Financial Management in Companies and Their Floatations onto the Stock Exchange - Case Study Example

FINANCIAL MANAGEMENT – STUDY OF 3 COMPANIES AND THEIR FLOATATIONS (IPO) ONTO THE STOCK EXCHANGE Table of Contents Table of Contents 2 Introduction 4 About the companies and its products and services 4 Build-up to the Floatation (IPO) onto the Stock Exchange 6 Groupon Inc. IPO 6 LinkedIn Corporation IPO 7 Angie’s List, Inc. IPO 8 Media Comments 9 Facebook IPO 10 References 12 Introduction For any company, Initial Public Offerings (IPOs) are a means of going public. Going for IPO is considered as one of the most vital decision to be taken by a company in its lifetime. Through IPO, companies intend to raise money by offering shares for the first time to the outsiders (Espinasse, 2011, p.1). Recently, Groupon, LinkedIn and Angie’s List decided to go public and released their IPOs. ‘Facebook’ has also filed its IPO recently. These are US based high profile internet companies and are running successfully worldwide. There are lot of benefits as well as some challenges too that are to be faced by companies going public. About the companies and its products and services Groupon: Groupon is a daily deal website, headquartered at Chicago, IL, US and was launched in November, 2008. Groupon is an e-commerce marketplace. It provides a link between the local merchants and consumers. The goods and services are offered at a discounting rate to the consumers. Groupon is a means of advertising through internet where local merchants can attract customers in order to facilitate selling of its goods and services. Consumers are informed about the daily deals through emails, websites and mobile applications. These daily deals are about, what the consumers can do, see, eat or buy in their local markets where they live. One coupon named, ‘Groupon’ is offered everyday in each of the markets where it serves. The ‘Groupon’ is like an assurance contract which requires a minimum number of people to sign up for the deal or offer before it is available to everyone, or else the deal gets lapsed for the day. LinkedIn: LinkedIn Corporation is a social networking website which is mainly meant for professional business purposes. It is headquartered at Mountain View, California, US. LinkedIn was launched in May, 2003 and its website is available in different languages like English, Spanish, German, Italian, Japanese, etc. It provides a leading service in professional networking globally. An individual can post their profile in LinkedIn website and then they can use different tools available in the site for accessing different services. These services include, opportunities for searching jobs, recruitment of candidates searching for job, search for partners, suppliers and customers, finding expert advice, etc (Yoffie, Slind & Achsaf, 2008). Through LinkedIn, registered users can maintain their contact details of users with whom they are related to each other. Sponsored advertising facility is also available in the site. The subscribers or members can also form groups which provide a platform for group discussion on various topics, mainly related to employment and career opportunities. Angie’s List: Angie’s List, Inc. is a US based company headquartered at Indianapolis, Indiana, US. It maintains a huge database of reviews made by customers. Angie’s List provides services that are consumer driven and requires membership fees. Customers give online reviews on the services provided by different companies and then grading of these companies is done by Angie’s List based on different criteria like, price, professionalism, quality, etc. From the reviews and grades provided, customers get to know more about services in the areas of architect, plumbing, medical, automobiles, etc (Green Watch, n.d.). Only the top graded companies in Angie’s List are allowed to advertise. Build-up to the Floatation (IPO) onto the Stock Exchange Groupon Inc. IPO Groupon Inc. decided to go public for the first time and launched its IPO during November, 2011. It got listed in NASDAQ stock market with the ticker symbol “GRPN”. Groupon planned to offer 30 million shares. The price range was expected to be $16 to $18 per share. Morgan Stanley, Goldman Sachs and Credit Suisse were amongst the leading book runners for this IPO. In the road of going public, Groupon organised road shows for the launch of its IPO during October, 2011. Road show presentations were made in front of potential investors by the executives of Groupon, led by CEO Andrew Mason. Key areas highlighted