...Initial Public Offerings Jay R. Ritter Cordell Professor of Finance University of Florida Gainesville FL 32611-7168 (352) 846-2837 jritter@dale.cba.ufl.edu http://bear.cba.ufl.edu/ritter Warren Gorham & Lamont Handbook of Modern Finance Edited by Dennis Logue and James Seward reprinted (with modifications) in Contemporary Finance Digest Vol. 2, No. 1 (Spring 1998), pp. 5-30 This is the modified version. Abstract In the 1990s, thousands of firms have gone public around the world. This article surveys the market for initial public offerings (IPOs). The process of going public is discussed, with particular emphasis on how contractual mechanisms deal with potential conflicts of interest. The valuation of IPOs, bookbuilding, price stabilization, and the costs of going public are also discussed. Three empirical patterns are documented and analyzed: shortrun underpricing, hot issue markets, and long-run underperformance. This article is reprinted, with modifications, from the chapter with the same title in the Warren Gorham & Lamont Handbook of Modern Finance, edited by Dennis Logue and James Seward. The chapter in turn draws heavily on "The Market's Problems with the Pricing of Initial Public Offerings," coauthored by Roger G. Ibbotson, Jody Sindelar, and Jay R. Ritter in the 1994 Journal of Applied Corporate Finance; "Going Public," coauthored by Kathleen Weiss Hanley and Jay R. Ritter, in The New Palgrave Dictionary of Money and Finance; and especially “Initial Public Offerings...
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...of IPO should E-Bay use to take Skype public - a traditional IPO or an online auction? E-Bay should use an online auction initial public offering (IPO) to take Skype public. In April 2009, E-Bay announced plans to separate Skype from the company. E-Bay’s main reason for selling Skype is the company allows 405 million users to make free phone calls over the internet which does not have the synergies to remain with an online payment business. This paper will argue that E-Bay an e-commerce company should use the online auction IPO procedure to take Skype public. This paper will also discuss the advantages and disadvantages of going public and how using the traditional IPO is very costly compared to online auction /Dutch IPO procedures which gives more opportunity for individuals investors. Background E-bay leading ecommerce company brought Skype into the corporation to become come one of the largest telecommunications company in the world. Buying Skype would allow E-Bay to soar over all the other technology giants such as Google and Microsoft Company in the telecommunication industry. E-Bay paid $2.6 million in cash and stock for Skype along with future payments that could total an additional $1.5 billion ( Kafka, 2010). E-Bay found investment group led by Silver Lake would pay $1.9 billion in cash and retain 65% interest in Skype and E-Bay would keep hold of 35% equity interest. Initial Public Offering Advantage Going public will offer a company financial...
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...American Finance Association The Long-Run Performance of Initial Public Offerings Author(s): Jay R. Ritter Source: The Journal of Finance, Vol. 46, No. 1 (Mar., 1991), pp. 3-27 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/2328687 . Accessed: 15/03/2011 14:34 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=black. . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Blackwell Publishing and American Finance Association...
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...Strategy Berry’s Bug Blasters is a privately held business and wants to expand its operations. The business is considering three options for moving forward with the expansion plan. The first option is going public with an IPO, or Initial Public Offering. The second option is to acquire another similar business within the industry, and finally the third option is merging with another organization. All three of these options are viable choices and this paper analyzes each options for its viability and suitability to needs of the business. The paper identifies the strengths and weaknesses of the each approach, and well as the opportunities and threats posed by each option. The analysis begins with the strengths of the IPO, merger, and acquisition. Strengths of an IPO, Merger, or Acquisition Berry’s Bug Blasters could effectively expand its organization very rapidly through an initial public offering (IPO). An IPO would position the organization, after an underwriting process, to go from a privately owned company with modest annual revenues of $3.2 million to a public company that could put Berry’s on the Bug map. The strength of an IPO for Berry’s Bug Blasters would be in the cash generated by selling shares to the public. This additional capital could help the organization to expand into new territories; more readily compete within its industry, and even become a household name. A listing on a major stock exchange such as the NYSE would...
