Introduction to Corporate Finance

12: Raising Long-Term Financing

to the volatility encountered by global listed equity markets over the same period. The US market share

of global IPOs has been in decline. According to research by Doidge, Karolyi and Stulz, the US share of

the worldwide IPO market (in terms of the number of IPOs) fell from close to 60% in 1990 to roughly

20% in 2007. More recent analysis by Ernst & Young^3 suggests the US still accounts for about 19% of

this market. Given its size and history, the US IPO market provides useful lessons for understanding the

domestic market. However, according to Ernst & Young, the Asia Pacific region (and China in particular)

has taken over as the leading region for IPOs, accounting for 56% of deals by number and 46% of deals

by value for the first half of 2015 (H1 2015).

12-3a PATTERNS OBSERVED IN THE US IPO MARKET

To the uninitiated, some quick facts about the US IPO market reveal some very interesting patterns:

1 The IPO market is highly cyclical. Over time, aggregate IPO volume shows a very distinct pattern of boom

and bust. Figure 12.3 on page 439 shows that the Australian market displays similar characteristics.

2 There is a tendency for firms going public in a certain industry to cluster in time. It is common to see bursts

of IPO activity in fairly narrow industry sectors, such as energy, biotechnology and communications,

and more recently, social networking companies. Perhaps the most famous of these industry IPO waves

occurred in the late 1990s, when the market witnessed an incredible boom in both the number of

Internet companies going public and the valuations assigned to them by the market. The Australian

market has experienced similar, albeit much smaller, industry IPO clusters. The recent mining industry

IPO wave is more unique to the Australian market, reflecting the importance of resources in this

economy. However, some of this activity has been masked by the reverse-listing phenomenon, which

occurred in the past decade. Via this process, many smaller mining and resource companies obtained

listed entity status by taking over Australian listed technology companies that were effectively shell

companies, since they had ceased trading during the technology bust in the early to mid-2000s.

example

In 1999 the short-term share-price increases for Internet-related IPOs had financial experts scratching their
heads, none more so than the 9 December 1999 debut of VA Linux. The US company went public with an
offer price of US$30 per share; after one trading day, the stock closed at almost US$240 per share. For
investors who bought shares at the offer price and sold them as soon as possible, the one-day return was
an astronomical 700%. Investors who held on for the long term did not fare as well. After the IPO, the stock
closed above US$240 only once, and it fell to an intraday low of 54 cents on 24 July 2002. By August 2011, the
company, now renamed Geeknet, Inc., saw its stock trading at less than 1% of its original IPO date value.

3 As recently as the early 1980s, investment banks targeted initial offerings almost exclusively at

individual investors, particularly at retail customers of the brokerage firms involved in the underwriting

syndicate. Since the mid-1980s, however, institutional investors have grown in importance, and they

generally receive half to three-quarters of the shares offered in the typical IPOs and up to 90% or

more of the hot issues.

3 Figures from Ernst & Young, Global IPO Trends Report. http://www.ey.com/Publication/vwLUAssets/ey-global-ipo-trends-report-2015Q2/$FILE/
ey-global-ipo-trends-report-2015Q2.pdf.

Jay Ritter, University of

Florida

‘Every single country

in the world has IPOs

underpriced on average.’

See the entire interview on

the CourseMate website.

Source: Cengage Learning

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