Raising new equity finance in the markets

Owners of companies looking to sell their business or to raise new finance can do so by floating the company on the stock market. It can do so in one of three ways.

A placing is where the company uses the services of a stock broker to sell the shares, typically to its existing client base. Depending on the demand for the stock, the opportunity to purchase the shares may be extended to the general public. This is a good way for those companies seeking an Alternative Investment Market (AIM) listing to come to the market.

An introduction allows companies to step up to the main market (FTSE) from AIM as it already has shareholders and is not looking to raise new capital.

The most high profile method is the offer for sale, which was used by the government to privatise several industries, for example British Telecom. Because of the size of companies involved, they are also the most high profile form of issue. They are accompanied by a prospectus as well as significant amounts of marketing.

The offer may be for a specified number of shares at a specified price as determined by the current and future profitability of the company. The merchant bank underwriting the offer has to set the price so it attracts enough takers whilst being high enough to raise the necessary finance. Ideally the offer would be over-subscribed so the shares are popular when they come to the market and hence the price rises as the number of buyers exceeds the number of sellers.

Alternatively, the underwriting bank may recommend a tender offer whereby investors bid for shares based on what they think they are worth. The price is then set at an amount where all the shares can be sold. This has the disadvantage that the price may not be as high as the company had hoped.

New companies listing on the market tends to lift the market as they create a lot of interest and trading activity. If the markets are volatile prior to a proposed listing, the company may defer until such a time when it is more likely to achieve the required price for its shares.