Jetblue Ipo Pricing Essays

Jetblue Ipo Pricing Essays Jetblue Ipo Pricing Paper Jetblue Ipo Pricing Paper 1. Introduction An initial public offering (IPO) is defined as the first offering of shares by a private company to the public. A share is one of a finite number of equal portions of the capital of a company that entitles the shareholder to a proportion of distributed, non-reinvested profits known as dividends, and to a portion of the value of the company in case of liquidation. Shares can be either voting or non-voting, meaning that the shareholder may have the right to vote on the board of directors and thus the corporate policy (Draho, 2004). The money the private company raises through the issuance of shares is either transferred to the original investors of the company, used to pay-off existing debt, used to finance operating expenses, or, is used to fund future company projects. The ability to conduct an IPO efficiently and effectively encourages entrepreneurship and economic growth through increasing the availability of equity and lowering the cost of equity finance (Kleeburg, 2005). The following report introduces a generic process of an IPO without detailing specifics for an individual country or region. The advantages and disadvantages of choosing an IPO to raise capital is then discussed followed by an examination of the various pricing and allocation techniques that are commonly adopted in the IPO. The final section uses the 2002 IPO of JetBlue as a case study to demonstrate the accuracy and effectiveness of the discussed pricing techniques. 2. The IPO Process Jenkinson and Ljungqvist (2001) define 5 generic steps that are required to be undertaken in the process of raising equity through an IPO: Figure 2. 1 – Five generic steps undertaken in the process of an IPO Each of the 5 steps are briefly discussed in the following section paying particular attention to the role of the investment bank and the pricing and allocation decision. 2. 1. The Choice of Market It is important to note that the act of ‘going public’ has two distinct requirements: Investors who are willing to purchase the shares Exchange regulatory conditions that companies must meet Historically, the first aspect of finding investors has not been of great concern, however, given the increasing levels of integration of global financial markets companies are able to select the market that best suits their requirements. The choice of market is therefore essentially focussed on ensuring that there is enough depth within the market so that the company can raise the amount of equity required and that the company is able to comply with the regulations imposed by the stock exchanges and their regulatory bodies (Jenkinson and Ljungqvist, 2001). . 2. Producing a Prospectus The second stage of an IPO is the preparation and lodgement of a prospectus with the market regulatory authorities. A prospectus sets out the terms of the equity issue and provides information on the financial and management performance of the issuing company. It is used to ensure adequate information is provided so that investors can make an informed investment decision (ASX, 2008). Investment banks ar e usually engaged to assist in the preparation of the prospectus to ensure due diligence has been performed. Due diligence refers to the process of providing reasonable grounds that there is nothing in the prospectus that is misleading, and typically involves reviewing company contracts and tax returns, visiting company offices and facilities and interviewing company and industry personnel (Draho, 2004). This prospectus usually includes either a fixed price for the offer (where a predetermined price has been established) or an initial price range (a first ‘best guess’ on the price) that have been determined by the investment bank. With the latter technique the initial price range is usually modified throughout the remaining stages of the IPO (Brau and Fawcett, 2006). 2. 3. Marketing Having produced a prospectus, the next stage is marketing the issue to investors. This marketing can take place in a variety of forms and usually involves a road show, where the issuing firm and the investment bank conduct presentations to a high concentration of institutional investors. Where the offer price has already been established (i. e. fixed price offering) the main purpose of the marketing stage is to elicit bids from investors. Where an indicative price range has been given, the key purpose is to produce expressions of interest and thus begin the process of book building. Book building encompasses the collating of non-legally binding offers of price and quantity that is used to develop a demand curve and thus a more accurate price range for the subscription (Geddes, 2003). An important aspect that influences the marketin g technique is the role of the investment bank as the underwriter. Underwriting can be in the form of a firm commitment, where the investment bank accepts the risk of the issue by agreeing to purchase any securities that had not been subscribed, or on a best efforts basis, where the investment bank agrees to only use its expertise to sell the securities to the best of their abilities (Jenkinson and Ljungqvist, 2001). 2. 