Single Period Dividend Discount Model
To understand the dividend discount model, we need to start from the basics. The simplest way to understand the dividend discount model and its application is to first start with a single period and then later extend it on to more complex cases. Hence, the term single period dividend discount model. The objective of application […]
Start-ups and Arbitration
Entrepreneurs who start up new companies have to deal with a lot of different types of stakeholders. As a result, they have to enter into a wide variety of agreements with these different stakeholders. Over the course of time, it is possible that the entrepreneur and an external party may not agree on some of […]
How Securities are Priced in the Primary Market
We already know that primary financial markets are used by firms to raise funds from investors. This is done by issuing shares via an initial public offer, rights issue, or even using private placements. In each of these cases, the firm selling shares has to arrive at a market price at which they are willing […]
The Stages of Descent into Bankruptcy
Bankruptcy is a common phenomenon in the business world. There have been many cases wherein the stalwarts of yesterday, the companies which were running multi-billion dollar profits, have later filed for insolvency. For the benefit of the readers, let us define bankruptcy. Bankruptcy is the stage at which companies find it financially unviable to function. […]
The Barnewall Model
The traditional financial theory assumes that all investors are rational. Hence, they believe that all investors will reach the exact same conclusion with regard to investment decisions. However, we see evidence of the opposite happening in the marketplace. Even if different people have the same information, they tend to process the information differently and come […]
It is common knowledge that investment bankers help a company when they want to list their shares on the stock exchange. This process is called listing, and there are hundreds of companies that undertake this process every year. However, the opposite of this process also happens. This means that companies that are already publicly listed also tend to go private. This process is called delisting and happens much less frequently. However, just like delisting, this process also requires the services of an investment banker.
In this article, we will have a closer look at what delisting is and how investment bankers help in the process.
Delisting means that the shares of the company will no longer be traded on the stock exchange. This could happen either voluntarily or involuntarily. Stock exchanges have certain criteria that need to be met in order for the companies to remain listed. For instance, they have to pay an annual listing fee, must maintain a certain amount of turnover, and must comply with the rules and regulations of the exchange. If they fail to do so, they can be delisted forcefully by the exchange. Such a delisting is called involuntary delisting.
Compared to this, many companies decide to get delisted by their own wish. This is because delisting allows them to keep their records private and provides some other benefits as well. This is called voluntary delisting. In the balance of this article, we will provide details about the voluntary delisting process as well as the role of investment bankers in the process.
Companies that want to delist their shares have to enlist the services of an investment bank. This is because, just like listing, delisting is a complicated legal procedure. There are many regulations that need to be complied with. As such, there is a need for the services of an investment banker who is well versed with the processes that have been put into place.
The delisting process happens via a procedure called reverse book building. In the previous article, we have already studied how investment bankers use the book-building process in order to list the shares. However, in this article, we will learn about how the process works in reverse.
During the reverse book-building process, the positions of buyer and seller are interchanged. This means that the company is the buyer for their own shares instead of being the seller. On the other hand, the investors who earlier bought the shares will now be the sellers. The reverse book building process is done to allow for efficient price discovery during the delisting process.
Example: If a company wants to buy 300 shares, it receives 4 bids of 100 shares each for $10, $12, $14, and $16. Here if the company pays $14, then they can purchase 300 shares. Hence, all shareholders who bid below $14 will have their shares acquired at $14 per share. Hence, $14 is the cut-off price. The process is exactly like book building, but it works in reverse.
The bottom line is that delisting is also an important opportunity for investment banks. This is because it is used by many companies to consolidate control back into the promoter’s hands.
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