The Analysis of Financial Markets and Institutions - Essay Example

Name: Course: Course Instructor: Date Submitted: Financial Markets and institutions According to Paul (34), accelerated renounceable pro-rata entitlement offer refers to; the issuing of a new share by company which may be mainly subscribed for in return for agreement to pay for the designed allotment of the new share at a certain predesigned price value. Here, the accelerated renounceable pro rata entitlement is not one which is tradable as compared to that of a right issue. Using the Tabcorp Holding Limited scenario, this kind of entitlement offer commence by announcement of a new share. For example, the company first announced of its proposal to demerge its operation into two separate listed corporations. It further went on explaining the reason for demerging as facilitation of better recognition of share value over a certain business period. It is important that Tabcorp Company to offer a book build or any definable sale facility for its designed renounceable entitlement so that any shareholder who do not participate are still in a position of releasing some value from their individual entitlement. Paul (43) asserts that, this holding was further involved in launching a fully underwritten one for a nine accelerated renounceable pro rata entitlement offer as a way of providing funding certainty described for capital growth. By so doing, it was a clear indication that these two corporations have appropriate capital structures. Further, this organization accelerated renounceable pro rata entitlement was entitled to give a certain offer of ordinary shares in Tabcorp to both its retailer and institutional investor as a way of enabling them to raise four hundred and thirty dollars. The offered issue price was termed to be $6.25 which was presented with a 12.0% discount which was the final price of trading prior to beginning of the designed entitlement offer. Australian Shareholders’ Association (1) asserts that, it is important for shareholders to know that this kind of entitlement offer should be preferred stating option for any organization seeking for any kind of additional equitable funding, since this method allow this particular organization to give offer to its shareholder which are mainly additional equity in proportional in relation to their current holding. According to the Australian Shareholders’ Association (1), research indicates there are many advantages associated to this method as well as some definable disadvantages. some of the advantages are; all shareholders are give an equal opportunity to any new share proportionally in any kind of issue, all shareholders for instance in our case of Tabcorp scenario have the opportunity of avoiding any kind of dilution of their shareholding and finally, in case of any required capital quickly, Tabcorp can acquire the ability of accelerating what is known as the institutional component of the said offer by use of the above described accelerated right issue. The main disadvantage of this kind of method is that it constantly rewards lowest number of its shareholders with various disproportionate amount of equity (Australian Shareholders’ Association, p2). According to Lewis (34), companies both public and private require capital either to increase their reach in market or in order to increase their productivity. It is due to this reasons that companies find different ways in which they can be able to raise capital to sustain their needs. Examples of ways in which organizations raise funds include the use of a placement to institutional shareholders and an associate share purchase for retail investors and making a pro rata issue to all shareholders. In order to understand these ways it is essential to understand what a share is. A share is defined to be a unit whereby totals share capital is divided. Therefore, total share capital of a company is defined as the sum into which a company is established to carry on business capital (Lewis, p76). Raising funds by way use of placement to institutional shareholder and an associate share purchase from retail investor entails, a company announcement that it want to raise a certain amount of funds by way of a fully written institutional placement. Sherman asserts that, after the announcement is made, the institutional placement price is then determined by use of a book build which define price of each share (1). Further, shares that are perceived to be issue under institutional placement are later ranked with existing shares which will later be projected to required funds. The use of institutional placement has various advantages. The main advantage of institutional placement is that assist organizations in increasing liquidity and free float for the company share thus ensuring that a company is moved towards achieving its desired goals and objectives. Further, time is saved through this use of saving money. This is due to funds can be raised within short period as compared to method like pro rata issue. Arguably, this method has minimal rules and regulations meaning that an organization is only entitled to pay incremental fees while exchanging (Sherman, p1). Another key advantage of institutional placement is that it is cost efficient and one which provide a substantial opportunity of buying non-locking share creating an ease in corporate governance mechanism. Based on disadvantage, the issuer automatically will be required to pay higher interest on the offered equity share at a certain market value so as to ensure the deal is one which is attractive to that institutional investor. The use of pro rata in raising of funds is one which is described as a proportionate allocation. Further, this can be defined as a method of raising companies’ funds or capital through assigning a certain amount to a fraction mainly according to a share of the whole. Taylor asserts that, an example of a pro rata right issue is where shareholder gets an equal proportion for each share owned (1). It further referred to practice of applying interest rates at different time periods within organizations. The main advantage of this method funds are obtained quickly and also give time to various people to combine expertise and resources. Further, each partner within this right can deduct looses that can emerge from this agreement. The main disadvantage of pro rata right issue is that can lead into disagreement especially on management plans, future visions for organizations and operational procedures. According to Australian Shareholders’ Association (1), underwriting facility is defined as a form of credit in which a number of underwriters agrees on providing loans in an event whereby a borrower seems to be unable to sell in Eurocurrency market. These loans are further provided by use of purchasing several short term euro notes. It mainly differs from other ways of obtaining loans in the sense that underwriters provide loans instead of purchasing the outstanding notes which constantly tend to fail. It is quite evident that Tabcorb Holdings Limited requires to venture into utility facility since it require capital growth so as to ensure their future development. The use of the utility facility will enable this company to raise the required $ 430 million. By so doing it is quite evident that this company will be able to raise its market share prior to the beginning of entitle offer for Tabcorb Holding Limited. Book building is defined as that process that highly determines the prices at which various stipulated initial public offering is perceived to be offered (Australian Shareholders’ Association, p3). This kind of book is usually filled with various prices that investor indicates there wiliness to pay per offered share and when this particular book is closed; the share price is further determined by use of an underwriter who analyses the said values. Book building process may also involve the sale of securities to institutional and public bidders on the basis of the predesigned price range. It is considered to be an innovative method in the marketing of securities in the sense that determination of price and the desired quantum of security are mainly focused on the basis of demand of each prospective buyer. In general term it will be correct to state that, book building process is that method of marketing of companies shares. Here, both the prices and quantum of securities to be issued are highly decided by the number of bids received by various potential shareholders by use of lead merchant banker. Lewis (23) asserts that, the book building method expects that 75% of the total public issue can be offered to only those institutional investors who had widely participated in the bidding process. Further it states that not less than 25% of the total public offer shall be available for the allocation to the various non qualified institutional buyers. It is good to note that the spirit which goes beyond the introduction of book building, is mainly linked to the fact that it lead to the discovery of the right price for any designated public issue. This is considered to be important since there is constant elimination of unreasonable pricing from greedy promoters. It is essential to note that the success of a sustainable book building highly depends on the co-operation between issuing companies, securities and exchange board and the managers of book runner lead. Work cited Australian Shareholders’ Association. Equitable Treatment of Shareholders in Capital Rising. http://australianshareholders.com.au/asa_site/images/pdf_archive/policyStatements/equitable%20treatment%20of%20shareholders%20in%20capital%20raising%20draft1.pdf Lewis, Jakema. "2000: A See-Sawing Year for Private Deals." Private Placement Letter. January 29, 2001. Paul, Barnes. Stock market efficiency, insider dealing and market abuse. Farnham, England; Burlington, VT: Gower, 2009. Sherman, Andrew J. The Complete Guide to Running and Growing Your Business. New York: Random House, 1997. Taylor, Lon W. "Raising Capital through Private Placements." Journal of Business Strategy. July-August 1988. Read More