shares and investors

[wends]

may question me..

how does shares and investors work?

lets say nagstart ako ng business tapos may naginvest na 2 ppl, can they be my partners for just a period of time? lets say 5 yrs.. then after that, i have the power to buy their shares whether they want to or not?

also, ano ba sinusunod when you buy the shares? book value or market value? and how do you measure market value?

[KuyaDanny]

1) Usually, people are shareholders in a company for as long as they want to be shareholders. If it is your intention to buy out your partners after five years you should enter into a shareholders' agreement so that everybody remembers what your intentions are.

The most important part of this buyout provision is the price you will pay for your partners' shares after five years. If you cannot specify a price at this time, you should specify a formula for determining the price.

2) Ang "nasusunod" na presyo sa pagbili ng shares ay ang presyo na napagkasunduan ng bumibili at nagbebenta. It could be the market value, the book value, the original cost, or any other price on which you can agree.

Market value is crudely defined as the price at which a willing seller and a willing buyer can agree to make a transaction. If the shares in the company are listed on the stock exchange, the market value is known and determinable every working day. If the company is privately held, such as this, market value is harder to determine. It can be the price a third party buyer is offering to pay, or the result of a valuation by an investment banker, accountant, or financial analyst. There are many methods.

[wends]

Thanks Kuya Danny.. :) that makes it clearer now..

For the agreement, I need a lawyer to do that right?

Btw, how do they determine to value of a stock in public companies?

[tr|n|ty]

a public company's stock is usually determined by its peers(co's who are in the same industry sector) that are already in the market. you also have to take into consideration the number of common shares outstanding, it's possible price to earnings ratio, their overall financial performance. it's actually a mix of art and science. for example, when then CIBC analyst (then went on to be with ML and now fired) whose name escapes me right now(KD, HELP we talked about this a few weeks back!) predicted Amazon with that astonishing IPO a few years back, he got that number because he had confidence in Amazon's future success(positive cashflow) rather than its present financial strength(current net income/profits). Most conservative analysts would look at past financial performance to determine the future capacity of the company. the downside with the dot.coms was it did not have any past to compare to. thus, the art of determining possible future earnings/positive cashflow.

[wends]

thanks :)

how does a company go public? requirements?

if amazon hasnt got any profits, how was it able to go public and how did they measured its value? and how did jeff bezos become rich if theres no profit at all?

sorry ah dami questions.. i know nothing about these stuffs kase m from Tech.. just want to learn how it works :)

[tr|n|ty]

how does a company go public?

let me rehash a story from macbolan00 in my Financial Engineering thread..

Originally posted by mac_bolan00
trinity's story:

trinity makes chairs. one chair costs P 30 to make. With her P 120 and a P 10 mark-up per chair sold, she is able to make 4 chairs a year and profits P 40. well and good.

just one thing. she knows she can sell 8 chairs a year if only she had P 240. so she goes around looking for people who would lend (or give) her another P 120.

first stop, aticus. aticus is a venture capitalist. he has a sharp eye (being part-vulture) and knows a winner when he sees one. he offers to give trinity not P 120 but P 160. nice. what's the snag? aticus wants to end up owning the majority of pexchairs, inc. trinity leaves in a huff and gives aticus this kissoff: "you're the chubbiest vulture capitalist i've ever seen!"

next stop, kuya danny. KD is a money lender: absolutely no interest in owning pexchairs (or owning trinity for that matter). P 120? easy. payable in 12 months at 5% a month and with the following conditions:

1. trinity to either secure the loan with her P 240 flower pot (KD wants a 200% collateral coverage) or it could be a clean loan but...

2. trinity had to open an account with KD and maintain an average daily balance of P 40 pesos.

trinity runs the numbers and finds to her dismay that, given a lumpy sales pattern, credit sales and all of KD's conditions, her business won't be able to churn out cash to pay interest and principal on time. she walks out of KD's office coldly but makes a mental note to invite him to a cup of coffee one of these days.

next stop, mac_bolan00. mac is an investment banker. trinity approached him accidentally because she needed to go to the powder room and mac happened to look (and sometimes act) like a janitor. mac juggled the figures trinity gave him, looked at aticus' and KD's offices in disgust, spat in those directions and said: even if you had P 240 for your very own, i wouldn't advise you to try selling 8 chairs a year. your money will just get tied up in receivables. 6 chairs is about right. you'll keep your receivables low and your selling price won't have to go down. that means you need only an additional P 60. he starts pointing to possible alternatives:

1. mac could a form a loan sindicate composed of four money lenders. if they split the amount, they'll probably charge an average interest charge of only 1.1% a month, two months grace period on principal, and a monthly re-payment. collateral coverage had to be at least 100% with specific assignments to each syndicate member.

