistake. Asian Economic and Financial Review. 8(2). pp.189-204.
Hussein, M., Zhou, Z.G. and Deng, Q., 2020. Does risk disclosure in prospectus matter in
ChiNext IPOs’ initial underpricing?. Review of Quantitative Finance and Accounting.
54(3). pp.957-979.
Kay, K., 2018. A hostile takeover of nature? Placing value in conservation
finance. Antipode. 50(1). pp.164-183.
Kerani, S. and Menon, K. N., 2019. L&T's Hostile Takeover of Mindtree: A Value Destructive
Transplant. Journal of Management and Public Policy. 11(1). pp.29-37.
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Krishnan, C. N. V., and et.al., 2011. Venture capital reputation, post-IPO performance, and
corporate governance. Journal of Financial and Quantitative Analysis. 46(5). pp.1295-
1333.
Krishnan, C.N.V., and et.al., 2011. Venture capital reputation, post-IPO performance, and
corporate governance. Journal of Financial and Quantitative Analysis, 46(5), pp.1295-
1333.
Leahy, B.P. and Carey, S.E., 2020. The acquisition of modal concepts. Trends in Cognitive
Sciences. 24(1). pp.65-78.
Prasad, D., 2018. “Underpricing” of IPOs on the OTC versus the NYSE. In New directions in
finance (pp. 146-158). Routledge.
Salop, S.C., 2017. Invigorating vertical merger enforcement. Yale LJ. 127. p.1962.
Souitaris, V. and et.al., 2020. Should I stay or should I go? Founder power and exit via initial
public offering. Academy of Management Journal. 63(1). pp.64-95.
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APPENDIX
QUESTION 1
D
i
Theoretical ex- rights price and value of right
Option 1- 30 % discount to avoid underwriting
= new shares * issue price + old shares * market price / New shares + old shares
= (200 * 5.25) + (150 * 7.5) / (200 + 150)
= (1050 + 675) / 350
= $4.92
Value of right
= 200 * 4.92
= 984
Option 2 – shares at 15 % discount and 3 % underwriting
= new shares * issue price + old shares * market price / New shares + old shares
= (200 * 6.375) + (150 * 7.5) / (200 + 150)
= (1275 + 675) / 350
= 1950 / 350
= $5.57
Value of right
= 200 * 5.57
= 1114
3 % for underwriting
1114 * 3 %
= 33.42
Value of right = 1114 – 33.42 = 1080.58
ii
Option 1
100 * 4.92 = 492
Option 2
100 * 5.57 = 557
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QUESTION 2
(b)
Calculation of shareholders benefits:
1 million shares* $35.50 = $35.5 millions.
= $35.5 millions* 30% = $10.65 million.
Total value of shareholder when the Pear Plc will give them 30% premium is $35.5 + $10.65 =
$46.15.
The share price of each shareholder of the Sense plc with this acquisition = $46.15/ 1 million
shares = $46.15 per share.
The excess share price benefits to each of the shareholders of the Sense Plc is as follows = share
price after acquisition — share price before acquisitions
= $46.15 - $35.50 = $10.65 per share.
(c)
Calculation of percentage premium offered to the shareholders of Sense Plc is as follows:
Total shares value of Sense Plc shareholders before acquisition = 1 million shares* $35.50 =
$35.50 million.
Total shares value of shareholders after acquisition = 1 million shares* $140 = $140 million.
Premium offered to the shareholders of Sense Plc = $140 - $35.50 = $104.5 million.
Percentage premium offered to the shareholders of Sense Plc = $104.5/ 140 * 100 = 74.64%
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