FINANCIAL MANAGEMENT

Financial Management



Financial Management

Sources of Finance

In this case it seems that there is a serious conflict of interests between the side of the company and the side of the underwriting syndicate. Having the role of the lead manager in an IPO of a company with such a global importance and brand name has a lot of benefits and we should certainly try to keep it even if that means making some concessions. Apart from the earnings of the management fee, we would have the power to determine the amount of securities each firm would get, and thus influence the way we will be reciprocally treated in future underwritings. Our lead management position can also affect positively our image in the investment community. So there are “diplomatic” issues involved as well in this case, that carry great importance. The initial proposal to set the price per share at £21-23 contradicts with the desire of the company to be priced for at least at £25 (firm's considerable book value). We are against putting too high the price, because, if the general tone of the market is to soften, the adverse psychological impact of having to subsequently backtrack on the price could actually push the ultimate offering price inordinately lower.

In fact when it comes to determining the price of a newly issued security the common practice suggests to look to the market valuations of companies in comparable businesses.

Nevertheless, we believe that the price should not reach £24 on the contrary we propose that the price of £23 is the most appropriate. The reason for not suggesting a low price (£21) is that the reputation of the underwriters will be influenced and at the same time problems in the future will emerge, since investors before choosing to put their money in a new issue, always look if the underwriter has a history of successful IPO's.

Nonetheless, by choosing not to set a high price (£25), the underwriter minimizes the risk of not selling the entire issue and face a financial loss. If the price is too high, the issue maybe withdrawn and the issuer raises no capital and the investment bank receives no commissions. In addition, the lead manager by proposing the price of £23 per share, tries to satisfy the issuers as much as possible in order to have an ongoing relationship after the public offering.

Another factor that should also be considered is that Tiffany's is a well known issuer in USA and abroad, with great history in the retail business. The whole investment community knows about the LBO investors and that the company at the moment has managed to improve its financial position. As a result the lead manager has to minimize the amount of under pricing to the investors, since most of them would face less uncertainty about the firm's real value. This fact is strengthened by the case that although issuers know more about the specifics of their businesses, the underwriter is more informed about the market clearing prices, because the ...