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Assignment_338_SD_V3

Task Brief: Word count 2600, Reference Harvard style.

The assignment is based on the following documents

· A case study: ‘Prada’s Hong Kong IPO’

· Prada IPO prospectus

· An Excel file containing daily share price of Prada from its IPO to June 2014 (1913.HK shareprice)

· Prada’s Annual Report 2013

Read the above documents and the IPO book (e-copy available on Blackboard) to answer the following questions. You may wish to use external references/material from credible sources (such as financial press, journal articles):

1

An IPO marks a strategic milestone for a company. What may have motivated Prada (Stock code ‘1913’) to go public? Why do you think Prada chose to list on the Hong Kong Stock Exchange? Were there any downsides of a Hong Kong listing?Why do you think Prada chose to conduct its IPO in 2011?What can you say about the primary and secondary shares sold in the Prada IPO? How did Prada plan to use the proceeds of the IPO?

16 marks 
2

What is an IPO over-allotment (Greenshoe) option? Describe the over-allotment option included in Prada’s IPO?

7 marks 
3The underwriting investment bank takes on a central role in the IPO process. What are the key tasks executed by the underwriter?What are primary considerations when selecting an underwriter?Often, multiple underwriters are involved. In the case of Prada, a syndicate of 4 underwriters was involved in the IPO. What are the main motivations for syndication? How much compensation was paid to the underwriters of Prada? How does it compare to the average compensation paid to underwriters in US IPOs?What do you understand by ‘price-stabilization’ activities conducted by the underwriter(s)? Do you think the underwriters  were involved in pricestabilization of the Prada IPO?25 marks 
4Describe what happens during ‘book-building’ of an IPO. What price range was used for book building of the Prada IPO? Why do you think Prada priced its offering at the bottom end of the book-building range?10 marks 
5Without conducting a formal valuation analysis and based on the information given in the case study and the IPO prospectus, discuss the pricing of the Prada IPO. Would you have invested in Prada at this price?10 marks 
6What are IPO lock-up agreements? Describe the lock-up agreement of the Prada IPO. How was the Prada lockup agreement different from that of other markets such as the US?10 marks 
7The diagram below shows the performance of Prada shares from June 2011 to June 2014. The first day of public trading of Prada’s shares was 24 June 2011. Shares were sold in the IPO at an offer price of HK$ 39.50. More information on daily share price movements is available in the Excel file (1913.HK shareprice).    
Based on a visual examination of the chart above, how does the performance of the Prada IPO compare with average IPO performance documented by past empirical studies in terms of the short term (1st trading day or the first week of trading)?and over the longer term (3 years)? Past studies have suggested a number of explanations for short-run underpricing and long-run underperformance of IPOs. Discuss the ones which you think are relevant to Prada’s case?
12 marks 
8In the light of the main theories of capital structure, provide a discussion of the evolution of the capital structure of Prada in the initial three years after its IPO. You will find Prada’s Annual Report 2013 helpful in answering this question.10 marks

 

Answers:

PRADA- IPO

Question 1

  1. Motivation to Prada to go public

Prada focused on making their IPO to the public because of the following motivations:

  1. For raising the funds and business capital for the business for the primary aspects (Beom and Yim, 2018).
  2. To make improvements in the network and also making the further expansion of the DOS networks (Beom and Yim, 2018).
  3. The funds of the business are been raised for clearing the amount of the debts Prada (Beom and Yim, 2018).
  4. Fulfilling the needs of the regular working capital in business operations and meeting the regular purpose that is raised for the corporate businesses.
  • Hong Kong Listing

The choice of Prada to list itself on the Hong Kong stock exchange were as follows:

  1. The company ticked over the majority of the boxes for considering its listing over the foreign stock exchange markets.
  2. The financial tracking of the company record is been made in the analysis and also showing the level of the business in Prada.
  3. The business has the enhanced and the growth recordings marked in the country of China.
  4. The business plan of Prada was also developed influentially and also this depicted a position of having informative support to the growth opportunities.
  • IPO was chosen in 2011

The position of the Hong Kong stock market has been making its position as one of the leading venues of listing the stock in the market as marked in the financial year 2009 and the financial year 2010. The international IPO was highly attracted by this stock exchange. In comparison to the position of the other stock exchange, this stock market was offering 10% to 15% of the premium hype in the prices (Beom and Yim, 2018). The stock exchange of Hong Kong gave a huge growth opportunity to the companies that listed their IPO on this. As the products of Prada belong to the category of luxury goods at the highest price in the past three financial years and also in the way of having the enhanced average of the company to be at a more feasible and favorable position (Chemmanur and Yan, 2019).

  • The offering of IPO of Prada

Near to about 14% of the entire offering made by Prada will be considered in carrying the primary offerings with the amount of proceeds heading towards the direction of Prada, while the left over 86% will be under the part of the secondary offerings from the shareholders in regards of Book Value of holdings of Prada as well as Intesa Sanpaolo ISP (Chemmanur and Yan, 2019).

