Definition in Detail
Offer For Sale is a process where a company invites the general public to purchase its stock through an intermediary, such as an issuing house or a merchant bank. This method is particularly prevalent during the initial offering of shares in the primary market and involves intermediaries that facilitate the distribution of shares to investors.
There are two main forms of an offer for sale:
-
Public Issue: Here, shares are offered to the public at a fixed price. If the demand for the shares exceeds the available supply, some form of balloting or rationing is implemented to allocate the shares among the interested parties.
-
Issue by Tender: In this mechanism, individuals bid to purchase a fixed quantity of stock at or above a specified minimum price. The shares are then allocated to the highest bidders.
An offer for sale ensures widespread distribution of shares among investors and involves the intermediary taking responsibility for underwriting and managing the process.
Examples
-
XYZ Corporation’s Public Issue: XYZ Corporation decided to go public through an offer for sale, fixing the share price at $15 each. Due to high interest, the company’s stock was oversubscribed, and shares were allocated to investors via a balloting process to ensure fair distribution.
-
ABC Ltd’s Issue by Tender: ABC Ltd wanted to raise capital and chose an issue by tender. The minimum bid price was set at $20 per share. Investors placed their bids, and the shares were allocated to the highest bidders who had bid above the minimum price.
Frequently Asked Questions (FAQs)
1. What is the difference between an offer for sale and an offer by prospectus?
An offer for sale involves intermediaries like issuing houses or merchant banks, whereas an offer by prospectus is a direct invitation from the company to the public to subscribe to new issues of shares, typically including detailed financial and operational information.
2. How does an offer for sale differ from an introduction or placing?
An introduction involves admitting existing shares to an exchange without raising new funds, while placing involves selling shares directly to select institutional investors rather than the general public.
3. Why do companies choose an offer for sale for flotation?
Companies select an offer for sale to access a broad investor base, ensure liquidity in the market, meet regulatory requirements, and often to benefit from the expert services of intermediaries.
- Flotation: The process of converting a private company into a public company by issuing shares available to the public.
- Public Issue: The initial sale of a company’s shares to the general public at a fixed price.
- Issue by Tender: A method where investors bid for shares at or above a minimum price and the highest bidders receive the shares.
- Introduction: Listing of a company’s existing shares on a stock exchange without raising new capital.
- Placing: Direct sale of shares to institutional or select investors, bypassing the general public.
Online Resources
Suggested Books for Further Studies
- “Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions” by Joshua Rosenbaum and Joshua Pearl
- “Corporate Finance: The Core” by Jonathan Berk and Peter DeMarzo
- “The Intelligent Investor” by Benjamin Graham
- “Initial Public Offerings: The Mechanics and Performance of IPOs” by Arif Khurshed
- “Investment Valuation: Tools and Techniques for Determining the Value of Any Asset” by Aswath Damodaran
Accounting Basics: “Offer For Sale” Fundamentals Quiz
### What is an offer for sale?
- [x] An invitation to the general public to purchase stock through an intermediary.
- [ ] A direct sale of shares to a single investor.
- [ ] A private transaction between two companies.
- [ ] An internal issuance of shares to employees.
> **Explanation:** An offer for sale is an invitation to the general public to purchase the stock of a company through an intermediary like an issuing house or merchant bank.
### Which form of offer for sale involves setting a fixed price for shares?
- [x] Public Issue
- [ ] Private Placement
- [ ] Introduction
- [ ] Issue by Tender
> **Explanation:** In a public issue, shares are offered at a fixed price to the public. If demand exceeds supply, a balloting or rationing process is used to distribute the shares.
### What happens in an issue by tender?
- [ ] Shares are given away for free.
- [ ] Shares are offered at a fixed price.
- [x] Shares are allocated to the highest bidders.
- [ ] Shares are sold only to institutional investors.
> **Explanation:** In an issue by tender, individuals bid to purchase shares at or above a minimum price, and the shares are allocated to the highest bidders.
### What role do intermediaries play in an offer for sale?
- [ ] They buy all shares for themselves.
- [x] They facilitate the distribution of shares to the public.
- [ ] They prevent the sale of shares to the public.
- [ ] They use shares for internal investment.
> **Explanation:** Intermediaries like issuing houses or merchant banks facilitate the distribution of shares to the public during an offer for sale.
### What is a primary goal of an offer for sale?
- [ ] To buy back shares from the market.
- [ ] To redistribute wealth within a company.
- [x] To raise capital and widen the shareholder base.
- [ ] To decrease market liquidity.
> **Explanation:** The primary goal is to raise capital and ensure broad distribution of a company's shares to the public, thus expanding the shareholder base and improving market liquidity.
### How are shares typically distributed in a public issue if demand exceeds supply?
- [ ] On a first-come-first-serve basis.
- [ ] By auctioning to the highest bidders.
- [x] Through balloting or rationing.
- [ ] By offering additional shares from the company treasury.
> **Explanation:** If the demand exceeds supply in a public issue, shares are distributed through a balloting or rationing process to ensure fair allocation.
### Which method involves selling shares directly to select institutional investors?
- [ ] Public Issue
- [ ] Introduction
- [x] Placing
- [ ] Issue by Tender
> **Explanation:** Placing involves selling shares directly to select institutional or known investors, as opposed to offering them to the general public.
### Compare the roles of "Introduction" and "Offer for Sale."
- [ ] Both raise new capital for the company.
- [x] Introduction does not raise new capital, while an offer for sale can.
- [ ] Both increase the number of outstanding shares.
- [ ] Introduction targets the general public; offer for sale targets institutional investors.
> **Explanation:** An introduction involves listing existing shares without raising new capital, whereas an offer for sale raises new capital through a public offering.
### What advantage does using an intermediary in an offer for sale provide?
- [ ] Increased company control over shares.
- [ ] Lower costs of distribution.
- [ ] Access to private investors only.
- [x] Expertise in managing and underwriting the stock offering process.
> **Explanation:** Intermediaries provide expertise in managing and underwriting the stock offering process, making the distribution of shares more efficient and professionally handled.
### What happens if an offer for sale is undersubscribed?
- [ ] The company withdraws the offer.
- [ ] Shares are given away at a lower price.
- [x] The underwriter may purchase the remaining shares.
- [ ] The company loses all raised capital.
> **Explanation:** If an offer for sale is undersubscribed, the intermediary (often the underwriter) may purchase the remaining shares to ensure the offering is completed successfully.
Thank you for exploring the intricacies of “offer for sale” with us and taking our sample quiz questions. Continue your journey to deepen your financial acumen and understanding of stock market operations!
