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The focus of this paper is to examine and research the financing issues that an organization must face when going public. The team has selected Chipotle Mexican Grill, Inc. as the organization which has had an initial public offering in the last three years. The learning team will address registration, disclosure, and compliance issues and cost of issuance. In addition, the team will examine the impact on ownership control and return as well as the source and application of funds.
Financing Issues that an Organization Faces When Going PublicAn Initial Public Offering (IPO), is extremely expensive for organizations. It is common for a small business to pay between $50,000 and $250,000 to organize and publicize an offering. According to Paul G. Joubert, author of The Portable MBA in Finance and Accounting, IPO claims between 15 and 20 percent of the proceeds of the sale of stock (IPO Forum, 2008). Some other costs associated with going public include lead underwriter’s commission, expenses for legal and accounting services, printing costs and filing costs with the Securities and Exchange Commission (SEC). Organizations may have ongoing expenses for legal, accounting and filing services (IPO Forum, 2008).
Issues Impacting Dividend Policies and Constraints on Dividend Payments
A firm must examine all financing and investment issues before determining the proper payout of dividends for their organization. Some organizations’ opt to pay out smaller cash dividends to reserve earnings for future expansion. It is ideal for an organization to start with smaller payouts, and continue with conservative dividends per share. This payout decision is a result of the organization’s capital budgeting decision.
Another option for payout of dividends is to finance a large portion of their capital expenditures. This will free up cash that the organization can pay out to shareholders. This payout decision is a result of the decision to borrow for the organization’s growth (Brealey, Myers, and Marcus, 2007).
Chipotle Mexican Grill, INC. is a “fast-casual” restaurant. It offers customers the quality food they would receive in a restaurant with “fast-food” style quickness. The first opening was in 1993 by the founder and CEO Steve Ells. They serve very few things but claim to provide thousands of options. Their base choices are burritos, burrito bowls, tacos, and salads. Chipotle’s culture is “Food With Integrity” which involves using “unprocessed, seasonal, family-farmed,.naturally made, added hormone free, organic, and artisanal”, in the words of Chipotle.com. Chipotle claims there products to better, all the way from dairy to meat. They only purchase from farms in which the animals are treated humanely and naturally raised. This philosophy has allowed Chipotle to grow from one location in 1993 to 670 in 2007 as well as compete in the fastest growing industry in restaurants (Chipotle, 2008).
Registration, Disclosure and Compliance Issues
Chipotle filed a form S-1/A with the United States Securities and Exchange Commission on December 23, 2003. Two securities were registered under the filing as follows: Class A common stock, par value $0.01 per share, offered by the registrant and Class A common stock, par value $0.01 per share, offered by the selling shareholder.
( Form S-1/A ,2005) Common stock offered by the registrant is at a Proposed Maximum Aggregate Offering Price of $1 million dollars and a registration fee of $11,770. The Proposed Maximum Aggregate Offering Price of the common stock offered by the selling shareholder is $49.5 million (over allotment selling to the underwriters, if any, factored in to total) with a registration fee of $5,296.50. A total of 78,78,788 shares is included in the IPO and broken down by 60,60,606 from Chipotle Mexican Grill, INC and 18,18,182 from McDonalds Ventures, LLC as the selling shareholder. Chipotle intends to list their common stock on the New York Stock Exchange under the symbol “CMG” and selling price is between $15.50 and $17.50 per share. (Form S-1/A ,2005)Disclosure is the release of relevant information. (Disclosure ,2008) In Chipotle’s SEC filing they disclosed the prospectus statement, financial data, and future plans. Through there prospectus statement Chipotle makes it clear that they are set apart from other chains by serving “Food with Integrity”.
However, there are risks involved in investing, they are as follows: the number of new stores rapidly being established, lack of independent operating history, ability to continue to grow and profit, and health and safety concerns regarding the ingredients used among others. Although the risk factors are in place, Chipotle’s financial data provides more assurance of returned profit on investment. In their “Rapidly Improving Financial Performance” section of the SEC filing they state a 130% increase in revenue in 2004 of 470.7 million up from 2002 and 49% up from 2003.
