Introduction to Corporate Finance

RAISING LONG-TERM FINANCING

12-1 The basic choices in long-term financing

12-2 Investment banking and the public sale of securities

12-3 The market for initial public offerings (IPOs)

12-4 Seasoned equity offerings

what companies do

FINANCIAL ENGINES REVVED UP

What comes to mind when you think about a

firm ‘going public’ by conducting an initial public

offering (IPO) of common stock (called ordinary

shares in Australia)? Most people would probably

think about hot technology stocks (or shares, as they

are called in Australia) like Google, or emerging

social networking companies like Facebook;

but excitement in the IPO market isn’t limited to

glamorous firms. On 16 March 2010, US company

Financial Engines, Inc. (founded in 1996 by William

Sharpe, Nobel Laureate and finance professor)

completed its IPO, selling 10.6 million shares at

$US12 and raising more than $US125 million. The

company, which provides services to nearly one-

quarter of all Fortune 500 companies, advises clients

on retirement account investing decisions. Financial

Engines’ computer programs decide how investors

should allocate their retirement savings among

different types of assets. That business model may

not excite many people, but the company’s initial

returns were very exciting for its investors.

The initial buyers of Financial Engines’ stock paid

US$12 per share, but shares began trading in the

secondary market at US$15 and kept climbing higher,

ending the first trading day up 44%. With millions of

Baby Boomers (those born between 1946 and 1964)

struggling to manage their retirement nest eggs,

Wall Street apparently felt that Financial Engines’

retirement investment advisory business would be

growth business. With the equity that it raised in its

IPO, Financial Engines was well positioned to achieve

rapid growth in the next few years. Looking forward

five and a half years, to October 2015, the company’s

share price had grown to US$31.22 and its market

capitalisation was US$1.609 billion.

Sources: ‘Hot IPO: Retirement-savings advisor Financial Engines soars in

debut,’ Business: Money & Company, Los Angeles Times, 16 March 2010,

accessed at http://www.latimesblogs.latimes.com/money_co/2010/03/financial-

engines.html, 8 June 2010; Rick Aristotle Munarriz, ‘Finally! A Hot IPO!,’

The Motley Fool, Fool.com, 17 March 2010, accessed at http://www.fool.com/

investing/general/2010/03/17/finally-a-hot-ipo.aspx, 8 June 2010;

and Google, https://www.google.com.au/webhp?sourceid=

chrome-instant&ion=1&espv=2&ie=UTF-8#q=FNGN+market+cap.

Accessed 8 December 2015.

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