in the road shows by Groupon were its business model, competitive edge over its rivals and its sound financial health. Finally Groupon set its IPO price at $20 per share, well above the price range that was decided earlier. This pricing was done with the expectation that Groupon will be valued at $13.7 billion and will raise $700 million by floating 35 million shares which is around 5% of its shares. In the first trading day on November 4, 2011, initially the share prices of Groupon rose sharply before settling down at a price of $26 per share or at a valuation of $16.5 billion. The 14 underwriters were paid $42 million, led by Morgan Stanley who received $17.4 million. Hence, the underwriters earned a tidy amount of money compared to the money raised in the IPO, which is around 6% of the money raised. LinkedIn Corporation IPO LinkedIn Corp. launched its IPO during May, 2011 and its shares were first traded on May 19, 2011. Its shares are traded in the New York Stock Exchange with the ticker symbol “LNKD”. Through its IPO LinkedIn proposed to offer 7.84 million shares, which is around 10% of its shares. Its prices were expected to be in the range $32 to $35 per share. LinkedIn expected to raise $175 million as proceeds from this IPO. Morgan Stanley, Merrill Lynch, Allen & Co. and UBS Securities were amongst the leading book runners of this IPO. On its way to the IPO, LinkedIn started its road shows, reaching out to people globally. Expecting to get valued around $3.3 billion, LinkedIn developed a video road show which presented its rising profitability, accelerating growth, etc. LinkedIn’s increasing cash profitability was also highlighted in their road shows. Finally, the price of IPO was set at $45 per share, which was a considerable increase in price from the proposed IPO price range that was set initially. With this LinkedIn was supposed to raise share capital worth around $350 million, which is double the amount proposed earlier. This meant LinkedIn would be valued at more than $4 billion, following the IPO. On the first day of float, share prices of LinkedIn rose 109% of its IPO price and closed at $94.25 on November 19, 2011. This helped LinkedIn to be valued at around $10 billion. Thus, LinkedIn managed to raise $353 million through its IPO and the book runners charged about 8%, which is around $30 million as IPO fees. Angie’s List, Inc. IPO Angie’s List Inc. was all set to launch its IPO during November, 2011. It decided to trade their stocks in NASDAQ stock market with the ticker symbol “ANGI”. BofA Merrill Lynch, Pierce and Fenner & Smith Incorporated were amongst the leading book runners for the IPO. Angie’s list decided to sell 8.8 million shares in the price range of $11 to $13 per share. Out of these 8.8 million shares, 2.5 million shares were to be sold by existing shareholders. It meant Angie’s List decided to offer about 16% of its outstanding stock through this IPO. Angie’s List organised several road shows on its way to the launching of its IPO. The company was experiencing a tremendous growth but its operating expenses also went up at a higher pace. Angie’s List adopted an aggressive market growth strategy. It needed money to meet up their marketing and other operating expenses, for which they decided to go public. The IPO was meant to fund advertising and increase membership. The final IPO price was set at $13 per share and 8.8 million shares were in offer in the IPO. It meant Angie’s list raised $114 million through this IPO. On the first day of trading on November, 17, share prices of Angie’s List rose sharply before settling down at a price of around $16 per share. This implied Angie’s List was valued at around $802 million at the close of first day’s trading. The book runners charged around 7% of the money raised through the IPO. Hence, it can be concluded that the IPO of these three companies were underpriced, with LinkedIn IPO underpriced the maximum by its book runners. It is a lost opportunity for the companies to raise higher share capital. The book runners were paid lump sum amounts ranging around 6% to 8% of the raised share capital by each of the companies. Overall these three e-commerce IPOs can be considered a great success. Media Comments Here are some of the media comments on the launch of IPOs by Groupon, LinkedIn and Angie’s List: According to a news report by Bloomberg on the first day of trading of Groupon shares, it was a float of record low percentage of the total outstanding shares amongst all the internet companies in US and it did so to stoke the demand