Financial Markets and Institutions - Assignment Example

Financial Markets and Institutions Customer Inserts His/her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 07/06/ 2011 Abstract Tabcorp Holdings Limited idea to demerge may be very effective with the utilization of the bookbuild sale method. This can be done in case where Tabcorp has offered a pro-rata entitlement offer that further splits into institutionalized and retail entitlement offers. There are other fund raising methods that are available for Tabcorp. These include the placement of shares to institutional shareholders or the use of a share-purchase plan. The ‘accelerated renounceable pro-rata entitlement offer’ is a funding structure developed through Renounceable Accelerated Pro-rats Issue with Dual- book build structure (RAPIDS). An entitlement offer can be divided into two components. These include: an institutional entitlement offer and a retail entitlement offer. With an institutional entitlement offer, offers are made to those security holders within an institution who have qualified to make application for their pro-rata entitlement. On the other hand, with a retail entitlement offer, offers are made to those security holders who have qualified for retail by making application for their pro-rata entitlement. Settlement and allotment of the shares taken under the institutional or retail entitlement offer and bookbuild are done at the same time. There are advantages and disadvantages of accelerated renounceable pro-rata entitlement offer (Anonymous, 2006). One advantage is that through this structure, if the shareholders (investors) fail to participate in the entitlement offer, they are allowed to realize value for their entitlements. This is because if in case the shareholders (investors) failed to take their entitlement, even after having their percentage interest diluted they would not receive any value for owning up such entitlement. Another advantage is the fact that, this structure enables the company, for example, Tabcorp to acquire a huge amount of its funds within a shorter time period under the entitlement offer compared to the previous methods such as Accelerated Priority Offer (APO). With this structure settlement of institutional entitlement offer and bookbuild occurs slightly over a week after the offer has been launched. In addition, investors of Tabcorp are not required to pay any brokerage fee in order to realize value for their investment through the accelerated renounceable pro-rata entitlement offer. Therefore, this structure ensures that a balance is achieved for both the investors and company, by providing the company with certainty and the investors with a chance to realize value for their investment in cases of non-participatory (Davidson, 2009). The disadvantages of ‘accelerated renounceable pro-rata entitlement offer’ is that the company might incur a large amount of losses because of certain investors failing to participate in the offer and as well they realize a value. On the other hand, the accelerated renounceable pro-rata entitlement offer is structured in two ways. In the first instance, the institutional investors are first engaged in the entitlement then the rest of the investors, retail investors are engaged in the entitlement. This two way structure may lender huge costs as well time consumption. This structure is presented in case of Tabcorp where those securities not taken up under the institutional and retail entitlement offer were offered for sale under the bookbuild process. This is quite useful since this method attracts many investors. b. Alternative methods of raising the funds There are several alternative methods of raising funds available to Tabcorp. These funding methods included but not limited to: placement, share-purchase plan and pro-rata entitlement offer. These funding methods have their own advantages and disadvantages to either or both the company and the investors. A placement is the quickest and cheapest method of issuing new shares. A placement is an arrangement done between the issuing company and an intermediary, usually a merchant bank to seek potential new investors of the shares available for issuance. A disadvantage of the placement method is that the purchasing institution might acquire a significant percentage holding of the company’s shares which may in future have major implications on the issuing company in terms of control and might even lead to a takeover bid (Lock, 1998). In addition, placement dilutes the holdings of small shareholders. The placement method of funding is highly viable for situations where a company intends to raise money within the shortest period of time. Consequently, at times a company needs to take up available opportunities such as acquisition hence the need to perform a placement. Another alternative method of funding is the use of share purchase plans. With this method, the company allows its employees to purchase the shares at a price less than the current market price. However, though all employees are eligible for the share purchase plan, the degree at which employees are allowed to participate to based on employees shareholding. The share purchase plan may be available to only the key employees of the company. The share purchase price may be at a small amount compared to the current price or at a price established at the time