2. offer to float P 60 in new equity, whether privately or on the stock market. mac advised against the stock market knowing that market was already heavy on issues soon to crack in this current state of the economy. those issues included scented candles, soaps, internet and cell cards, fake osama beards, and CHAIRS.

so the prospect of a private placement looked good. no interest to pay, no principal repayment to worry about. trinity will not benefit when it comes to returns since the incremental earnings will become attributable to whoever puts up additional equity. but that didn't matter since she had no plans of increasing her take anyway. in fact, she wanted to reduce her own take and that of the prospective investors. the increase to 6 chairs will weaken her stongest competitor's position (delisyus recliners, inc.) all in all, trinity's business will end the year as the biggest chair-maker and with enough cash to target an 8-chair level the following year.

she turns around to thank mac_bolan00 but finds him gone. also, she discovers too late that mac filched P1.8 from her wallet (equal to 3% of the float amount) and that he had pulled trinity's back zipper more than halfway down.

as for Jeff Bezos and what was the new economy, the employees of the dotcoms were promised a LOT of ESOPs(employee stock options) for compensation along with standard salaries. back then(this was just 2 or 3 years ago), a lot of dotcoms were offering fresh bschool grads and techie grads from Stanford, Cal, MIT big sums of money. sad to say, most if not all these companies went belly up.

we can talk further into how an invesment bank works. these institutions are the ones who engineer IPOs.

[KuyaDanny]

Originally posted by tr|n|ty
for example, when then CIBC analyst (then went on to be with ML and now fired) whose name escapes me right now(KD, HELP we talked about this a few weeks back!) predicted Amazon with that astonishing IPO a few years back...

The name is Blodget. Henry Blodget. He will write a book soon.

[tr|n|ty]

ayon! blodget..yep..supposedly he'll be writing a book about the now defunct "new economy" THANKS

[KuyaDanny]

Originally posted by wends
if amazon hasnt got any profits, how was it able to go public and how did they measured its value? and how did jeff bezos become rich if theres no profit at all?


Sometimes the "value" of a stock is what you can convince buyers to pay. Even if a company had no earnings, analysts, money managers, and investor relations officers could be made to believe that the company has the potential to make money in the future. That story is often sufficient to make buyers agree to buy the stock. If more buyers believe the story, more people will want to own the stock, and the price goes up.

[tr|n|ty]

exactly, like what i said a couple of posts up, a lot of these analysts determine a company's value by looking at their possible future success. you can also add to that fact that most of these equities analysts work for investment banks who are part of the investment bank syndicate who engineer the IPO thus making a lot of profit in the process for themselves and the company.

and as KD has mentioned, there are different ways to value a company. i can rattle off formulas and methods with you right now, but it can get quite technical. for private companies, analysts use guideline companies who are in the same SIC/industry to compare their value with their peers. this can get tricky because we have to consider different factors...capitalization, source of income, geography, company maturity, management..so on and so forth.

[wends]

thanks! you're a genius :geek:

are there any books that you can recommend where i can learn more about this? :bookworm:

[tr|n|ty]

hmm you really want to read a thick-arse book? :p

one of my favorite books in college was Investments (http://www.amazon.com/exec/obidos/ASIN/0072339160/qid=1007122174/sr=2-1/ref=sr_2_75_1/103-5670591-4376620) by Zvi Bodie, Alan Marcus, Alex Kane
(which reminds to get it from my friend because i have to start studying for my CFAs). I also liked this book Modern Portfolio Theory and Investment Analysis
(http://www.amazon.com/exec/obidos/ASIN/0471007439/ref=pd_sim_books/103-5670591-4376620) by Edwin J. Elton, Martin Gruber


you can also try looking at this website The Vault (http://www.vault.com/), it's a good "cramming" tool for those finance job interviews :p

[wends]

thanks tr|n|ty! :)

[wends]

Originally posted by tr|n|ty

we can talk further into how an invesment bank works. these institutions are the ones who engineer IPOs.

o nga.. how does it work? :confused2:

[mac_bolan00]

investment houses in the US are a jewish phenomenon (at least in the beginning). new financial players wanted to be more flexible and to be able to operate without the usual hindrances the government puts on ordinary banking operations. you had houses like lehman brothers, morgan-stanley, etc.

traditional banking then was the stronghold of america's original setllers (loosely termed WASPS - white anglo-saxon protestants). banks like chase manhattan and bank of new york are examples of wasp institutions (again, at the start of the 20th century).

an investment bank basically works the same way as a commercial bank except that it does not engage in retail banking. this means it is non-depository. also, it does not offer consumer loans like car/housing loans, etc. a good way to describe an investment bank's operations is "wholesale banking". it lends money, and, to a small extent, handle other peoples' money. call the above actions "quasi-banking" functions.

the fee-based aspect of banking (insignificant among banks since the bulk of their income comes from lending) is the significant source of income for IBs. what are fee-based incomes? examples include the following:

1. stock underwriting - it arranges to offer shares of the client corporation to the public or to private individuals. in the event of a failure in issuance, the IB will find a way to shoulder the deficit (that's why it's called "underwriting"). IBs usually charge 3% of the total issuance value.

