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refers to a later stage investment provided to a company that is already producing and selling a product or service, for the purpose of helping the company achieve a critical objective (such as increasing inventories to accomplish greater sales) which will enable it to go public. Mezzanine financings are typically undertaken when they promise to decrease a company’s overall cost of financing by helping the company attract a significantly better price for its shares in a later public offering. Sometimes they are undertaken because the market for public offerings is so poor that going public is not a viable alternative. A theory espoused by many underwriters and investment bankers is that there are important psychological break points in initial public offerings below which the stock of most companies will not attract institutional investors and other important investors. Without their interest, the theory goes, the stock will have fewer potential buyers and will obtain a lower price. Many investment bankers believe that a company needs to offer at least 500,000 to 1,000,000 shares of its stock to support the active trading of its shares that is necessary to support a good price. A minimum price of between $10 and $20 is considered necessary to attract the large investment banking firms and institutional investors. A price below $5, the theory goes, decreases the attractiveness of the company’s shares. Since the number of company shares can be changed easily by stock splits, the critical factor in determining a viable price of a company’s stock becomes the valuation the company can command in the marketplace. For most companies in most industries, this usually becomes a factor of the size of the company, its sales and earnings history, its prospects for continued and dramatic growth and the price-earnings ratio its shares can command. Notably, however, company sales and earnings history have not been critical factors for Internet companies going public in the late 1990s. Mezzanine financings are usually intended to provide a company with sufficient capital to enable the company to continue to grow its business to a size that will support a public offering or a public offering on more favorable terms. Typically, the intent is for the company to use the mezzanine funds to move the company into a position where its stock will attract a larger audience and higher price. By making its stock more appealing (and more expensive) to investors, companies hope to decrease the company’s overall cost of financing. See: Going Public, Investment Bankers, Penny Stock. |
