Size of Issue

Source: Ibbotson, Sindelar and Ritter

Private firms tend to pick investment bankers based upon reputation and expertise, rather than price. A good reputation provides the credibility and the comfort level needed for investors to buy the stock of the firm; expertise applies not only to the pricing of the issue and the process of going public but also to other financing decisions that might be made in the aftermath of a public issue. The investment banking agreement is then negotiated, rather than opened up for competition.

Illustration 7.2: The Initial Public Offering for United Parcel Service

On July 21, 1999, United Parcel Service, the world's largest private package company, announced plans to sell its shares to the public. The company, which was wholly owned by its managers and employees, announced that it was going public in order to raise capital to make acquisitions in the future. UPS reported revenues of $ 24.8 billion and net income of $ 1.7 billion in 1998 and at that time employed about 330,000 people.

UPS followed the initial announcement by filing a prospectus with the SEC on the same day, announcing its intention of creating two classes of shares. Class A shares, with 10 votes per share, would be held by the existing owners of UPS, and class B shares, having one vote per share, would be offered to the public.

The firm chose Morgan Stanley as its lead investment banker, and Morgan Stanley put together a syndicate that included Goldman Sachs and Merrill Lynch as senior co-managers. Other co-managers included Credit Suisse, Salomon Smith Barney and Warburg Dillon Read. On October 20, 1999, UPS filed a statement with the SEC (called an S-1 registration statement) announcing that it planned to issue 109.4 million shares (about 10% of the 1.1 billion outstanding shares) at a price range12 of $ 36 to $ 42, and that the initial public offering would occur sometime in early November.

Based upon the strong demand from institutional investors, gauged in the process of building the book, the investment banking syndicate increased the offering price to $ 50 per share on November 8, 1999, and set the offering date at November 10, 1999. At that time, it was the largest initial public offering ever by a U.S. company.

On November 10, 1999, the stock went public. The stock price jumped to $ 70.1325 from the offering price of $ 50. At the end of the trading day, UPS shares were trading at $ 67.25. Based upon this price and the total number of shares outstanding, the market value of UPS was assessed at $ 80.9 billion.

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