Mining the Prospectus

Sunder Ram Korivi

Success Factors: What makes a
good IPO

• A significant opportunity (Amazon)

• Fast mover, category leader
• Superior service
• Reasonable size of product market
• Relevant background of management
Success Factors: What makes a
good IPO/2

• Barriers to entry must be high

• Focussed company
• Sustainable growth for high valuation
• Strong brand identity
• Low operating costs to compete
Flop Predictor (Avoiding a Bad
IPO)

• No entry barriers
• Financial Chicanery
• History repeats itself
• Overly high expectations
• Insiders bailing out
Flop Predictor (Avoiding a Bad
IPO)

• Customers overwhelmed
• Abandoning a business that made it great
• The emperor has no clothes
• Prospectus makes you wonder…
• Small company with huge capital spending
Flop Predictor (Avoiding a Bad
IPO)/2

• If it doesn’t work on land…

• Trying to wed a land-based industry to net
 Five Phases of a Bad IPO

• Exuberance of IPO, Money to burn

• When Reality hits
• Frenzied efforts to stave off disaster
• Endgame, top executives bail out
• Punishment of the innocent
 Natural Law

• The forces of financial Darwinian-ism

always prevail
 IPO Investment Strategies

• Beware of seduction of internet metrics

• Know the flavour of the day
• Buy the leaders
• Buy when nobody else will
• Don’t be afraid to admit a mistake
 IPO Investment Strategies/2

• Don’t believe the hype

• Be sensitive to the overall market environ
• Understand the stage of development of co
• Suitability of business model to net
• Biotechnology phenomenon
Management Helps or Hurts an
IPO

• Who benefits from the IPO

• Other benefits and fees / perks
• Management experience and longevity
• Management track record
• Independence from controlling shareholders
Management Helps or Hurts an
IPO/2

• High share ownership by management

• Reasonable compensation
• Skilled independent directors
• Full time, independent executives
• Shareholder-friendly outlook
 After-market: 4 Scenarios

• Hot IPO. Wait for 3rd day after listing

• Pricey. Does not live up to pre-IPO hype
• Last minute bargain. Unlikely to trade well
• Deals that don’t trade well
 Trading Ideas for IPO allotted
shares

• Flip. Price may taper off permanently

• Sell before lock-in shares get saleable
• Margin calls (in bear markets)
 Mining the Prospectus

• Front Cover
• Prospectus Summary
• Offering
• Summary Financial Data
• Risk Factors
 Mining the Prospectus/2

• Use of Proceeds
• Management Discussion & Analysis
• Cash Flows
• Business
• Management & Control
• Certain Transactions
 Risk Factors - details:

• Accumulated Deficits, Ongoing Losses

• Customer Concentrations
• Lengthy Sales Cycle
• Product Acceptance
• Internal Control Problems
• Rapid Growth - constraints
 Risk Factors - details:/2

• Sole-source Contractors
• Geographical Concentrations
• Insider Transactions
• Litigation
• Fluctuating Results
• Key Executives
 Terminology:

• After-market
• Beauty Contest
• Breaking Issue Price
• Carve-out
• Class Action Suit
• Green Shoe Option
• Red Herring Prospectus
 Terminology:/2

• Flipping
• GARP
• Green Shoe Option
• Red Herring Prospectus
• Road Show
• Syndicate
 Going Public:

• Setting the Stage

• Board of Directors’ Meeting
• Process of Going Public
• The Morning After
Corporate Finance Literature/1
Stabilization
• Support price a reward for some
(Benveniste, Busaba, Williams - BBW,
1996)
• Compensates uninformed investors for
‘Winner’s Curse’ (Chowdhry, Singh - CN,
1996)
Corporate Finance Literature/2

• (T Jenkins & A Ljungqvist, 2001)

• Stylized Facts

• Under-pricing Syndrome
• Prices (taper off)
• ‘Hot Issue’ Period
Corporate Finance Literature/3

• Investor Behaviour: Optimism and

Pessimism. Impact on After market.
(Cornelli, Goldreich & Ljungqvist, 2006)

• Actions by Underwriters (K Lewellen,

2006)
Thank You