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Ferrari: The 2015 Initial Public Offering

 

 

 

 

 

 

 

 

 

 

Ferrari: The 2015 Initial Public Offering

 

 

Part-1

Ans (i). a)- Initial Public offering means the process of providing shares of a private corporation to the public in a issuance of new stock. It helps company is raising the capital. There are various pros and cons of IPO that are as follows:

Advantages:

  • Fundraising: The benefit of IPO is to bring in the funds for the company. These funds will be in huge number and can help the company in their growth. They can be used in research and development for the company, reducing the debt etc.
  • Opportunity for exit: In every company there are stakeholders who might have contributed significant amount of money and time. These investors might go for years as no significant return could be seen on their contributions. IPO provides a significant opportunity to exit the business (Souitaris et al., 2010). They can sell off their shares in the secondary market.
  • Credibility and publicity: For the growth company needs to have an exposure and for that it needs to come into the eyes of public. Initial public offering does that for the organization. Credibility of the company also improves as then they procure annual reports of the company.

Cons:

  • Additional requirements for regulation: Public companies needs to go through various regulations and also they have to procure their financial statements with the Securities and Exchange Commission at the end of every financial year. Also, a public company is required to follow GAAP and have their results audited. This increases the regulations of the company (Ghonyan, 2017).
  • Market pressure: Pressure of the market also effects the company leadership. Once an organization goes public every move is scrutinized by the investor and they are interested in knowing about the next quarter results only. Failing to achieve short term goals leads company in losing its value.

b) The motivation for Ferrari to go public are as follows:-

  • The parent company of Ferrari i.e Fiat after the merger of Fiat and Chrysler in the year 2014 was in high debts and requires cash so as to reduce its debt which were high at that point of time. Also, the company was planning to expand so that it can compete with Toyota and other brands. IPO might have brought that money.
  • Also, the parent company of Ferrari had a portfolio of various brands and Ferrari was being undervalued. Thus, as a joint company both the brands were creating less value while they might have created more if they are being separated (Schill & Craddock, 2017).
  • Ferrari had a good reputation in the market. It was known and promoted as a racing brand. Formula races were the main promoters of Ferrari. This provided a scope for the company to grow. Thus, these were the various motivations that were attached for bringing in the IPO of Ferrari.

 

c) Ferrari listed itself on the New York stock Exchange because:

- The model of the New York stock exchange is such that it leads to lesser volatility in the market in respect to the share prices of the company that were listed on it.

- New York Stock Exchange gives access to worldwide audience. To have its IPO expanded to large number of audience, Ferrari opted for New York Stock Exchange.

- Also, for creating a better presence and making it easy to raise the funds with appropriate valuation New York Stock Exchange is the best stock exchange. Thus, Ferrari opted for NYSE.

 

d) Primary share are the ones that were sold in the Initial public offering of the company. In its primary share holding, the company sold around 17.2 million of share at a price of $52 per share. The overall capital that was raised by the company totaled $893 million.

Once the IPO is completed shares started trading in the market. These are called as secondary market shares. After the IPO was completed of Ferrari, it had around 18.9 million shares that could be traded on daily basis and individuals can buy and sell them as they want.

Part 2

Ans (ii)- Green shoe or overallotment option is in the reference of Initial public offering. Under underwriting agreement it is provided as an option that gives the underwriter a grant and the right to sell more shares to the investors than it was initially planned by the company. It happens when the demand of the security is more than the expected figures. An option of green shoe provides an additional security to the prices of the shares that are being issued ad underwriters have the right to increase the supply of securities and smooth out the fluctuations of prices (Saadah & Panjaitan, 2019). This is the only type of stabilization measure that is allowed by the Securities and Exchange Commission.

Ferrari had the green shoe option attached during the time of its Initial Public Offering. Underwriters were allowed 1,717,150 additional shares by the company. These were the shares that could have been brought by the underwriters. This option provided by the company was open up to the 30 days (Ferrari prospectus, 2015). FCA’s stake in the company was then reduced to 80%. The option states that the additional shares would be purchased according to the shareholding ratio of the syndication of underwriters. In this manner Ferrari has allotted the Green shoe option to the underwriters and it could have been utilized as and when deemed necessary by the underwriters.

 

 

Part 3

Ans a) Underwriter serves as the intermediary between investors and the company who is seeking IPO. Underwriter ensures that all the requirements that are regulatory are completed by the organization. They make sure that the company deposits all the fees and all the required financial data is made available to the public.

