Embed Size (px)
DESCRIPTION
The advantages of variable pricing for publicly traded companies
Citation preview
Variable vs. Fixed Pricing for Equity Transactions
Advantages and Disadvantages
October 3, 2008
• $2.7B AUM in primary funds
• 200+ transactions funded in 29 countries
• No effective upper limit
• Harvard Honors Thesis Topic – Efficient Pricing in a Specialist Exchange System– 30 Years Ago
Sterling Atlantic & Affiliates
• Invested funds result in increased EBITDA and stock price
• Funds expended over development period 6-18 months
• Milestones can be accomplished and announced, stock price likely to appreciate
• Issuer determines when needs capital
• Immediate commitment is important
Ideal Variable Price Situation
• All capital expended at closing
• Use is to restructure fixed price debt
• Future prospects not favorable
• No immediate need for commitment or capital, time for investor due diligence
• No Fixed Rate Trap
Ideal Fixed Price Situation
• Fundamental– Warren Buffett– Cash Flow Focused– Slow Decisions- due diligence oriented
• Trader– George Soros– Trend, Liquidity, and Arbitrage Focus– Rapid Decisions
• Hybrid– Fundamental-Long Bias– Structure Focus– Rapid Decisions
Investor Types
Stock Price Up Scenario
Assumptions:• Stock sold once quarterly• Variable Price Discount: 10%• Fixed Price Discount: 15%
Average Variable Price Per Share: 15.75
Fixed Price Per Share: 8.50
Difference: 7.25
% of Fixed Price 85.3%
0
5
10
15
20
25
30
Q1 Q2 Q3 Q4
Stock Price
Stock Price Flat Scenario
Assumptions:• Stock sold once quarterly• Variable Price Discount: 10%• Fixed Price Discount: 15%
Average Variable Price Per Share: 9.00
Fixed Price Per Share: 8.50
Difference: 0.50
% of Fixed Price 5.9%
0
2
4
6
8
10
12
Q1 Q2 Q3 Q4
Stock Price
Stock Price Down Scenario
Assumptions:• Stock sold once quarterly• Variable Price Discount: 10%• Fixed Price Discount: 15%
Average Variable Price Per Share: 6.25
Fixed Price Per Share: 8.50
Difference: (2.25)
% of Fixed Price (26.5)%
0
2
4
6
8
10
12
Q1 Q2 Q3 Q4
Stock Price
Volatility Scenario
Assumptions:• Stock sold once quarterly, not
at low points• Variable Price Discount: 10%• Fixed Price Discount: 15%
Average Variable Price Per Share: 12.50
Fixed Price Per Share: 8.50
Difference: 4.00
% of Fixed Price 47.0%
0
2
4
6
8
10
12
14
16
Q1 Q2 Q3 Q4
Stock Price
Fixed Price Trap
• Fixed Price transaction Jan 08
• Goldman Sachs Investor
• Jeffries – Investment Banker
• 80% price drop when issuer told they were getting a fixed price
• Blue Chip participants offer no protection
• Company committed but (i) price variable prior to closing or (ii) substantial over-allotment
Share Price Effect of Large Fund Commitment
Investors Chronicle found average share price increase of 69% after obtaining financing commitment
Share Price Effect of Large Fund Commitment
“Unlike open-ended convertible bonds, where the interests of equity shareholders and bondholders are not aligned (the lower the share price, the greater the dilution for shareholders on conversion), the GEM model clearly works in the favour of shareholders.
First, news that an equity credit line agreement is in place can act as a kicker to the share price as the stock market acknowledges that future funding concerns have been resolved. To a certain extent this happened with electronic software designer Easyscreen, whose share price more than doubled in the three months after the agreement was signed. Second, there is an incentive for the firm to exercise the subscription option after a period of heavy trading in the shares (thus maximizing the number of shares that can be subscribed for under the agreement), and when the share price is as high as possible, to increase the amount of funds released.”
Investors Chronicle, page 17, May 2002
Appreciate your time and interest!!
Conclusion