4. Pricing and Allocation Where a fixed priced is initially established, it is typical for either heavy over or under subscription to occur. In these cases, allocation methods such as pro rata allocation, retail investor bias allocation or random allocation are utilised depending on the policies imposed by the market regulators (Jenkinson and Ljungqvist, 2001). Where book building has occurred, if the issue is oversubscribed the allocation is typically based on either a common strike price (where a single price is quoted and allocation is based on the amount of information contained in the bid and/or the investor reputation), or, allocation and pricing starting from the highest bid downward until the issue demand is fully met (Draho, 2004). . 5. After the IPO Once the final pricing and allocation decisions have been made, trading in the shares usually commences within a few days. In some countries it is typical for the investment bank to be involved in a price stabilisation process where the principal purpose is to protect the downward price pressure once trading begins. This process of price stabilisation is usually linked with the granting of an over-allotment option (typically 15% of the total number of shares issued) which have usually been sold during the marketing process (Geddes, 2003). 3. Advantages / Disadvantages of the IPO Decision There are considerable advantages with obtaining equity through the IPO process. There are, however, some drawbacks that also need to be taken into consideration. Table 3. 1 outlines the key advantages and disadvantages as outlined by Fishman (1993). AdvantagesDisadvantages The partners can obtain a true value of the shares they possess in the companyThe market is extremely unpredictable and an unsuccessful IPO can result in a great loss of time as well as money for the company Partners can remove their signatures from the lines of credit and thus, are no longer personally liable to the creditorsThe ownership of the partners is dissolved and they become mere employees who are responsible to the shareholders and Board of Directors The overall financial condition of a company is improved as it brings in non-refundable moneyContinuous dealing with shareholders and the press is a time-consuming process A broader capital base gives the company more access to credit which gives the company an option to venture into new business opportunitiesShareholders judge the performance of the company on the basis of the profits and stock price and may cause managers to overlook the long-term strategic objectives Capital raised in an IPO can be used to pay off debt and t hus reduce the interest costs and enhance the company’s debt to equity ratioThe company needs to make nation-wide presentations about its performance to the interested shareholders, brokers and the investment bankers The value of the stock may see an upward trend thus increasing the initial investors financial wealthThe company’s continued success may bring a lot of close scrutiny by the public When a company goes public, it attracts the attention of the media and financial community thus providing free publicity and helps in creating a better corporate imageLarge amounts of fees and expenses are associated with a public company on a continual basis commissions, advertising costs, securities exchange fees etc. By going public and listing on a stock exchange it can directly foster public reputation in general Table 3. – Advantages and disadvantages of going public through the IPO process 4. IPO Valuation Techniques Deriving a value for an IPO is the critical par t of the process. In both fixed price and book building offers some form of initial price must be determined by the investment bank. The key methods that are used to determine the value of a company and thus the initial IPO price include (Geddes, 2003): Discounting Methods – based on a firms intrinsic value (future cash flows) Comparable Multiples Method: value based on similar publicly traded companies 4. 1. Discounting Methods Theoretically, the price of a share is derived by discounting all future cash flows that accrue to shareholders. These techniques are used throughout industry, however, they do suffer in practical application due to the risk associated with forecasting both revenue and expenses (Draho, 2004). The two most frequently used discounting methods include the discounted free cash flows (DCF) and a residual income model (RIM). 4. 1. 1. Discounted Free Cash Flows Free cash flows are defined as the cash flows from operations after investment in working capital and any capital expenditures. These cash flows are considered more appropriate than accounting earnings which include non cash items such as depreciation that cannot be used to pay shareholders. Cash flows are used to pay dividends and thus capture true value for the investor. These cash flows are then discounted using a risk adjusted rate. The rate is estimated either by using the capital asset pricing model (CAPM) for a 100% equity company or by calculating the weighted average cost of capital of the firm’s debt and equity (Geddes, 2003). 4. 1. 2. Residual Income Model The DCF model requires accounting earnings to be converted to cash flows. This is considered inappropriate as accounting values do not take into consideration the time value of money and may be subject to manipulation by way of accounting methods. The RIM is similar to the DCF method in that both methods use a risk adjusted discount rate. The RIM model, however, utilises the difference between the realised earnings and the expected earnings, where the expected earnings is the cost of equity multiplied by the start of period equity book value (Draho, 2004). 