of granting the options. These plans are usually used in cases where the company needs to attract more equity, need to provide greater compensation to certain employees and believe that employees ownership will lead to high performance (Nikolai, Bazley and Jones, 2009). An advantage of the share purchase plan is the fact that it provides employees with a sense of ownership to the company. This can lead to high levels of performance and production with an aim of increasing the value of the shares and dividends thereon. A share purchase plan is quite disadvantageous to shareholders since it disproportionate and disallow all shareholders an equal opportunity to own shares as well as avoid dilution of their holdings. Consequently, it rewards the lowest number of shareholders with a disproportionate amount of equity. The pro-rata entitlement offer requires the company to offer all shareholders additional equity in proportion to their current holding. This method is most appropriate in cases where a listed company intends to acquire additional equity funding. If Tabcorp chooses to offer a pro-rata entitlement offer it should provide a bookbuild or other sale facility for renounceable entitlements so as the investors who do not participate are still able to realize some value from their entitlement. Companies making a pro-rata entitlement offer should offer a prospectus to all its shareholders and other potential investors. In many jurisdictions, corporation law does not allow companies to make a share issuance without a prospectus (Dunn, 2011). c. Explain what is meant by an underwriting facility and why Tabcorp would use it. An underwriting facility consists of a medium-term commitment by the underwriting banks to buy notes issued by the borrower. A group of underwriting banks agrees to bid for the paper, or the borrower employs the service of a single bank to act as an investment bank and a sole placing agent to place the .paper at a certain price. An underwriting facility can also be described in its various forms. The Revolving Underwriting facility is a form of revolving credit where a group of underwriters agrees to provide loans in the event that a borrower is not able to sell in the Eurocurrency. These loans are generally provided through the purchase of short-term Euronotes. A Transferable Revolving Underwriting Facility contains documentation to allow underwriters to transfer their commitment to another bank (Walmsley, 1998). Tabcorp can use underwriting facilities so as to engage a merchant bank or institution to place its shares both for the original company and the new one formed after the demerger. This will present a neutral price for the shares for both demergers. d. What is meant by a bookbuild sale process? The bookbuild sale process is a security pricing method where the issuing company engages in a price discovery instead of dictating or assigning prices for the securities to be issued. This is to mean that, instead of Tabcorp fixing up a particular price for its shares; it provides the investors with a range of prices from where they can chose a particular price. To attain this price, the investors engage in a bid. There are two critical prices in the price range: the ‘floor price’ and the ‘cap price ‘. The ‘floor price’ is used to refer to the lowest price in the price range, while the ‘cap price’ refers to the highest price in the price range. Consequently, investors can only bid for security prices within the price range. On the other hand, the company’s underwriters and insiders use the market forces (demand and supply) to provide with the final issue price of the securities (Greg 2006). The issue price or the price at which the securities will be sold will always be lower than the cap price and not less than the floor price. With the bookbuild sale process there is a higher a demand for the securities. The demand is high with the bookbuild sale process because it is known on everyday basis unlike with the fixed method where the demand is known after the issue closes. Since all interest groups in the Tabcorp sale of shares will be involved in the price discovery, the bookbuild sale process is considered a market determined with a high level of transparency. These interest groups are both corporate and individuals. Fan (2007) argue that the bookbuild sale process is influenced by market demand because all potential investors and insiders do not have the knowledge of the issue price not until they as a whole discover it. The bookbuild sale method is considered the best method of issuing shares. References Anonymous, 2006, Asiamoney, Euromoney Publications. Davidson, A 2009, How The Global Financial Markets Really Work: The Definitive Guide To Understanding International Investment and Money Flows, Kogan Publishers. Dunn, James 2011, Share Investing for Dummies, 3rd Ed, For Dummies. Fan, Q. 2007. Earnings Management and Ownership Retention for Initial Public Offering Firms: Theory and Evidence: The Accounting Review, Vol 82, Issue 1, pp27-64. Greg, N.G. 2006. Initial Public Offerings: An International Perspective, Butterworth-Heinemann. Lock, D 1998, The Gower Handbook of Management, 4th Ed, Gower Publishing Company. Nikolai, L.A., Bazley, J.D & Jones, J.P 2009, Intermediate Accounting, 11th Ed, Cengage Learning. Walmsley, J 1998, New Financial Instruments, Wiley Publishers. Read More