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...Initial Public Offering Paper: VISA Introduction An initial public offering takes place when a company issues common stock or shares to the public for the first time. There are several reasons for companies to go public, for example, small and young companies that seek capital to expand and large privately owned companies that want to become publicly traded. After a company lists its securities on a public exchange, the money collected from investors for the sale of the shares goes directly to the company. Once a company is listed, it is able to issue additional common shares via a secondary offering. Usually, these kinds of public offerings are made by companies wishing to refinance, or raise capital for growth. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public. Visa Inc. is a global payments technology company headquartered in San Francisco, California. It facilitates electronic funds transfers throughout the world. Visa does not issue cards, extend credit or set rates and fees for consumers; instead, Visa provides financial institutions with Visa-branded payment products that they then use to offer credit, debit, prepaid and cash-access programs to their customers. Visa has operations across Asia-Pacific, North America, Central and South America, Caribbean, Central and Eastern Europe, Africa and Middle East. Visa’s industry is Financial Services which includes a broad range of organizations that...
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...Initial Public Offerings FIN/370 July 13, 2015 Professor Thomas Rietta Initial Public Offerings An Initial Public Offering is defined by investopedia.com as, “The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.” Initial Public Offerings can be considered very risky as numbers and value involved with trade are very unpredictable. In the following paper, we will discuss the roles of bankers, underwriters, originating house as well as the risks of all parties involved. “The investment banker is an expert in the issuance and marketing of securities. The investment banker might advise the firm to issue its bonds in a timely fashion to avoid the higher interest rates that are forthcoming” (Titman, Keown, & Martin, 2014). According to “Investopedia” (2015), “investment bankers may also arrange assistance to their clients such as mergers and acquisition advice, or advice on specific transactions, such as spin-off or reorganization.” “An underwriter is a company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. An underwriter works closely with the issuing body to determine the offering price of the securities buys them from the issuer and sells them to investors via the underwriter’s distribution network” (Investopedia...
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...Introduction In today’s society, devices such as the iPad, iPhone, and iPod have become standard household gadgets, and the company behind these products, Apple Incorporated (Inc.) has lead the way in computer innovation. Since Apple released its initial public offering (IPO) in 1980, the company has thrived in all aspects of its business and breaking records on the stock market. This paper will discuss Apple’s company background, analyze the implementation and evaluation of its IPO, and conclude with the reason behind Apple was chosen. Company Background Before becoming the largest technological company in the world, Apple Inc.’s humble beginning started in April 1976 as a small private computer company owned by three men, Steve Jobs, Ronald Wayne, and Steve Wozinak. The company originally focused on creating personal computers for the first 25 years of its existence until 2001 when Apple Inc. introduced the iMac followed by the iPod, iPhone, and iPad. Over the last decade, Apple started purchasing various software corporations, such as the music company Lala, the personal assistant Siri, and most recently, Anobit Technologies, to integrate their products into Apple’s new computer innovations. Today, Apple Inc.’s main business and operational activities continue to focus on producing and marketing computer electronics, computer software, and personal computers through 357 retail stores in ten countries and its online store (Anonymous, n.d.). Much of Apple’s...
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...Investment Banking and the Capital Acquisition Process Smith (1986) 1. Introduction This paper reviews the various methods firms use to raise capital and the effect these methods have on security prices. Firms can raise external capital by selling several securities which they market in different ways. In terms of the theory of corporate finance, capital markets play a vital role in a firm’s investment policies. Therefore, it is critical to have an understanding of the various contractual procedures in the process of raising capital. To provide us with this understanding, this paper will look at the theory and evidence related to stock price reactions around announcements of differing security offerings, the contractual arrangements associated with the marketing of corporate securities and incentives for under-pricing in initial public equity offerings. 2. On the corporation’s choice of security to offer When contemplating the type of security to issue, the corporation must consider the reaction of the market to its announcement. Four generalisations are made when looking at the two-day common stock price reactions to the announcement of industrial and utility firms raising capital with various securities – * average abnormal returns are non-positive; * abnormal returns around the time of the announcements of common stock sales are negative and larger in absolute value than those observed with preferred stock or debt; * abnormal returns...