Question 2

The position of the allotment where the overallotment is been regarded at the position where the underwriters are given the rights for making the additional sales of the additionally applied shares of the IPO. The option of this gives the rights to the underwriters that they can make an additional issue of near to about 15% of the more shares that were previously planned by the company (Chemmanur and Yan, 2019). The option of underwriting can be accessed and implemented within the 30 days counted from the day from which the offering of the shares is made and it cannot be made on a similar day as on the day the offerings are made. The option of the Prada green shoes- the total option that can be allowed for making the increase and making the overall offering to be increased by the level of 15%, the additional offered shares were been bought from the Prada Holding BV that is bene regarded as the holding company (D’Anolfo, et. al., 2017). The underwriter option can be accessed within these days so that the additional issue of the shares can be made.

Question 3

  1. Key tasks executed

The underwriter who has been formed as a part of a new offering is referred to as a link amongst the seeking company who is issuing IPO and the investor. The preparation of the IPO of the company is made by the underwriters, it is made using the capital raising, type of shares to be issued, and others (D’Anolfo, et. al., 2017). The draft company prospects to present to the investors are also been prepared by the underwriter, after all this, the price of the IPO is been decided by the company and the underwriter, the share price is determined on the basis of the demand raised. The allocation of the shares to investors is made by the underwriters. The demand for the IPO is been raised by the investors by the underwriters and after the issue of shares, the underwriters allot the shares to the investors (D’Anolfo, et. al., 2017). The tasks were performed well and the Prada IPO in Hong Kong was subscribed five times the actual IPO value.

  • Qualities of underwriters

The knowledge of the business shall be clearly known to the underwriter, the strategies, goals, and purposes of the business shall be understood well by the business. In this the underwriter aware of the industry to which the company belongs, the Experience of the underwriter is credible, is the underwriter directly involved with the business and banking operations, the study of company IPO, who will be leading the IPO capital equity market of the company (Dong, et. al., 2019). The underwriter should be the person who knows the details about the business, the industry in which it is operating, and also small and big information that is related to the company and also that might affect the operations of the business either in a direct or in an indirect form. The entire security in regards to the underwriter services shall be mentioned that will be beneficial in the IPO (Kang and Sung, 2021).  

  • Syndicate underwriters

The underwriter syndicate is been referred to as a small group and in the IPO of Prada, 4 syndicate underwriters were there for studying the security-related aspects and making the IPO to be offered effectively (Kang and Sung, 2021). The underwriters were motivated towards the IPO of Prada as it is motivating the syndicate groups as the IPO is a well-known brand and also establishes the more effective position in which the benefits are been gained by the business and in which the gains are also made by syndicates (Dong, et. al., 2019). The IPO was a beneficial one and the motivation to the syndicate was that the IPO was subscribed for five times.

  • Compensation

The compensation amount that was paid to the underwriter of the shares issued by Prada in their IPO of the financial year 2015 amounted to a total of $26,793,000. The underwriters in this amount received the compensation of $1.56 per share. The compensation that was paid by the US IPO was made by Prada. Italian house Prada capped an additional commission on the level of 1.9%, which is one of the lowest-paid amongst the IPO paid in Hong Kong (Kang and Sung, 2021). The comparison is drawn amongst the IPO compensation of the US and Hong Kong made by Prada. It can be said that the compensation paid in the US was quite higher as compared to what was paid in the Hong Kong IPO (Dong, et. al., 2019).

  • Price Stabilization

Underwriters in some of the cases prepare a stabilization bid for making the purchase so the shares on the specific price do not exceed the price of the share offer if the share distribution is not completed. The price drop is postponed in this and this also makes the reselling available in the case the negative demand curve is been depicted (Kang and Sung, 2021). In the IPO of Prada, the underwriters had the involvement in the concept of price stabilization. This was possible as the underwriters operating in this IPO were closely related to the issuing IPO body and also related to the financial specialists concerned with it (Dong, et. al., 2019).

Question 4

The concept of Book building is a way of attempting and determining the value of the IPO at which it will be offered. The price discovery in the book-building process will include the process to generate and record the demand of the investors because of reaching the final price of the share issue (Shamila, 2021). The system of book building is referred to as a way of discovering the prices at which the company will be hiring the bank merchant for deciding the range of the price and also sharing the price of the issue rather than the specific pricing. The indicative range of price was given between $1.69 to $6.17 for every share issued an IPO. The valuation of the company was marked at the level of between $11.4 to $14.6 billion. The oversubscription of the IPO was made. The IPO of Prada was at the bottom line and the bottom-line IPO was marked because that the stock market was at the oath of deterioration and the concerns raised in regards to the valuation and the taxation implications were the major reasons for having the bottom-line issue (Shamila, 2021). Taxation implications were also the Demand for an offering made by Prada.  The volatility in the global markets is also a crucial aspect that is undertaken by the investors and also resulting in weak pricing. The bottom-line issue of was a line-up of Prada was because of the stock market situations and the higher competitive brand that are also issuing the IPO over the stock market of Hong Kong in competition with Prada.

