The Generic Benefits and Drawbacks of Going Public

The decision to go public through Ferrari's (IPO) resulted in numerous advantages for the company. First, it created an excellent opportunity for the organization by allowing the firm to raise a considerable amount of capital the company needed for the advancement in the Net Present Value (NPV) projects. Secondly, going public was a motivational factor for the organization as it boosted the positive reputation of Ferrari as well as enhancing the overall transparency in the company. By making the Ferrari public, the company became more conscious about its operations as it had become more answerable to the shareholders, the government, and the general public (Ferrari, 2018, p. 100). Therefore, the high level of transparency that comes with going public reduced the chances of unethical and fraudulent activities in the business environment. Thirdly, going public for Ferrari meant opening up the company to greater possibilities. The company attracted investors from different backgrounds enhancing diversity in the company. Thus, the company was in an excellent position to increase its market shares in different regions of the world. Finally, going led to increased overall profitability and growth in the company.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

Besides the numerous advantages associated with going public, there were some drawbacks that the company encountered in the process. First, the decision to go public had several hidden costs. These costs made the decision-making process in the company hard, especially during the initial stages of going public. The operations in the company during this time were a bit messy. Secondly, the going public had some negativities in the eyes of the private shareholders. To them, going public was an indication that the company was overvalued (Ferrari, 2018, p. 112). As a result, some of these shareholders had to offer their shares to sell as secondary equity. It is worthwhile understanding that equity has a higher value and thus more expensive for the company compared to the debt. The third disadvantage of going public was the diversion in the organization's traditions and cultures, values, and goals and objectives. Forth, Ferrari got a lot of exposure to the public. The company experienced pressures from the market and the public as a result of going public. As a mitigation effort, the company had to increase the value of short-term equity, which may be expensive in the long run. Fifth, there were several negativities associated with the publicity that comes with going public. For instance, the company lacked the capacity for concealing the private information due to the requirements to disclose vital information in the financial statements. Finally, the floatation costs associated with going public was a disadvantage for the company.

The Motivation for Ferrari 'RACE' to go Public

Despite the tough IPO market of 2015, Ferrari chose to go public due to several reasons. One of the most significant motivation factor Ferrari RACE going public was the accumulated debt, especially on the floating-rate. The amount of credits on the high yields had increased significantly, calling for high costs to roll them over. Therefore, the going public provided an excellent opportunity for the company to pay off part of the debts.

Reasons Ferrari Chose to List on New York Stock Exchange

Ferrari embarked on listing on the NYSE, most probably because of the importance of the NYSE. The company stands to benefit from the wider audience created by the NYSE. NYSE is vital for the company as it spans across numerous industries and sectors, opening up unending opportunities for Ferrari. Additionally, Ferrari being an internationally prestigious and classy dealer, needed to work with the leading innovators in the world. Therefore, working with the NYSE ensured that there was less volatility in the stock prices for the company.

The Primary and Secondary Shares Sold in the Ferrari IPO

The primary shares of the company primarily consisted of the unstructured shares by the underwriters, while the secondary ones were those transferred from an investor to another.

The IPO Over-allotment (Greenshoe) Option

The over-allotment refers to the provisions made in the IPO underwriting arrangement that allows the underwriter to offer to the investors' shares exceeding the initial planning during the issue of the stock. The issuer, in that case, grants these rights if the demands for security for the shares are higher compared to the initial expectation. Generally, the over-allotment grants up to 15% value over the initial share issue (Schill and Craddock, 2017, p.210). Therefore, over-allotment is critically essential as it provides price stability and liquidity. Ferrari's IPO considered the over-allotment alternative, which motivated the underwriters to acquire supplementary shares.

The Roles of the Underwriting Investment Bank in the IPO Process

The Key Tasks Executed by the Underwriter

The underwriters in the realm of the IPO process play a central role in accessing the financial risks involved in the purchase of shares. They can achieve this role by taking active participation in the purchase of the whole IPO issue and offering it to the investors. Therefore, they cover the financial risks involved in the issue of the shares. It is worth noting that although they may purchase the IPO issued, it is not their obligation to guarantee a specific price quote for it (Vaz, 2018, p.25). However, it is their work to use the best approach to sell the issue to the public. Thus, their primary role is to preside over the public issuance and distribution of the IPO issues and securities.

