You are the president and chief executive officer of a family owned manufacturing firm with assets of $ 45 million. The company articles of incorporation and state laws place no restrictions on the sale of stock to outsiders. An unexpected opportunity to expand arises that will require an additional investment of $ 14 million. A commitment must be made quickly if this opportunity is to be taken. Existing stockholders are not in a position to provide the additional investment. You wish to maintain family control of the firm regard-less of which form of financing you might undertake. As a first step, you decide to contact an investment banking firm.
a. What considerations might be important in the selection of an investment banking firm?
b. A member of your board has asked if you have considered competitive bids for the distribution of your securities compared with a negotiated contract with a particular firm. What factors are involved in this decision?
c. Assuming that you have decided upon a negotiated contract, what are the first questions that you would ask of the firm chosen to represent you?
d. As the investment banker, what would be your first actions before offering advice?
e. Assuming the investment banking firm is willing to distribute your securities, describe the alternative plans that might be included in a contract with the banking firm.
f. How does the investment banking firm establish a selling strategy?
g. How might the investment banking firm protect itself against a drop in the price of the security during the selling process?
h. What follow- up services will be provided by the banking firm following a successful distribution of the securities?
i. Three years later, as an individual investor, you decide to add to your own holding of the security but only at a price that you consider appropriate. What form of order might you place with your broker?
a. Some considerations that might be important in the selection of an investment banking firm include their reputation and track record in the market, their expertise and experience in the specific industry, their network of potential investors, their ability to handle a transaction of this size, their understanding of your goal to maintain family control, their proposed fee structure, and their communication and support throughout the process.
b. When deciding between competitive bids for the distribution of securities and a negotiated contract with a particular firm, factors to consider include the firm's reputation and track record in the market, their proposed fee structure, their expertise in reaching the target investors, their commitment to the company's goals, their understanding of maintaining family control, and the level of support and communication they offer. It is important to evaluate both options to determine which serves the company's interests best.
c. Assuming a negotiated contract, some first questions to ask the chosen firm might include:
1. What is your experience and expertise in our industry?
2. How do you plan to ensure that our goal of maintaining family control is achieved?
3. What is your proposed fee structure?
4. How do you plan to market and distribute our securities?
5. Can you provide references from previous clients who have successfully completed a similar transaction?
d. As the investment banker, before offering advice, the first actions might include conducting due diligence on the company, reviewing its financials and operations, assessing its market potential, analyzing the feasibility of the expansion opportunity, and evaluating potential risks and rewards. This information will form the basis for the advice and recommendations provided to the company.
e. Assuming the investment banking firm is willing to distribute the securities, alternative plans that might be included in a contract with the banking firm could include:
- Determining the pricing and valuation of the securities
- Developing a marketing and distribution strategy
- Managing investor relations and communications
- Assisting with regulatory compliance and filings
- Providing ongoing support and advice throughout the process
- Potentially offering additional financial services such as underwriting or advisory services
f. The investment banking firm establishes a selling strategy by analyzing market conditions, conducting market research, identifying potential investors, determining the optimal timing, pricing, and allocation of the securities, and creating a marketing and distribution plan. They will use their expertise and experience to create a tailored strategy that maximizes the chance of a successful and efficient distribution.
g. To protect against a drop in the price of the security during the selling process, the investment banking firm may use various strategies, such as:
- Setting a floor price or minimum acceptable offer price
- Implementing a stabilization mechanism where they can intervene as a buyer in the market if the price drops below a certain level
- Employing hedging techniques to mitigate risk
- Analyzing market trends and investor sentiment to identify potential risks and adjust the strategy accordingly
h. Following a successful distribution of the securities, the banking firm may provide various follow-up services, such as:
- Providing ongoing investor relations support and communications
- Assisting with the post-distribution reporting and compliance requirements
- Managing any subsequent offerings or capital transactions
- Offering strategic advice and support for future business growth and financing needs
i. As an individual investor, if you decide to add to your own holding of the security but only at a price you consider appropriate, you might place a limit order with your broker. A limit order allows you to specify the maximum price at which you are willing to buy the security. Your broker will execute the order if the security's price reaches or falls below your specified limit price.