Question 5

Prada made its IPO in the stock market of Hong Kong because of the lesser legal implications attached with it. The set price of the IPO of Prada was marked at the level of %5.06 for every share. Being an investor, I would have willingly invested in the shares of Prada as the brand is a luxury brand that has a huge potential to grow in the market and also establishing its position in the mind of the investors as the company is heading towards higher profits and also offering the investors with the higher share price (Masè and Silchenko, 2017). As the pricing is referred to as the selective pricing that is been seen with the volatility of the global stock market and thus, the IPO of Prada is a beneficial one. In my opinion, the opening tumbled its listing with the hype of 7.7%. the deal was one of the biggest amongst the share stock market of Prada. To make an investment in Prada is a successful deal to be considered and also the pricing will be made on a premium basis. The investment opportunities offered in Prada could be beneficial. After the launch of the IPO, the valuation of the price ranging was indicative and narrowed making the prices hype (Masè and Silchenko, 2017). The market of China and its movement towards luxuries would be resulting in having the higher pricing for the IPO as the market of Hong Kong is influenced because of this and Prada can get the higher values for its shares that will be resulting in increased returns to the investors.

Question 6

A lock-up agreement is referred to as a contract-based provision that prevents the company level insiders from making the sales of the shares for any specific time period. This is primarily used in the IPO of the companies (Masè and Silchenko, 2017). The IPO-based lock-up period stops the sales of the shares that are already owned by insiders and stops them from making the sales of these shares for the specific time after which the IPO was issued. IPO Lock-up time is standardized and has a specific marked period from 90 days to 180 days and for some specific range companies, this may vary from 180 days to a year (Chemmanur and Yan, 2019). Prada imposed the lock-up period of one year, only after this period the shares were allowed to be traded and the insiders can deal with the shares only after this period. The stock market of the US and the Hong Kong stock market was highly different from one another (D’Anolfo, et. al., 2017). SPA brought US$2.14 billion up in its first sale of stock in Hong Kong, by estimating its offers at the lower part of its direction, two individuals acquainted with the circumstance said Friday, in an impression of falling apart securities exchange conditions and worries about the Italian extravagance retailer’s. From the year 2012, the IPO made by Prada made prevention of the sales for the amount of 268 million shares in the period of the starting three months from the date of the issue of IPO (D’Anolfo, et. al., 2017).

Question 7

From the analysis of the graph, the position of the IPO of Prada can be analyzed as follows:

  1. In short-term- Short-run under-pricing was noted in the value of the share pf the IPO of Prada IPO as the closing price of the share on the very day of IPO share was higher than the IPO book price. It was short-lived as the constant investments made took the price of Prada share to increase on the day of its IPO issue itself. of Prada was issued on the day 24 June 2011 depicted the position that the IPO was opened with the Price of HK$39.50, which was made as per the book building valuation made for the shares. The IPO of Prada was a strong one that had a huge potential to grow and also establishing that the share was well-executed (Masè and Silchenko, 2017). The price of the share generated a huge demand for the shares in the market and the subscription of the shares was five times more subscribed. The share price went to its highest amount in the day at HK$40. The trading of the share was also effectively marked on the day. the IPO was opened at the price of HK$39.50 and the price of the share didn’t reduce and the closing price of the share was marked at the level of HK$39.60. The total volume of the shares of Prada as marked on an opening day was 75295100 (Shamila, 2021).
  2. In long term- the IPO of Prada was also indicating the long-run underperformance in the starting few months after the IPO was released in the market as the lower prices of the share were noted that made the investors withdraw their investment from Prada. But soon fate the completion of 2011, the share of IPO again took a hype and it was no more an underperforming share on the stock market (Masè and Silchenko, 2017). From the long-term investment perspective, it can be analyzed from the graph that the position of the shares of Prada was on the decline in the starting period after the listing of the IPO was made the share price was on the hype in the starting months but soon after the month of November, as the constant decline was noted in the share price. Soon, after this period, the share price took a hype and constantly showing a positive side. The investors can make a considerable amount of investment in the share (Shamila, 2021). The share of Prada is of the long-term investment as analyzed from the position as the price in the long-run of the share increased. The investors who made the purchase of this share in the later months of 2011 (in November), and retained the share for the period of more than a year would have made huge gains on the sale of those shares of Prada (Simo, 2020).

Question 8

Prada made the sale of 45% of its ownership stake of Church and company for privatizing its Equinox equity and also made the sales of Helmut. These radical actions were taken by Prada for reducing the level of its debts (Simo, 2020). The capital structure of the company was based majorly on the debt funds before the launch of its IPO and the company was under major debts and after the issue of IPO, the company started to reduce its debt by selling its stake to other companies also (Simo, 2020). The capital structure was shifted from the debt structure to the equity structure majorly for making the higher protection, maintenance and also making the development of the core businesses of Prada and giving the stake in the auxiliary brands so that the debts can be reduced for Prada and also it can efficiently invest in its core operations.

References

Simo, E., 2020. Digital marketing strategies of luxury fashion brands in China: the Prada case study. http://tesi.cab.unipd.it/65586/1/Simo_Emma.pdf

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