Methods of raising additional equity financefunds. These could include existing shareholders. This is still a public issue, but here
‘public’ does not have its usual meaning. The advantage to the business raising
the equity finance is that certain costs, such as adverts and underwriting (see above)
are saved. There is still the need to provide the extensive and costly information of a
more traditional public issue, however. In April 2007 the rail maintenance business
Jarvis plcraised £25 million through a placing.
As we can see from Table 8.1, placings represent an important means of issuing new
shares, both as IPOs and SEOs. Over the period, placings have had a higher profile for
seasoned businesses, but they are still significant for newly listed ones. For both types
of business they seem to be gaining in importance over time. For 2007, the percentages
are historically high for both IPOs and SEOs.
Pricing of issues to the public
The pricing of issues of ordinary shares to the public is of vital importance to existing
shareholders.
If the new shares are priced at a discount on the value of the existing shares, unless
existing holders were to take up such a number of new shares as would retain for them
the same proportion of the total as they had before, it would lead to the new share-
holders gaining at the expense of the original ones.
Since issues to the public tend to occur where the business is significantly extend-
ing its equity base, it is most unlikely that an existing shareholder will be able to take
up sufficient new shares to avoid being penalised by an issue at a discount.
It is a matter of judgement as to how well the issue price strikes the balance
between attracting the maximum amount of cash per share on the one hand, and
avoiding a very costly failure to raise the required funds, after spending large amounts
on promoting the issue, on the other. There are two ways in which the pricing prob-
lem can be mitigated. One is to have the shares underwritten. For a fee, underwriters
will guarantee to take up shares for which the public do not subscribe. This ensures
the success of the issue. The underwriters’ fee or commission is fixed by them
according to how many shares they are underwriting, the offer price and, naturally,
how high the underwriter believes the probability to be that some shares will not be
taken up by the public. Underwriters are, in effect, insurers. Most issues to the public
are underwritten. Underwriting costs tend to be in the order of 4 per cent of the
capital raised.
The second way of dealing with the pricing problem is for the shares to be open to
tender. This is much like an auction where the shares are sold to the highest bidders,
usually subject to a pre-stated reserve price (that is, a price below which offers will not
be accepted). When all of the offers have been received (the closing date for offers has
been reached), the business or the issuing house assesses what is the highest price at
which all of the shares could be issued. This can probably best be explained with a
simple example.