The Primary Considerations when Selecting an Underwriter

Underwriters are central to the success of the purchase of the IPO issues. There are numerous primary considerations that a potential investor needs to consider when selecting an underwriter. First, understanding the business is a critical consideration when selecting an underwriter. The investor needs to choose an underwriter who not only know the basics about the company but also all the essential elements of the company. For instance, the underwriter should understand what the company specializes in, how it does its work, and the primary strategies implemented in the company (Carter, Dark, and Singh, 1998, p.285-300). Secondly, the investor needs to consider the capacity of the underwriter to align and communicate the organization's story. Thirdly, the investor needs to consider the level of experience of the underwriter as well as their reputation in the field. The fourth consideration is the quality of the interaction between the company's team and the underwriter. Finally, other concerns such as the conflict of interests, the personality of the underwriter, and the possibilities for the post-IPO interactions and support are vital when selecting an underwriter (Carter, Dark, and Singh, 1998, p.285-300).

The Main Motivations for the Syndicate of Seven Underwriters in the Ferrari's IPO

Underwriters form alliances when handling tasks of large corporations. These alliances predominantly create syndicate. For Ferrari's IPO, there were up to a syndicate of seven. The primary motivational factor for this syndication was the large size of the company, with the lots of financial transactions involved making individual underwriters to undertake the task impossible (Dereeper, and Schwienbacher, 2018, p.390). Therefore, the individual members formed the syndication motivated by pulling resources together to see that there are smooth operations in their tasks. Despite the high amount of potential returns in the undertaking, the level of the risks involved was extremely high for an individual (Schill and Craddock, 2017, p.100). Therefore, the syndication was essential in sharing the returns as well as shouldering any potential risks resulting from the Ferrari's IPO.

The Compensation Paid to the Underwriters of Ferrari

The underwriters working for the Ferrari's IPO had access to the share valued at $1.56. They also had an underwriting discount and commissions totaling approximately $26,793,000 (Ferrari, 2018, p.122). The amount remitted to the underwriters is comparable to the typical compensation that underwriters in the US IPOs get. A critical examination of these amounts against other US IPOs indicates that the amount was slightly high than the average in the United States.

The 'Price-stabilization' Activities Conducted by the Underwriter(s)

The price-stabilization activities following the IPO formation refer to the actions of acquisition of the stock issue by underwriters with the primary aim of supporting or alleviating ripple effects (Muller, 2017, p.38). It is critically essential in stabilizing the secondary costs for the stocks in the market after the IPO. Therefore, price-stabilization helps in ensuring that the share prices do not crash way below the IPO price. It helps in shielding companies from negative publicity resulting from going public. In this case, underwriters were central in the price-stabilization. They were primarily involved in the making of critical decisions concerning the fixation of the share prices and tracking the shifts in the secondary market price.

What happens During 'Book-building' of an IPO

Book building refers to the series of activities involved in the underwriters' attempts to identify the optimal price for offering the IPO. Typically, the underwriter would do the building by providing invitations to institutional investors requesting for their proposed number of bids as well as the intended prices for the proposals. Numerous processes or steps are critical in the book building. The first step involves the hiring and engagement of the underwriters who would, in turn, examine the price ranges for the securities and draft the prospectus. The second step consists of the invitation of the potential stakeholders to submit their number of shares of interest and the proposed prices for the shares (Vaz, 2018, p.25). Thirdly, the underwriters list and assess the aggregate demands arising from the submitted bids. The step constitutes the actual book-building for the process. At this stage, the underwriters use their analytical skills to determine the cut-off prices for the issues. The fourth step is then publicizing the details of the bids. The final step involves the distribution of the stocks and shares to the acknowledged bids (Vaz, 2018, p.25).

The price range employed in the book building of the Ferrari IPO was between $48 and $52. The pricing of the shares offering at this elevated end of the book-building spectrum as a result of the high demand for the shares. According to Kao and Chen, there was oversubscription for the shares driving the company to price them at the top end (Kao and Chen, 2019, p. 295-300). The strength of the brand was a significant motivational factor for customers' interest in the purchase of the shares.

The Pricing of the Ferrari IPO

The pricing used by Ferrari in the IPO for the shares was slightly lower based on the prestigious nature of the company and the global command of the company. The underwriters in the company seem to underestimate the demands prospects for the company's shares. Based on the pricing and the strong financial base for the company, investing in the company's stock at this time was an intelligent decision.

The IPO Lock-up Agreements

The IPO lock-up agreements are generally the legal contracts, pacts, or bonds binding the underwriters and the insiders during the IPO process. They primarily ban the company's insiders from the participation of the sale of the shares for a specified period. The lock-up agreement of the Ferrari IPO states that the insiders to th...