of its shares. The news report further commented on the significant rise in the share price on the debut day of trading as the result of optimism about Groupon being the leading company in online coupon market. It helped to suppress the fact about increasing high costs incurred by Groupon (Spears & MacMillan, 2011). According to another news report by Reuters, it expressed concerns about the steep rise in Groupon share price on its first trading day and considered it to be a short term phenomenon. The share prices may go down after the 6 month lock-up period is over. Groupon’s business model is questionable and there is a huge competition from Amazon.com Inc. and Google Inc., who are Groupon’s better funded rivals (Baldwin & Barr, 2011). According to Reuters, in one of its news article raised concerned about the success of LinkedIn IPO because of the underlying risks involved. One of its biggest risks may be LinkedIn betting about its growth in the future in spite of not being profitable according to US-GAAP principles, in the year 2011 (Selyukh & Baldwin, 2011). In one of its news articles published by Reuters, it forecasted a declining price of the stocks of Angie’s List. Although the stocks resulted in a whopping 44% rise on their debut in the market but there was a concern regarding the sustainability of this momentum. It is because Angie’s List was yet to record a profit until September, 2011 (Shah, 2011). Facebook IPO Facebook is a multilingual social networking website. It is headquartered is at Menlo Park, California, US. It was launched in February, 2004. Mark Zuckerberg is credited to be the founder of Facebook. Recently Facebook decided to go public and filed its IPO on February 1, 2012. Facebook IPO can be regarded as one of the most anticipated event in Wall Street in the year 2012. Allen & Co, Morgan Stanley, J. P. Morgan, Goldman Sachs and Merrill Lynch are amongst the leading underwriters for this IPO. The underwriters and bankers are set to charge very low fees of about 1.1% of the amount raised as share capital through this IPO. Facebook IPO will help the company to raise capital amounting to $5 billion. That means the bankers are about to receive around $55 million. The fees charged by the bankers are low in percentage terms as compared to other IPOs released in recent times. It is so, may be because of the absolute value being a hefty amount and also because of the reputation of Facebook. Facebook is already a highly valued company worldwide and the bankers have to do very little to add any further value to it. Facebook is having a significant growth in its profitability over the past few years. There is a great expectation that this IPO will mean Facebook to be valued at around $100 billion. Hence, with a market capitalization of $100 billion and its net profit or earnings of $1 billion, the P/E ratio comes to 100. Even if the facebook earnings were to increase by 40% by Q1 2012, the P/E ratio would still be 71, which is quite high. It means investors would expect a huge growth of Facebook in future as it has been going good for the past few years. References Baldwin, C. & Barr, A. (2011). Groupon shares surge but concerns linger. Reuters, [Online] 4 Nov. Available at: http://www.reuters.com/article/2011/11/04/us-groupon-finalpricing-idUSTRE7A27TG20111104. [Accessed on March 22, 2012]. Espinasse, P. (2011). IPO: A Global Guide. Hong Kong: Hong Kong University Press. Green Watch. (no date). Angie’s List. [Online]. Available at: http://www.green-watch.org/green-business/eco-business-profile.cfm?businessID=449&locationID=17786. [Accessed on March 21, 2012]. Selyukh, A. & Baldwin, C. (2011). LinkedIn IPO prices at $45 per share, but risks real. Reuters, [Online] 18 May. Available at: http://www.reuters.com/article/2011/05/18/us-linkedin-ipo-risks-idUSTRE74H0TL20110518. [Accessed on March 22, 2012]. Shah, A. (2011). Angie’s List soars on debut, but concerns linger. Reuters, [Online] 17 Nov. Available at: http://www.reuters.com/article/2011/11/17/us-angieslist-idUSTRE7AG05C20111117. [Accessed on March 22, 2012]. Spears, L. & MacMillan, D. (2011). Groupon surges in trading debut after IPO prices above range. Bloomberg, [Online] 5 Nov. Available at: http://www.bloomberg.com/news/2011-11-03/groupon-said-to-raise-700-million-after-pricing-its-ipo-above-price-range.html. [Accessed on March 22, 2012]. Yoffie, D. B, Slind, M. & Achsaf, N. (2008). LinkedIn Corp., 2008. [Online]. Available at: http://hbr.org/product/linkedin-corp-2008/an/709426-PDF-ENG. [Accessed on March 21, 2012]. Read More