4. 2. Comparable Multiples This is the most common method used by investment banks to value IPO’s. Its fundamental approach is the comparison of ratios of companies that operate in similar businesses that possess the same characteristics of risk, current and future profitability and growth prospects (Geddes, 2003). There are number of ratios that can be used under this method, the most common being: Price/Earnings multiples Price/EBIT Market value/Book value Price/sales The successful application of this method lies in choosing an appropriate comparison company. One method used by practitioners is to select up to 10 company’s operating within the same industry and to use the group’s median multiple to value the issuer. The second and most common method is to select 3-4 companies that are direct competitors within the particular industry to the issuer. The third method is to use multiples of firms that have recently gone public assuming all issuers share common valuation multiples (Jenkinson and Ljungqvist, 2001). Comparable multiples is a popular method to value an IPO due to its simplicity and accuracy (Richardson and Tinaikar 2004). With the use of multiples there is no need to estimate the cost of capital, neither is there a need to depend on forecasted earnings and assumptions of valuation models. The use of multiples is supported by the idea that relevant ratios capture the markets estimate of risk and growth (Zarowin, 1990). 5. JetBlue Pricing Table 5. shows the results of utilising the techniques discussed in the previous section for determining the share price for the 2002 JetBlue IPO (for complete calculations see Appendix 1 and 2). The initial subscription price of the IPO was given by th e investment bank (in this case Morgan Stanley) at $22-$24 and this was revised to $25-$26 during the book building process. MethodShare Price ($) Discounted Cash Flow Free Cash Flows$94. 00 Industry Averages Price / Earnings Multiples$40. 38 Market Value / Book Value$115. 22 Price / EBIT$33. 13 EBIT Multiple Leading$38. 92 Competitor Averages Price / Earnings Multiples$97. 06 Market Value / Book Value$274. 54 Price / EBIT$88. 33 EBIT Multiple Leading$65. 10 Recent IPOs EBIT Multiple Leading$40. 37 Table 5. 1 – Share prices for the JetBlue IPO using the different techniques It should be noted that the JetBlue opening share price, this being the price of the stock at the end of the first day of trading, was $50. 30 demonstrating that the IPO was heavily underpriced. The price peaked in September 2003 at just above $90. 00. JetBlue’s current trading price is approximately $17. 21 (after adjusting its actual price of $5. 10 for the three 3:2 share splits and dividends distributed). This shows that there has been a significant loss since the shares began trading in April 2002 (for historical monthly stock price data see Appendix 3). This could reflect either changing market conditions since the IPO or inadequate pricing techniques used at the time of the IPO. Table 5. 1 demonstrates the wide range of share prices that can be achieved depending on the technique that is adopted. The free cash flows technique utilised Southwest Airlines data, assumptions for the airline industry and cash flows given from JetBlue management (see Appendix 1). This value was quite high but reflects high investor demand which took the share price above $90. 00. Of the comparable multiple techniques, the industry average and recent IPO methods reflect the first day closing price, whereas, the competitor average technique reflects similar results to the discounted cash flow technique. Recognising that the discounted cash flow method utilises data for Southwest Airlines that may not accurately represent JetBlue’s conditions, a sensitivity analysis was conducted (see table 5. 2). The four variables that were examined were the horizontal growth rate, the beta (a measure of company returns relative to market returns), the credit rating and the debt to equity ratio. VariableShare Price ($) Growth Rate Forecasted4%$94. 00 Optimistic5%$133. 44 Conservative3%$64. 18 Beta Forecasted1. 3$94. 00 Optimistic1. 1$149. 74 Conservative1. 5$52. 78 Credit Rating (spread) ForecastedBa (3. 00%)$94. 00 OptimisticBaa (1. 50%)$96. 37 ConservativeB (5. 0%)$90. 90 Debt / Equity Ratio Forecasted5. 0%$94. 00 Optimistic10. 0%$108. 03 Conservative2. 5%$86. 96 Table 5. 2 – Sensitivity analysis of share price for fluctuations in the growth rate, beta and credit spread Changes in the value of beta, the perpetual growth rate and the debt to equity ratio provide considerable variatio n in the calculated share price. Credit rating had little influence over the final value. As the premise of the discounting cash flow method is the forecasting of data, this sensitivity analysis demonstrates that caution should be used when relying on this technique given the uncertainty of forecasting information. 