A basic question: who gets cash

Discussion in 'Strategy Building' started by honghsu, Dec 22, 2002.

  1. honghsu


    Greeting All,

    Here is my question. When a company went to IPO, the cash from investors is flowed into the company's packet except certain % of money went to underwriter.

    Then with trading of buy and sell, one buyer's cash went into another seller's packet, not the symbol company's packet. Am I right? If so, how the symbol company's business could be effected by the price of their stock? Because the company do not get any money except issuing new shares. The money just flows among investors.

    Let's say MSFT's price went down to $10/share, Bill Gates could ignore all market's pressure as long as he think the company is on the track.

    Do I miss some thing here, or it is simply the fact? Thanks,
  2. Foz


    A strong equity price helps a company:

    -- employees are often compensated with options. A rising stock price helps a company acquire and retain employees without paying a lot of cash.

    -- companies often acquire other companies using their shares as the currency. A strong stock price gives them the ability to make attractive acquisitions.

    -- companies often have secondary share offerings. A strong stock price helps them raise more money more easily.

    -- a strong stock price is good advertising. Vendors will try a little harder to land a Fortune 500 account than an account with a no-name pink-sheets company. And look at all the free publicity companies like Amazon and Yahoo got as their stocks rose in 1998-2000. I'm sure that helped sales.

    -- a strong stock helps a company's moral and stability. A lousy stock price means disgruntled shareholders and boards of directors who feel pressured to "fix" things by seeking new management. New management leads to frictional turnover costs and a lack of focus by the staff.
  3. In and IPO, an example of the shares distribution is 60% available to the public, and 40% remain in the treasury of the company and the officers and private investors. The stock in the treasury of course maintains the same market value as those shares on the open market. In this way, the open market value effects the net asset value of the company, and thus it's ability to borrow money etc etc.

  4. companys only sell a small number of shares on an ipo so the stock price determines the value of the rest of the company.
  5. If stock price goes down company becomes vulnerable to takeovers.
  6. honghsu



    Is it usually case that a IPO company hold 40% shares, that is a lot?

    Thanks all,
  7. I am in no way qualified to give you an answer other than 'I don't know.'

    The only IPO I have looked at recently, and this was even several years ago, was HSAC, a company started by the guy from Charter and Microsoft or whatever, not Gates. Any way my wife's family was all into it because her brother worked there and oh wow Paul Allen, is that his name, was in it so it must be big. They all lost all there money even though I told them to sell at 24.

    So yeah I am a guru in my own mind, but the ratio there was about 35% held and 65% public. I just used those numbers as an example earlier, but it is usually a fairly significant number I think. Secondary offerings are probably much less.

  8. One more point that speaks to the hongshu's example of Gates not having to worry about the price of MSFT.

    Sometimes the debt instruments used by a company have a stock-price related repayment triggers. Debtholders or banks can demand immediate repayment if the company looks like it is in trouble (as defined by a low stock price). One can think of these debt repayment clauses as a stop-loss for debt holders.

    This forced repayment can cause a death spiral in which low stock price forces the company to pay back debt (or default) which fatally damages the company by draining it of cash, which lowers the stock price even further which..... A good example was Excite@Home (and I think Enron had this problem too).

    The point is that a low stock price can lead to serious problems if debt and bank credit lines are tied to it. Bottomfeeders beware!

    Happy holidays,