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...Integrative Problems & Virtual Organization Strategy Paper There are mainly three options for expansion when a company is privately held and wants to expand their operation. This paper will discuss three specific options that a privately held company would have if they were to expand. First of those options would be to go public through an IPO or Initial Public Offerings. The second option would be to acquire another organization in the same industry in order to expand the business. The third and final option being to merge with another organization. With all three of these options having strengths and weaknesses, this paper will discuss some of the strengths and weaknesses of each and what opportunities may arise from each approach as well as the threats. Other things that this company may want to consider when looking to expand are the effects of globalization on the company's financial decision as well as the factors that contribute to exchange rate risks. Finally ending the paper with mitigating the exchange rate risk. Going Public through an IPO Taking a business public or better known as participating in an initial public offering is a process where the business is offered to the public by selling stock of the company. In turn, these stocks represent a partial ownership in the company to the individuals that purchase the stock. One common step in deciding whether or not to take a company public it is always best to speak with an IPO consultant to help determine the...
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...Integrative Problems and Virtual Organization Strategy Paper Integrative Problems and Virtual Organization Strategy Paper Fuller-Patton Community Hospital (FPCH) has been in operation since 1975. The management of FPCH would like to upgrade and expand its operations in the community. In order to do so, a large influx of resources would need to be obtained. There are a variety of ways FPCH could add to its resources in order to accomplish its vision. These include taking FCPH public by holding an Initial Public Offering (IPO), acquiring another facility out right, or merging with another facility. This will be to compare and contrast each of these resource opportunities and to ultimately decide on a course of action. Strengths of the Various Resource Opportunities As stated, FPCH has various opportunities to generate an influx of resources in order to be able to expand their operations. The first of these opportunities is to enter an IPO. An IPO is the initial sale of stock in the hospital to the public, basically making those who purchase stock partial owners in the company. An advantage to an IPO is there is an instant influx of cash resources into the business. This influx of cash can then be used to make the upgrades and expansions that FPCH is envisioning. In addition to the instant influx of cash, another benefit of an IPO is that it generates publicity for the hospital and can increase their market share because of the added exposure. Another avenue that FPCH is...
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...Analysts' Selective Coverage and Subsequent Performance of Newly Public Firms ABSTRACT This study examines the ability of analysts to forecast future firm performance, based on the selective coverage of newly public firms. We hypothesize that the decision to provide coverage contains information about an analyst’s underlying expectation of a firm’s future prospects. We extract this expectation by obtaining residual analyst coverage from a model of initial analyst following. We document that in the three subsequent years, IPOs with high residual coverage have significantly better returns and operating performance than those with low residual coverage. This evidence indicates analysts have superior predictive abilities and selectively provide coverage for firms about which their true expectations are favorable. ∗ Das and Guo are at the University of Illinois at Chicago, and Zhang is at the University of Hong Kong. We thank Eli Amir, Gilbert Bassett, Oleg Bondarenko, Konan Chan, Hsiu-lang Chen, Tim Kruse, Chao-Shin Liu, Malcolm McClelland, Roni Michaely, Tom Nohel, Ram Ramakrishnan, Cathy Schrand, Abbie Smith, Lenny Soffer, WeiLing Song, Robert Stambaugh (Editor), Steve Todd, Beverly Walther, Nan Zhou, an anonymous referee, and seminar participants at the City University of Hong Kong, Indiana University at Indianapolis, the London Business School, Nanyang Technological University, the Office of Economic Analysis at the U. S. Securities and Exchange Commission, Singapore...
