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Jetblue Initial Public offering (ipo)

Essay by   •  December 25, 2018  •  Case Study  •  1,080 Words (5 Pages)  •  60 Views

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Initial Public Offering

Offering shares of a private corporation to the public for the first time is called an initial public offering (IPO).  There are several advantages and disadvantages of going Public. Growing companies that need capital, and cannot merely rely on retained earnings will frequently use IPOs to raise money. Established firms may also use an IPO to allow the owners to exit part or all of ownership by selling shares to the public/market.


IPO Advantages

A public company can easily raise additional funds in the future through secondary offerings as it already has access to the public markets. About 1/3rd of IPO's make a follow-up offering.
Companies can compensate executives and employees through stock compensation. Liquidity of these shares makes them more attractive to employees and helps the company recruit and retain better talent. Merger and acquisition is easier for a public company that can use its shares to acquire another firm. It is easier to value the acquisition target if it is listed publicly and trade on the exchange.
IPO makes the company more accountable to SEC, for accurate financial reporting. This allows the company to get bank loans at more favorable terms(lower cost of capital).

IPO Disadvantages

There are several disadvantages associated with an IPO, and a lot many firms chose not to grow through the IPO route. Doing an IPO is costly. The estimated direct & indirect costs related to an IPO is approx. 20% of proceeds. Being public is a costly process as well. Quarterly financials imply a loss of confidentiality and perhaps unwanted competition. The costs of compliance are higher with increasingly complex regulations for listed companies. Fluctuations in share price can be a distraction for the management which is compensated and evaluated based on stock performance. Rigid governance by the board of directors, as a part of SEC compliance, can reduce the number of risky projects the firm can undertake. Public companies are often prone to legal actions and lawsuits, which are expensive and distracting.

IPO Process


The process of going public (selling publicly traded equity for the first time) is an arduous task that usually requires about three months.

  1. Selecting an Investment bank
    Firms have to generate a credible business plan, put together a qualified management team to prepare audited financial statements, performance measures, and projections. They also have to create an outside board of directors and develop relationships with investment bankers/underwriters, lawyers, and accountants. Sometimes, firms access their options with various investment banks before finalizing a lead underwriter. Essential characteristics of an underwriter include compensation package, track record, analyst research support, distribution capabilities, and aftermarket market-making support.

    2.
    Due Diligence and Regulatory Filing
    Red herring document: The underwriter creates an initial prospectus which consists of the details of the issuing company. Once the red herring document is created, the issuing company and the underwriters market the shares to public investors. Underwriters then go on road shows to market the stocks to institutional investors and evaluate the demand for the shares.
    During this time, the underwriter also forms a syndicate of other investment banks to support the issuer with initial sale. In addition to the syndicate members, dealers are also engaged to sell a certain number of shares on a best-efforts basis. The underwriter also files equity issuance proposal to SEC.

    3.  
    Pricing
    After the SEC approves the IPO, the issue date is decided.  One day before the effective date, the issuing company & the underwriter chooses the offer price and the number of shares to be sold. IPOs are often underpriced to ensure that the issue is fully subscribed/ oversubscribed by the public investors, even if it results in the issuing company not receiving the full value of its shares. If an IPO is underpriced, the investors of the IPO expect a rise in the price of the shares on the offer day. This increases the demand for the issue. Furthermore, underpricing compensates investors for the risk that they take by investing in the IPO.

    4.
    Stabilization
    After the stocks have been issued, the underwriter has to provide analyst recommendations, after-market stabilization and be a market maker. The underwriter carries out after-market stabilization in cases of order imbalances, by purchasing shares at even the offering price or below it.

Economics of the Airlines Industry

The Airline Industry is a capital Intensive, low margin industry, face by excessive competition and price-sensitive customers. Debt providers to the airline industry are rewarded for
their capital, usually invested with the security of aircraft asset to back it.
Stronger economic growth is pushing traffic ahead of capacity growth, but breakeven loads rising as unit costs grow significantly. Variability in fuel costs often adds to the industry woes, which cannot transfer the cost increase to customers. Infrastructure partners play vital role airlines provide to their customers, affecting the experience, the timeliness of the journey, and its cost. About 87 airlines have shut operations in the last 20 years.  

Jet Blue’s Strategy

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