Jet Blue IPO Case

Jet Blue Airlines
JetBlue is a low cost airline that was incorporated in Delaware in August, 1998 .
JetBlues main idea was to offer low cost but comfortable services to the
customers through strategies like point-to-point travel.

This case analyses JetBlues decision to make their initial public offering(IPO)
months after the terrorist attacks of 2001. The initial price range for JetBlue
shares, communicated to potential investors, was $22 to $24. Facing sizable
excess demand for the 5.5 million shares planned for the IPO, management had
recently filed an increase in the offerings price range($25 to $26). JetBlues lead
underwriter was Morgan Stanley and the co-lead manager was Merrill Lynch &
Co.

Advantages and Disadvantages of an Initial Public Offering

Advantages:

1) A small company, which wants to further its growth, seeks an IPO to gain
the capital required for that growth. This acts as a distinct advantage.
The gained capital can be used for research and development purposes.
Some even use it to clear the previous debts if any. There is stock value
appreciation if the company performs well after going public. The prices
of the stocks tend to increase and attract more investors.

2) The publicity that a company gains through an IPO acts in the benefit of
the company in more ways than one. People get aware of the company,
especially if its a startup. The company targets future potential owners
through an IPO, which could help them establish themselves in the
market.

3) The company has access to financial market for future capital needs.
Once the company has gone public using IPO, it gets open to the public
and to the financial market as well to turn up to whenever required.

4) In addition to the better promotion and establishment of the company in
the market, the company gets attracts better personnel which may
including high level executives and officers. With a better team working
at the company, the company can expect better results which in turn
could increase the stock value of the company.

5) Once the company is public, there is increased exposure for the company
in every way. From facing new companies to releasing new products,
every aspect nurtures the company to grow more.

6) Liquid Equity is another great benefit of going public with your company.
When a company goes public, the shares can be used as or turned into
cash for various purposes such as paying debts, acquiring new business
and more.

7) Going public attracts lots of media spotlight. It attracts more investors,
personnel, people start to talk about the company more.

Disadvantages:

1) Going public is an expensive process, the costs of which can range from
$250,000 to $1 million. If a company has other ways to raise capital, they
often do not go public to save and eventually generate more capital. To
use an IPO, that much investment is required. If the offering is rejected,
then the invested amount goes to waste. So companies, especially the
startups have to think twice before going public. If its the offering is
accepted, it may go in their favor but it is a huge risk as well keeping in
mind the money that is involved.

2) A company is required to disclose all its financial information while going
public. Where all the expenditure has been used needs to be clearly
stated. Any wrong information in the same could lead to the offering
being rejected.

3) There is an increased risk of exposure of civil liabilities to public
companies, executives and directors for false or misleading statements in
the registration process.

4) It is not an easy process while registering for the offering keeping in ming
the legal process. Sometimes, the management of the company seeking to
use an IPO is not familiar with the whole process of going public, this may
cause problem both time wise and efficiency wise.

5) Public companies are often at risk of takeover attempts. Once a company
is public, it becomes open to the market in every way. It does attract
qualified personnel but it also attracts big companies, which are looking
to expand their company. The company going public, should have a
staggered board of directors as an anti take over measure.

6) Meeting the funding targets is another issue that comes up while going
public. There is a high risk that funding targets may not be met. If that is
the case, the company may have to stop the IPO process in between and
the money invested till then would be lost.

7) Once the company goes public, it attracts high officers and executives.
There are more people who want to become a part of the company
especially if the company is doing well after going public. There is a
chance that the company loses control over its employees and in general
in the market. From managing a startup to suddenly being so open in the
market can be a huge task for most companies.

Relative Valuation

P/E Multiple

With earnings per share of $1.14 and using the average P/E multiple of the four
major competitors of JetBlue, JetBlues price per share based on leading
financials would be $30 per share. Similarly using the trailing financials, JetBlues
price per share would be $36 per share.

Trailing Leading

PE
Multiple
PE
Multiple
AirTran 25.3 20.0
Frontier 8.4 45.9
Ryanair 44.0 34.1
Southwest 27.6 28.4
26.3 32.1
JetBlue's EPS 1.14 1.14
JetBlue share
price 30.00 36.61

Conclusion

From the analysis of the company using the Method of Comparables, it is
concluded that JetBlue airways IPO is significantly underpriced and should be
within the price range of $28 to $30. This range has been kept conservative to
make sure that the company enjoys the benefits of underpricing like generating
goodwill, access to future capital and targeting uninformed investors. The
current suggested price of $25 to $26 is hence inappropriate and would lead to
too many opportunities being missed.

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What are some of the advantages and disadvantages of an initial public offering (IPO) for a company?

What valuation methods did the case study use to determine an appropriate price range for JetBlue's shares?

Jet Blue Airlines

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