6. Conclusion In conclusion, the initial public offering (IPO) process involves a decision on which market is used to raise the funds, the preparation of a prospectus to meet regulatory conditions, marketing of the issuance to institutional investors and a pricing and allocation decision based on the type of subscription that is being offered (fixed price or book building). The key challenge for both the issuing firm and potential investors is the pricing of the shares. The two key techniques of discounted cash flows and comparable multiples, demonstrate that considerable variation in value can occur depending on the technique used. The reliability and accuracy of forecasted and historical data is also of considerable importance in ensuring accurate pricing. In order to overcome many of the disadvantages of an IPO, accurate pricing is paramount to ensure ongoing investor involvement. To draw any conclusion on the accuracy of techniques from this case study would be inappropriate, however, the complexities of the pricing decision has been quite clearly demonstrated. 7. Reference List Australian Securities Exchange. (2008, February 29). Listing on ASX. Retrieved April 23, 2008, from asx. com. au/professionals/listing/index. htm Brau, J. Fawcett, S. (2006). Initial public offerings: An analysis of theory and practice. The Journal of Finance, 61(1), 399-436. Draho, J. (2004). The IPO Decision: Why and How Companies Go Public. Cheltenham, UK: Edward Elgar Publishing. Fabozzi, F. Modigliani, F. (2003). Capital Markets: Institutions and Instruments (2nd ed. ). New Jersey, Prentice Hall. Fishman, L. (1993). Going public: The pro’s and cons. The Secured Lender. 49(4), 58-60. Geddes, R. (2003). IPO’s and Equity Offerings. Oxford, UK. Butterworth-Heinemann. Jenkinson, T. Ljungqvist, A. (2001). Going Public: The Theory and Evidence on How Companies Raise Equity Finance (2nd ed. ). United States: Oxford University Press Inc. Kleeburg, R. (2005). Initial Public Offering. Ohio, Thomson. Richardson, Gordon D, and Surjit Tinaikar. (2004). Accounting based valuation models: what have we learned? Accounting and Finance, 44(2), 223-255. Zarowin, Paul. 1990. What determines earnings-price ratios: Revisited. Journal of Accounting, Auditing Finance, 5(3), 455-457.

How to Begin Your Career in Architecture

How to Begin Your Career in Architecture As in any profession, the steps to be an architect seem simple, involve a lot of hard work, and can be filled with fun. Simply put, becoming an architect involves education, experience, and examinations. Your journey from student to professional architect will move through several stages. You begin by choosing the right school for you. Step 1: School Some people become interested in designing and building things while still in high school is a great place to start to become an architect. Since the 19th century when architecture became a profession in the United States, you have to go to college to be an architect. This is the 21st century. But, many paths can lead to a career in architecture. In fact, you can become an architect even if you earn a bachelors degree from a school without an architecture program. But its a little more complicated. What is called higher education comes at different levels - undergraduate and graduate. You can earn an undergraduate degree in most anything - English, History, Engineering - and then be admitted to a graduate program in architecture to earn a professional degree in architecture. So, you dont even have to decide if you want to be an architect until after you receive a bachelors degree. Going this route, a professional masters degree in architecture (M.Arch) may take an additional three years beyond your four-year degree. You can also become an architect with a professional undergraduate degree (B.Arch), which in many architecture schools takes five years to complete. Yes, its a five-year program, and you only earn an undergraduate degree. A vital area of architectural study is the Design Studio, which is hands-on experience that consumes a lot of time. For students less interested in becoming an architect but still interested in architecture, most schools also offer NON-professional degrees in architecture - without the Design Studio. It turns out there are plenty of opportunities for architecture majors as well as for professional architects. Choosing the school that best fits your needs is the first step. If you possibly can, begin your career in architecture while still in school. Consider joining the American Institute of Architecture Students (AIAS). Look for a part-time job related to architecture or design. Do clerical work, drafting, or crowdsourcing for an architect or designer. Consider volunteering for an emergency relief organization or charitable program that provides design services for those in need. Whether you are paid or not, the experience will give you the opportunity to develop your skills and build a strong portfolio. Hopefully youve chosen a school with an active alumni. Does your university sponsor alumni homecomings, bringing your schools graduates back on campus? Get your face out there among the established architects - whether these gatherings are called networking opportunities or meet and greet gatherings, mingle with the people that you will forever be associated with as alumnus of the same college. Alumni are also a great source for externships. Usually short-term and unpaid, externships can do a number of things for your career. Externships can (1) kickstart the experience section of your resume; (2) help you test the waters, observing a real work environment, without the pressure and stress of having to produce a product like a project