Underwriters also contact various large investors that includes insurance companies or mutual fund companies who can invest large sum of money in the company. Underwriters helps in deciding the prices for the shares of the company. These are the prices at which the shares will be traded. Underwriters also acts as guarantors where they provide guarantee to the organization for selling a specific number of shares during the Initial Public offering. The underwriters if unable to bring the prospective buyers will purchase the shares themselves.

Ans b) The considerations before selecting an underwriter are as follows:

  • Understanding of the business: Does the underwriter knows about the business. It should be seen that an underwriter has knowledge about the company and its strategies and the way it operates.
  • Ability of portraying the story of company: It should be seen that underwriter is capable enough of portraying a story for the company in a manner that the company receives a strong valuation and acceptance in the market (Bajo et al., 2016).
  • Reputation and experience: The number of IPO’s that the underwriter has generated successfully should be seen. Also, what is the experience and the reputation that the underwriter holds in the market should be considered.

Ans c)-Syndication of underwriters refers to a group that is formed on a temporary basis for the deal or any particular process of the IPO. Syndication is done when the securities that are to be issued are in large number and requires more people to get involved. Also, the funds will be divided among the underwriters (Vithanage, Neupane & Chung, 2016). If the shares are not subscribed then underwriter has to buy them. Having a syndication will benefit the underwriters as this will divide the liability among various members.

Ferrari had a syndicated team of underwriters for its IPO process. The valuation of the company stood at $10 billion euros and the shares that were being offered in the market was around 17.2 million. The company had a 7 member’s syndicated team for the IPO. The primary underwriter for the organization was UBS securities that had the maximum shareholding. After that Merrill Lynch and other five underwriters worked. The syndication helped the company in dividing its shares among the underwriters and also reduced the burden on them. Also, the liability or the responsibility of the underwriters got divided. This was the main motivation for syndication.

Ans d) The underwriters were paid$1.56 per share commission by the FCA. After all the shares were sold, the underwriters will receive around $26793000 and if the overallotment option has been utilized than the overall money that will be receive will total $29471754 in form of commission. Underwriters were also paid $10000 for filling the clearance of FINRA for Ferrari. The overall compensation that was received by the underwriters was 3% for the IPO (Ferrari IPO prospectus, 2015). The average rate of compensation that prevails in the U.S. is at 4.5% for IPO’s. The compensation percentage was bit low but the valuation of company was according to that. Thus, the rate provided was appropriate.

Ans e)- Prize stabilization activities involve issuing more shares in the market so as to control the prices. This is the option of green shoe or allotment by the company. Underwriters of the Ferrari were provided an option of green shoe but it was not utilized by them. If required they could have opted for green shoe to stabilize the prices in the market.

 

Part 4

Ans.  Book building refers to the process of price discovery. In this process the period for which the bids are open investors are allowed to bid at various prices (Neupane et al., 2017). These bids are above or equal the floor prices. In the process of book building following steps are taken:

  • Appointing an underwriter: An underwriter is appointed at the first step. They suggest the price band for the company. Lower end is known as the floor price while upper end is known as the ceiling price.
  • Bids collection: In the next step bids are collected between the price bands set.
  • Discovery of price: Once the bids have been received the prices are set as per the weighted average method for all the bids that are received.
  • Settlement: According to the price set, the shares are allotted as per the bids that are received from the investors.

Ferrari had a book building process for its IPO. The price band that was set by the underwriters was between $48 to $52 for the process. Due to high demand of shares the prices were set at the ceiling. Also, the investors basically institutional created a strong demand for the shares of Ferrari due to which the share prices were set at the ceiling in the book building process.

Part 5

Ferrari is a well-known brand known for its exclusive cars. The brand is recognized by Formula 1 race. It has a demand in the market and also a dream car too be owned by many. The brand of car is recognized for its racing or speed.  Yet the produce of the company are limited. The company plans to have innovation with regards to its vehicles in the future. Apart from the automobile business the company has also expanded it products in the watches, perfumes section. These were the business areas of Ferrari. Apart from this the prices of stocks of the organization were set as per the standards of Europe and as per the demand there were chances of increase in the prices in near future. Company is a brand and also in high demand suggests a good scope of investment in the share of organization. I would have invested in the stocks as over time due to its brand value the company would have paid better returns.