And, average sales in new restaurants after 90 trading days increased 24.9% a total of $303,390. From 2002-2004 Chipotle opened a total of 237 stores. Their increased financial growth is attributed to “word-of-mouth” sales and quicker implementation of Chipotle culture in the area of the new restaurant. Also, more people are aware of Chipotle, thus increasing average opening sales.( Form S-1/A ,2005)
The future plans of Chipotle is to expand operations and sales by opening new stores. They forecast opening a total of 75 stores in 2005 of which 58 were already opened at the time of the SEC filing. In order to expand sales they plan to implement an online method of ordering and increasing fax lines to accommodate heavier traffic without causing service to suffer. And, create new food options with existing ingredients. Through filing the SEC Chipotle is in compliance with the securities act of 1933 through rule 457 by following registration fee rules. (Compliance, 2008)
Cost of Issuance
A company filing an IPO must select underwriters in order to issue their stock. The underwriters purchase the stock and sell it at a slightly higher price than what they bought it for. They are responsible for all shares allotted, not including over allotment, and are not reimbursed for shares not sold at initial offer price. Chipotle’s underwriters areMorgan Stanley & Co. IncorporatedSG Cowen & Co., LLCBanc of America Securities LLCCitigroup Global Markets Inc.
J.P. Morgan Securities Inc.
Merrill Lynch, Pierce, Fenner & SmithIncorporatedA.G. Edwards & Sons, Inc.
RBC Capital Markets CorporationSunTrust Capital Markets, Inc.
Wachovia Capital Markets, LLC(Form S-1/A ,2005)Chipotle Mexican Grill, INC. did not disclose the cost of issuance in the SEC filing.
Impact on Ownership Control and ReturnChipotle had filed their IPO October 25th, 2005. Seeking $121.4 Million, Morgan Stanley and SG Cowen & Co., LLC they auctioned their shares. Clarifying some of the details behind its highly anticipated stock offering, Chipotle estimated its market value to be as high as $121. 4 Million, Chipotle will remain majority owned by McDonald’s Corp. (Chipotle.com, 2008).
On its first day as a public company, Chipotle stock rose exactly 100%, closing at $44.00 per share. On September 8, 2006 McDonald’s Corp. announced it had started an offer for its shareholders to exchange McDonald’s stock for shares of Chipotle Mexican Grill. The exchange allowed McDonald’s shareholders to acquire Chipotle shares at a 10 percent discount. The offer is capped at a level of 0.9157 Chipotle shares for each McDonald’s share exchanged owned by McDonalds Corporation. On October 13, 2006, McDonald’s Corp. completed a tax-free swap of class B common stock in Chipotle Mexican Grill, Inc. (NYSE:CMG), for its own common stock. McDonald’s Corp. has now fully divested its investment in Chipotle.
Source and Application of FundsWhen it comes to an IPO, the initial funds come from an investment banking firm referred to as an underwriter. The underwriter provides the financial advice to the company, buys the stock from the company, and then resells it to the public. Depending on the size of the IPO and number of stocks being offered, the company may have one underwriter or multiple underwriters. Before the stocks can be sold, they must be registered with the U.S. Securities and Exchange Commission (SEC). The primary responsibilities of the SEC are to enforce federal securities laws and to regulate stocks and the stock market. The company must also decide whether to trade the stocks on either the New York Stock Exchange or NASDAQ. This would be the secondary and future source of funds.
When Chipotle decided to go public, they had two underwriting companies as their primary underwriters: Morgan Stanley and SG Cowen & Co. LLC. Chipotle originally planned to sell 6.3 million shares at $15.50 to $17.50 per share but ended up changing at the last minute to 6.3 million shares at $22 per share. In the end the offering raised approximately $133M in primary capital
to fund new store growth.
In conclusion, organization’s must take into consideration many financial issues and decisions when going public. Many of these financial issues will be ongoing, and have to be taken into consideration when determining dividend payout to shareholders.
Brealey, R., Myers, S., and Marcus, A. (2007). Fundamentals of corporate finance. (5th ed.). [University of Phoenix Custom Edition e-text] New York, NY: McGraw-Hill/Irwin. Retrieved February 9, 2008 from University of Phoenix, rEsource, FIN325-Financial Analysis for Managers II Web site.
Chipotle (2008) Chipotle.com Investor Relations. Retrieved on February 10, 2007 from,http://phx.corporate-ir.net/phoenix.zhtml?c=194775&p=irol-homeProfile&t=&id=&Compliance (2008) Compliance Definitions. Retrieved on February 10, 2008 from, http://www.investorwords.com/5468/compliance.htmlDisclosure (2008) Disclosure definition. Retrieved on February 11, 2008 from,http://www.investorwords.com/1469/disclosure.htmlForm S-1/A (2005) Chipotle Mexican Grill. INC SEC Filing. Retrieved on February 10,2007 from, http://phx.corporate-ir.net/phoenix.zhtml?c=194775&p=irol-sec&secCat01.1_rs=241&secCat01.1_rc=10#Initial Public Offering Forum. (n.d.). Initial public offering. Retrieved February 11, 2008 from http://www.referenceforbusiness.com/small/Inc-Mail/Initial-Public-Offerings.html