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...Virtual Organization Strategy Paper Caroll Ulbrich, Erin Thompson, Latasha Smith-Tutt, Levi Williams, Samantha Ehrlich FIN/370 August 19, 2013 Richard Jenkins Virtual Organization Strategy Paper Kudler Fine Food is a very well known food store. The owner Kathy Kudler is thinking about going public through an IPO. There are four approaches that need to be looked at from the IPO stand point. They are strength, weakness, opportunity and threat. Strength When a private company is thinking about raising money in the financial market an initial public offering (IPO) has advantages. By going with an IPO Kudler generates revenue from the sale of shares of stock in the company. The owner has gained liquidity in their company. With Kudler going public, the company now has access to the public market in the future. It also opens up the possibility for higher growth. Kudler will also have a higher profile making it easier to get vendors for goods. Weakness One of the things that could be a problem is arbitrage. Arbitrage is a purchase is made with the expectation of selling for a higher value in different markets. Opportunity Kudler Fine Food would have many opportunities with going public with an IPO, A greater amount of capital would come from issuing of shares that are traded on the stock market. It will also help the amount of business that takes place at Kudler should...
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...After a careful study of what has been achieved within the current infrastructure of Gene One, the founding members of Gene One and the current board members are in agreement with the idea that Gene One is prepared and capable of becoming a public entity. Gene one has revolutionized the manner in which farmers preserve tomatoes and potatoes. Gene One is currently conducting research that will rapidly expand the crops that can benefit from Gene One’s gene technology that prevents crops from becoming diseased and is hopeful that their research will speed up the growth rate of multiple crops. The success that Gene One has had in eight short years has presented several questions concerning the strategic path of Gene One’s future. The path chosen is to move forward with its initial public offering. In this study I will examine the steps gene one will have to take in order to complete the initial public offering and to look at two companies and how they approached their initial public offerings. First, I want to show the steps Gene One must follow to prepare for its initial public stock offering: Step One Start planning well in advance, Gene One has set a goal of thirty six months which should give them plenty of time. Step Two Ensure your product is beyond the prototype phase before you proceed. Gene One is well beyond the prototype phase of the core products. Step Three Network. Get to know other entrepreneurs in your community and your industry who know the lawyers...
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...FIN 516 – Advanced Managerial Accounting IPO Paper The Fresh Market, Inc. June 9, 2013 Fresh Market, Inc. Company Overview The Fresh Market is a high-growth specialty retailer focused on creating an extraordinary food shopping experience for its customers. Since opening the first store in 1982, the company has offered high-quality food products, with an emphasis on fresh, premium perishables and an uncompromising commitment to customer service. The Fresh Market seeks to provide an attractive, convenient shopping environment while offering its customers a compelling price-value combination. As of October 28, 2010, The Fresh Market operated 100 stores in 20 states, primarily in the Southeast, Midwest and Mid-Atlantic United States (Nasdaq, 2013). The business is characterized by the following key elements: • Differentiated food shopping experience. The Fresh Market provides a differentiated shopping experience that generates customer loyalty and favorable word-of-mouth publicity. We combine fresh, carefully-selected, high-quality food products focused on perishable categories, with a level of customer attention that the company believes is superior to conventional grocers, and it strives to create a “neighborhood grocer” atmosphere. • Smaller-box format and flexible real estate strategy. The stores average approximately 21,000 square feet, compared to the approximately 40,000 to 60,000 square foot stores operated by many conventional supermarkets. Within this...
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...believes that if the company is to continue its growth of 40% each year, the company will have to go public with an initial public offering (IPO) within the next three years. The purpose for this paper is to review Gene One’s decision to become a public company. Taking Gene One public would be a new venture for the senior team members, who realize that, collectively, they have zero experience with IPOs. This paper looks at the issues and opportunities Gene One is facing, stakeholder’s perspective and ethical dilemma, the end-state goals, alternative solutions, a risk assessment and the optimal solution, and last implementation of the plan. Situation Analysis Issue and Opportunity Identification Gene One is a company that entered the biotech industry with groundbreaking gene technology that eradicated diseases in tomatoes and potatoes. In just eight short years, the company grew into the $400 million company that it is today. Past events that have led to Gene One current issues and opportunities are the fact that the company has grown at such a rapid pace that it outgrowing itself. Further, an increase in stock prices is indicative of the growing interest in the biotech industry. Don Ruiz, the company’s CEO, and the board of directors believes that if the company is to continue its growth of 40% each year, the company will have to go public with an initial public offering (IPO) within the next three years. Stakeholder Perspectives/Ethical Dilemmas The rights, interest...
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