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Make an Initial Public Offering (IPO.) The other main option is to sell all or part of the bank in a public offering. This has the advantage that it is essentially run as an auction, gaining the benefit of price competition. On the downside, IPO’s historically have to be priced below the expected trading price of the stock in order to lure enough investors to buy in upfront. (There are a number of reasons for this, ranging from the absence of a trading history in the stock, which increases the riskiness of estimating where it will trade going forward, to the need to motivate a large number of investors to buy on a given day. The potential buyers are usually less motivated to buy than the owner is to sell.) This price discount tends to be substantially lower for any future offerings, once there is a trading market establishing the fair price of the stock. A common strategy is to have an IPO for perhaps 20% of the stock and to follow it with later offerings, after the stock has a reasonable trading history. The government ended up disposing of most of its stake in Continental Illinois through such share sales, with the final disposition being a strategic sale of the whole bank to Bank of America after the government’s ownership was down to 20%.

It is difficult to know in advance what the right sales method will be. The government should discuss the issue with investment bankers and potential purchasers early on to get an idea of the initial options. Most likely the government will conclude that the initial price is too low and that it needs to clean up the bank and start to produce an operating history as a reorganized entity. The right strategic plan may not be much affected by the ultimate form of sale – the best approach is to build value and reduce risks, regardless of who the buyer will be in the end.

The timing of a sale is similarly hard to predict in advance, other than the likelihood that it will not be soon, unless the government places a very high value on a quick disposition at the expense of maximizing the price received.


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