Part 6

IPO lock up agreement refers to a contractual agreement where the insiders of the organization are prevented from selling shares in the market for a specific time. These are required in order to prevent the pressure of selling in the first few months of trading after the Initial Public Offering.

Ferrari also had a lock up period agreement of 90 days. Insiders of the company were not allowed to sell the shares of the company. It was done to safeguard the overvaluation and then sudden fall in the prices of the company. Insiders may buy the shares and then sell them once the IPO is over. Thus, IPO lock up agreement was signed.

 

 

Part 7

 

                     

 
                   
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     

(Source: Yahoo Finance)

Ans a) Average prices of the stocks are underpriced at the first day of IPO in general. This happens around all the countries in the globe. In U.S. the stocks underperform by 16.8% on an average on the first day of trading. On the first day of trading Ferrari shares touched $55 while on the next day the value reached to $56.75. Due to information asymmetry prices are underpriced. If the prices are underpriced by the company then investments will be attracted and various investors will invest. This will lead to rise in the prices once the trade opens for the company. This happened with Ferrari too. Its share prices were underpriced and investors were attracted. So, on the first day of trading the prices shoot up for the company.

Ans b) The trends in the long run for the company who has underpriced their shares shows that the companies underperform in the long run. The average return that has been provided by Ferrari over the 4 years tenure is 30%. In the first year the prices of company’s share fell yet at later stages they started to grow. Even in the year 2018 when prices were falling, they did not reach the level price of IPO. The holding period return for the company stands at 134%. This shows the company did not follow the trend and outperformed the market. With the rise in prices, it is also expected that the share prices will rise in the future for the company.

 

 

Part 8

Ans: In the year 2016 500 million euro debt was issued by the company. This debt will be paid off in the year 2023. Bonds were issued to raise the capital in the ear 2017. Ferrari has a debt of around 34% in the year 2017 which has risen only by .77% in the year 2018 (Ferrari annual report, 2018). According to the Annual report of the company the bonds and capital raised was used for the operations in the company. The Modigliani Miller theory of capital states that a company needs to create as structure of capital that is optimal and also helps the company to reduce the cost of capital. After putting the shares in the market the company focused on increasing its operations and also reducing the cost of raising the funds by issuing bonds at relatively low cost. Thus, in this manner company is creating an optimal capital structure for the company.

 

2019

2018

2017

Assets

€ 8,933,335,000.00

€ 9,011,948,000.00

€ 9,006,675,000.00

Equity

€ 5,861,914,000.00

€ 5,878,083,000.00

€ 5,944,345,000.00

Debt

€ 3,071,421,000.00

€ 3,133,865,000.00

€ 3,062,330,000.00

 

 

 

 

Debt to Asset

34.38%

34.77%

34.00%

Equity to Asset

65.62%

65.23%

66.00%

(Annual reports, 2018-19)

 

 

References

Annual Report. 2018. Ferrari. Available at: https://corporate.ferrari.com/sites/ferrari15ipo/files/ar_2018_ferrari_nv_web_0.pdf

Bajo, E., Chemmanur, T. J., Simonyan, K., & Tehranian, H. (2016). Underwriter networks, investor attention, and initial public offerings. Journal of Financial Economics122(2), 376-408.

Ghonyan, L. (2017). Advantages and Disadvantages of Going Public and Becoming a Listed Company. Available at SSRN 2995271. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2995271

IPO prospectus. 2019. Ferrari. Available at: https://corporate.ferrari.com/sites/ferrari15ipo/files/16_f-1_prospectus.pdf

Neupane, S., Marshall, A., Paudyal, K., & Thapa, C. (2017). Do investors flip less in bookbuilding than in auction IPOs?. Journal of Corporate Finance47, 253-268.

Saadah, S., & Panjaitan, Y. (2016). The green shoe option's effectiveness at stabilizing the IPO's stock price on the Indonesian Stock Exchange (2000-2013). Gadjah Mada International Journal of Business18(1), 71.

Schill, M. J., & Craddock, J. (2017). Ferrari: The 2015 Initial Public Offering. Darden Case No. UVA-F-1775.

Souitaris, V., Zerbinati, S., Peng, B., & Shepherd, D. (2020). Should I stay or should I go? Founder power and exit via initial public offering. Academy of Management Journal63(1), 64-95.

Vithanage, K., Neupane, S., & Chung, R. (2016). Multiple lead underwriting syndicate and IPO pricing. International Review of Financial Analysis48, 193-208.

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