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Todd Story and Mark Sexton have been discussing the future of S&S Air. The company has been experiencing rapid growth, and the two see only clear skies in the company’s prospect. But, the fast growth can no longer be funded by internal sources, so Mark and Todd have decided the time is right to take the company public.

To this end, they have entered in discussions with the investment bank of Crowe and Mallard. The company has a working relationship with Kim McKenzie, the underpreparer who helped with the company’s preceding bond offering. Crowe & Mallard have helped several small companies in the IPO process, so Mark and Todd feel confident with this choice.

Kim begins by telling Mark and Todd about the process. Although Crowe and Mallard charged an underpreparer fee of 4 per cent on the bond providing, the underpreparer fee is 7 per cent on all initial stock allowing of the size of S&S Air’s offering. Kim tells Mark and Todd that the company can anticipate to pay about $1 800 000 in legal fees and expenses, $12 000 in SEC registration fees, and $15 000 in other filing fees. In addition, to be listed on the NASDAQ, the company should pay $100 000. There are also transfer agent fees of $6 500 and engraving expenditures of $520 000. The company must also anticipate to pay $110 000 for other expenses allocated with the IPO.

Finally, Kim tells Mark and Todd that to file with SEC, the company should provide three years’ audited financial statements. She is unsure regarding the costs of the audit. Mark tells Kim that the company offers audited financial statements as part of the bond covenant, and the company pays $300 000 per year for the outside auditor.

problem:

1. At the end of discussion, Mark asks Kim concerning the Dutch auction IPO process. What are the differences in the expenses to S&S Air if it uses a Dutch auction IPO versus a traditional IPO? Should the company go public through a Dutch auction or use a traditional underwritten offering?

2. Throughout the discussion of the potential IPO and S&S Air’s future, Mark states that he feels the company should increase $75 million. However, Kim points out that if the company requires more cash in the near future, a secondary offering close to the IPO would be problematic. Instead she suggests that the company must increase $90 million in the IPO. How can we compute the optimal size of the IPO? What are the merits and demerits of raising the size of the IPO to $90 million?

3. After deliberation, Mark and Todd have decided that the company must use a firm commitment offering with Crowe and Mallard as the lead underpreparer. The IPO will be for $75 million. Ignoring under pricing, how much will the IPO cost the company as a percentage of funds received?

4. Many employees of S&S Air have shares of stock in the company due to an existing employee stock purchase plan. To sell the stock, the employees can tender their shares to be sold in IPO at the offering price, or the employees can retain their stock and sell it in the secondary market after S&S Air goes public. Todd asks you to advise the employees regarding which option is best. What would you suggest to the employees?

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