Wednesday, May 4, 2016
The IPO market has slowed down in recent years. From 1980-1989 and 1990-1998, an average of 204 and 401 companies went public each year, respectively. Compare that to the 2001-2015 period, when an average of 119 companies went public each year. Although there are various reasons as to why the IPO market has slowed so dramatically, the end result is that raising capital has become more difficult for small companies. Regulation A+, part of the JOBS Act, allows companies to raise up to $50 million in a 12-month period under certain conditions. Importantly, Regulation A+ allows companies to raise funds from non-accredited investors. While there are several possible qualifications to be an accredited investor, such as an income of over $200,000 per year, the number of accredited investors is limited. Removing the accredited investor restriction opens funding to a much larger number of potential investors. As this article discusses, with a tight IPO market, we may soon see a surge in Regulation A funding.
A recent article on the McKinsey & Company website discusses the effect of dividends versus stock repurchases. We are happy to report that the article comes to the same conclusion as the textbook: Repurchases do not necessarily create value and are equivalent to paying a dividend of the same amount. However, the article does bring out a couple of interesting points. First, while repurchasing debt (re-leveraging the company) results in a higher EPS, this is offset from the lower company risk due to less debt. The value of the company is unchanged (M&M), and the PE ratio should fall. Second, a more important point is that the company should undertake profitable, positive NPV projects, if available, rather than repurchase stock. In other words, a stock repurchase is essentially a capital budgeting project. A company should only repurchase its stock if the NPV from the repurchase is greater than other capital budgeting projects. Of course, if the market is efficient, the NPV from a stock repurchase is zero.
Tuesday, April 26, 2016
In the textbook, we discussed cat bonds. Cat bonds, which are often issued by insurers or reinsurers, have a trigger based on natural catastrophes. Credit Suisse is taking the concept of a cat bond even further. The company has approached investors about a cat bond like issue that has a trigger that would cover operational losses due to events such as rogue trading or cybercrime. A major drawback is that quantifying the costs of cybercrime is a difficult process. If the Credit Suisse operational risk cat bond succeeds, we will likely see more of these bonds in the future.
Tuesday, April 19, 2016
The Atlanta Braves have the worst record in the National League so far this year, and the tracking stock has mirrored the team's on field performance. Liberty Media, the owner of the Braves, issued tracking stock on Monday that tracks Liberty Media's Braves ownership. Tracking stock is stock that is intended to track the performance of a particular unit of the company. Tracking stock generally has no voting rights, but is often used to track the performance of specific units of the company and may occur ahead of a public offering. The Braves tracking stock was a sinker ball as the stock dropped 40 percent on the first day of trading, then about 10 percent the next day.
Monday, April 4, 2016
The first quarter of 2016 was the worst on record for large cap mutual funds as fewer than 1 in 5 beat the stock market. Growth funds performed particularly poorly, as only 6 percent beat the S&P 500. About 20 percent of value funds and 29 percent of core funds beat the S&P 500. Small cap fund managers performed better, with 80 percent beating their benchmark.
Friday, April 1, 2016
With a public company, the price per share is easy to obtain by looking at the stock market. For private companies, stock prices are more difficult. Although you can price a private company using multiples or free cash flow techniques, the valuation of private companies by mutual funds shows how much disagreement exists. For example, cloud-based storage company Dropbox is valued at $9.40 per share by T. Rowe Price, while Hartford Financial Services Group has a value of $15.20 per share. The valuations on database software company are even wider, ranging from $8.06 to $18.55. As Jeff Grabow, head of the valuation practice at EY states, “Valuation is as much an art as it is a science.”
The yield spread spread between investment grade corporate bonds and non-investment grade, or high-yield bonds, is often viewed as a risk premium on credit risk. So far this year, this yield spread has increased, signalling an increased cost to credit risk. For the first quarter, $454 billion on new investment grade corporate debt was issued, an increase from the $446 billion sold in the first quarter of 2015. However, high-yield issuance was only $36 billion, down dramatically from last year's $86 billion. While low interest rates have garnered much of the attention in the press, non-investment grade bond yields have increased. For example, Western Digital recently sold $3.35 billion in bonds at a 10.5 percent coupon. The credit rating on the bond's was BB+, just one notch below investment grade.