1. Identify an initial public offering (IPO) that has been announced and completed at least 3 years back (since 3-year post-IPO price performance is required).
2. Compute underpricing (1st day closing price - IPO price) / IPO price. Compare it with the market return on the IPO day.
3. Compare the stock performance with market (S&P500) performance over 3 year following the IPO. Download historic stock returns from yahoo. Draw a graph of compounded daily stock returns and compounded daily market returns from the 2nd trading day to 3 years after the IPO.
That is, 2nd day compounded return = (2nd day closing price - 1st day closing price) / 1st day closing price 3rd day compounded return = (3rd day closing price - 1st day closing price) / 1st day closing price Make sure that the prices are adjusted for dividends and stock splits (use adjusted closing price in yahoo).
Both the stock return and the market return should be plotted on the
same graph.
4. Collect and summarize relevant information (search for prospectus on SEC website) that was distributed to the public before the IPO. At the very least, include the following. Wherever possible, summarize using tables
• Sales, asset, and net income for the year before the IPO.
• 3-year growth (annualized) in sales, assets, and net income before the IPO
• What is the market capitalization of the firm based on IPO price?
• What is the value of the firm of the firm (assume book value of debt = market value of debt) based on IPO price?
• Compared to others in the industry, how big is the firm based on market cap?
• What is the amount of $ raised at IPO?
• What is the proposed use of these $? How much of it is being used by the firm to grow the business and how much of it is due to sale of shares by existing shareholders?
• How does the above compare with the assets already owned by the firm? That is, what asset growth can we expect in the IPO year?
• What type of IPO (firm commitment versus best efforts versus Dutch auction)?
• Was there any revision (upward or downward) in the offer price prior to IPO? If so, what reasons were given?
• What is the IPO price compared to final offer price range?
• How did the underwriters justify the offer price?
• Who are the underwriters of the IPO?
• Is the IPO firm funded by a Venture Capitalist or Private Equity group?
• What is the underwriting fee/share compared to net price/share received by the firm?
• What is the estimate of total transaction cost (including underwriting fee) as a % of cash received by the firm?
• Are management and VC selling their holdings?
• Were there other firms from the same industry that went public in the 12 months surrounding the IPO?