2. loan syndication - when a client needs to borrow a humongous amount, the IB forms a syndicate of several banks. this will reduce the exposure of each syndicate member.

3. asset management - an IB could act as a manager/seller of a client's unwanted assets. these may include like a bank's non-performing assets, a company's receivables, etc.

4. financial advise - this runs to the entire gamut of consultancy services; whether for the purposes of a buy-out, a merger, a re-structuring, etc., etc., etc.

last time i heard, you need only 100 mn to open an investment bank in the phils. that figure must have doubled by now.

[wends]

can a small company approach an investment bank and sell like some of its shares? :glee:

[mac_bolan00]

ask an IB to sell some of it's shares, you mean. with the IB's fee at only 3% or even less, that company had better offer a sizable number of shares.

:evilgrin:

[wends]

then how does a company come up with the number of shares?

is there a formula for that?

[tr|n|ty]

shares for what? to offer the public? the ibanking syndicate has a lead ibank then a subsequent group of ibanks who help market and sell the primary offering.

as for small cap companies approaching IBanks, middle market issues are handled by corporate finance divisions of commercial banks like Fleet Boston Financial, Bank of New York etc.
Hiring Ibanks for financial advise is very expensive. the money involved is well within the tens of million dollar range.

mac_bolan00-a lot of integration in the finance sector and with the lifting of the Glass-Steagall act has opened the market for a combination of commercial and investment banking operations. such as the merger of the citigroup and salomon smith barney, JP Morgan and Chase Manhattan...there were prior rumors to BA and lehmanbrothers and even DB and Lehman..even the combination of premiere boutique IBs such Lazard and Lehman prior to 9/11.

[KuyaDanny]

Young lady, that would be the Glass-Steagall act which was lifted.

[tr|n|ty]

o di ba..shempre na correct pa ako ni KD :lol:

thanks for the correction, KD

:shy:

[wends]

kase theres this company who was offering me stock options before. and i don't even think they have 1M pesos.

what i want to ask is how they come up with the # of shares that they can give out or sell to their friends? also, if they sold out those shares, what's left with the ownership of the company? do they still own the whole company? or like only 90% of it?

[mac_bolan00]

before you ask how many shares, first determine how much "value" it owes you. a company issues shares (whether new or existing) because it needs new funds. in your case, however, it is issuing shares in exchange for money it owes you. i take it the stock option is in lieu of regular salaries.

having determined the amount of money it has to give you in the form of shares, it now strategizes how it will do this. paying someone in the form of new shares is a lot like printing money: there is no real value generated. but let's digress. let's say the company owes you 1,000. and can't pay you in cash.

so it decides to pay you with existing shares at BOOK VALUE. it has 10,000 in shares at par value 1.0 per share. a few years profitable operations less dividends has left the company a net worth of 18,000 consisting of the 10,000 initial capital and 8,000 in retained earnings. this means that the book value is currently 1.8 per share. to give you your 1,000-worth, it only has to transfer 556 shares to your name, equal to 5.56% of total voting shares.

you want to base the valuation on the stock market? let's say the average ratio of selling price per share to earnings per share (eps) of similar businesses is 5X. since your company is not publicly traded, get the average eps of your company and compute the likely price of one share IF IT WAS CURRENTLY BEING TRADED. assuming eps is 0.2, the likely price is a fat 1.0 per share. :eek: i'll stick to book value then.

the stock is publicly traded on the stock market? if the agreement is to give you shares at market value, it's a simple procedure of determining how much shares to give you so that the total amount is worth 1,000.

[wends]

Originally posted by mac_bolan00

so it decides to pay you with existing shares at BOOK VALUE. it has 10,000 in shares at par value 1.0 per share. a few years profitable operations less dividends has left the company a net worth of 18,000 consisting of the 10,000 initial capital and 8,000 in retained earnings. this means that the book value is currently 1.8 per share. to give you your 1,000-worth, it only has to transfer 556 shares to your name, equal to 5.56% of total voting shares.



does this mean that the 10,000 shares at 1.0 per share is derived from their 10,000 capital? :D

[mac_bolan00]

yes, in most cases. it is usually the total value that is decided and sub-division into shares become arbitrary. some shares don't even have par values. go figure.

[KuyaDanny]

To add to the excellent discussion here:

It seems to me that the stock options wends is talking about were offered to her as some form of compensation. There is a related discussion about Stock Options for Dummies (http://www.pinoyexchange.com/forums/showthread.php3?s=&threadid=59512) which you might find useful.

Stock options granted as compensation are usually "fulfilled" from shares already issued, not new shares. Some of the existing shareholders or even the company agree to sell shares to the employee at a predetermined price. If these shares are already listed and traded the value of the options might have little relation to the company's "capital" as it appears on the balance sheet.

[wends]

thanks guys! post ako uli pag may question ha :glee: