Corporate Finance

Project finance makes sense if the project

• is physically isolated from the parent
• offers the lender tangible security
• involves risks that are better shared between the parent and others

The best example is in the financing of major foreign projects, where political risk can often be minimized by involving international lenders.

If the project is:

1. very large compared to the company's current size
2. has a higher degree of risk than the average risk level for the asset portfolio in the balance sheet
3. is linked to the company's own core business

What factors does a company have to consider when deciding about financing?

• firm‘s current debt levels
• the financing costs
• the accepted risk level
• the desire for corporatecontrol
• the flexibility to respond to future financing needs
• and the pattern of thecapital structure in the industry.

How can a company internally and externally raise money?

Internally

• Improving operating cash flow
• Adjust working capital
• Dispose fixed assets

Externally

• Raise equity
• Take on debt- short-term or long-term financing

• Conditions
• Character
• Capacity to repay
• Collateral
• Covenants

rationale:

• Eliminate barriers caused by laws that protected minority shareholders and that limited research collaboration
• Minimize overhead costs and stop duplicating facilities
• Allow Roche to have direct access to the cash generated by Genentec

challenges:

• Managing the reaction of Genentech employees (key asset of Genentech)
• Managing the reaction of Genentech minority shareholders and to convince them to sell their shares to Roche at a reasonable price
• Managing the financing: by October 2008 the original term sheet was no longer valid and classical bridge financing was no longer an option. 

What were the financing alternatives?

• Bridge loan
• Bonds
• Capital increase

What is the role of the finance function with regard to the value creation of a company?

– Influence strategic decisions
– Requires full understanding of business model
– Requires being able to communicate efficiently with investors

Roche completed three successful rounds of bond issuance in less than three  

By structuring the deal and cutting out the normal intermediaries, Roche reduced transaction costs by at least a half and could allocate shorter- and longer-term bonds according to the needs of the company and the bond investors.

Roche closed the Genentech acquisition, securing the support of 96 per cent of minority shareholders at first, and the rest two weeks later.

• Funding
• Extension of investor base
• Liquidity of stock
• Reduced cost of capital
• Image boost
• Alignment of interest
• Chance to cash in

• Costs
• Publicity
• Agency problems
• Change of culture

• Management and Board
• CEO
• Board
• Accounting and Finance
• Corporate Structures
• Corporate Governance

• lead manager
• bank syndicate
• auditors
• lawyers
• IR agencies
• stock exchange

Management fee (typically 1% to 2% of the total proceeds)
Underwriting fee (1% to 2%)
Selling concession (3% to 4%)

Important! typical: Median of gross spead is exactly (!!) 7%, that doesn't look like a very competitive market! They don’t want the IPO processes to become a commodity

• bookbuilding (very common)
• fixed price (less common)
• auctions (e.g. google)

Good reasons:

• Economies of scale
• Economies of vertical integration
• Complementary resources

Dubious reasons:

• Surplus funds (mean a company has too much money; they should better pay out the money to the investors)
• Diversification (Investors can make their own diversification in their portfolio)

.

a) 12'000'000

b) 3'000'000

c) 7'000'000

d)

cash: same

stock: 5'000'000

-> SEE LECTURE SLIDES WITH SOLUTIONS (am PC)

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