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Bluesky
Bluesky.com, which currently is a privately held corporation, is making plans for future growth. The company's financial manager has recommended that Bluesky "go public" by issuing common stock to raise the funds needed to support the growth. The current owners, who are founders of the company, are concerned that control of the form will be diluted by this strategy.
If Bluesky undertakes an IPO, it is estimated that each share will sell for $5, the investment banking fee will be 15 percent of the total value of the issue, and the costs to the company for items such as lawyer fees, printing stock certificates, SEC registration, and so on will be approximately 1 percent of the total value of the issue.
A. If the market value of the stock issue is $42 million, how much will Bluesky be able to use for growth?
B. How many shares of stock will Bluesky have to issue to obtain $42 million for growth?
C. The founders now hold all of the company's stock - 10 million shares. If the company uses the number of shares computed in part B, what portion of the stock will the founders own after the IPO?
D. If the founders now hold all of the company's stock to finance the growth of the firm, is there anything you can think of that they might be able to do to protect their controlling interest for at least a few years after the IPO?
Expert Solution
(a)
If the company sells $42 million in shares and the total expenses are 16% (15% for investment bankers + 1% for misc. expenses), that leaves 84% of total net proceeds to the company:
$42,000,000 x 0.84 = $35,280,000 net dollars raised
(b)
$42,000,000 / 0.84 = $50,000,000 gross will need to be raised.
(c)
$50,000,000 / $5 = 10,000,000 new shares will be issued. A total of 20,000,000 shares will be outstanding after the IPO and the owners own 50% of the company.
(d)
While 50% is technically not a controlling interest, in practicality it is, because the remaining 10,000,000 shares outstanding are widely dispersed and you will never find 100% of those owners agreeing on a proposal or even voting their shares. Most analysts agree that 35% of ownership by a small group is practical control of a company of the size discussed. However, the company could issue Class A and Class B common stock. They retain the Class B stock which has 10 votes for every share and now they have 91% of the voting power and that's absolute control
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