or paper; (3) allow you to shadow a professional architect for a day or work week, getting a feel for the professional side of architecture; and (4) help you determine your comfort level in a small or large architectural firm. Louisiana State University calls their externship program a chance to Get out of town! The difference between an externship and an internship is found in the name - an extern is external to the workplace, and all expenses are usually the responsibility of the extern; an intern is internal to the organization and is often paid an entry-level wage. Step 2: Architecture Experience Yay! Youve graduated from college or graduate school. Most graduates work for several years as interns in a professional architectural firm before they take licensing exams and become registered architects. For help finding an entry-level position, visit the career center at your college. Also look to your professors for guidance. But, the term intern is on its way out.  The National Council of Architectural Registration Boards (NCARB), the licensing organization for architects, is highly involved with helping architecture firms mold neophytes into architects ready to contribute to a practice. Before you can even apply to take the test to become a registered architect, you have to have experience. What used to be called the Intern Development Program (IDP) is now the Architectural Experience Programâ„ ¢ or AXPâ„ ¢.  A beginning professional needs 3,740 hours of experience before earning a professional license. AXP certification is a requirement for initial registration to sit for the licensing exams. These required hours are associated with nearly 100 tasks  - for example, Review shop drawings and submittals during construction for conformance with design intent. How do you log experience?  Now theres an app for that  - My AXP App. How does NCARB help? Architecture firms are businesses and not schools - professional hours are best spent doing the business of architecture along with training new hires. NCARB helps the new graduate transition from being a student to becoming a professional without using some of a firms billable hours. Dr. Lee Waldrep, author of the Becoming an Architect book series, explains the value of this program when it was called IDP: In a recent discussion with an intern-architect a few years out of school, she confessed that while architecture school prepared her to think and design, it did not sufficiently prepare her to work in an architectural office. She further admitted that IDP, with its training areas, simply lists out what you need to do. Step 3: Licensing Exams In the United States and Canada, architects must take and pass the Architect Registration Examination (ARE) to receive a professional license in architecture. The ARE exams are rigorous - some students take extra coursework to prepare. A new set of exams, ARE 5.0, was implemented in November 2016. Although the tests are completely online, you cannot use your own computer. NCARB, the licensing organization that creates the test questions, works with Prometric test centers who administers the exams. Study for and taking the exams are usually accomplished during the AXP experience-gathering phase of a professional career. This can be the most stressful part of the process of becoming an architect - generally, youre not getting paid very much (because you are not a peak contributor to the architecture firm), preparing and taking exams is stressful, and all this comes at a time when your personal life is also in transition. Remember, however, that you are not the first person to go thro ugh these times. Step 4: Building a Profession After completing the ARE, some early-career professionals find jobs at the same firms where they first gained experience. Others seek employment elsewhere, sometimes in careers that are peripheral to architecture itself. Some architects start their own small firms after licensure. They may go it alone or team up with ex-classmates or co-workers. A strong career network will pave the way toward success. Many architects begin their careers in the public sector. State, local, and federal governments all hire architects. Generally, the jobs (and incomes) are stable, control and creativity may be limited, but your personal life that may have been put on hold can be reawakened. Lastly, its important to remember that many successful architects dont come into their own until they are into their 60s. When most people are set to retire, the architect is just beginning. Be in it for the long haul. Summary: Becoming an Architect Stage One: Complete an accredited professional architecture program at the undergranduate or graduate levelStage Two: On-the-job experienceStage Three: Pass the licensing exams - only then can you call yourself an architect.Stage Four: Follow your dream Sources Externships, LSU College of Art Design, http://design.lsu.edu/architecture/student-resources/externships/ [accessed April 29, 2016]History of the AXP,  National Council of Architectural Registration Boards, https://www.ncarb.org/about/history-ncarb/history-axp [accessed May 31, 2018]Architectural Experience Program Guidelines, National Council of Architectural Registration Boards, PDF at https://www.ncarb.org/sites/default/files/AXP-Guidelines.pdf [accessed May 31, 2018]Becoming an Architect by Lee W. Waldrep, Wiley Sons, 2006, p. 195