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    Jet Blue

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    Damian Arias
    This case examines JetBlue's decision in 2002 to price its IPO during a difficult time for the airline industry. It outlines JetBlue's innovative strategy and strong financial performance in its first two years. The task is to value JetBlue's stock and determine if the proposed $25-26 per share price range is appropriate. The case allows students to practice valuing early-stage companies using discounted cash flow and market multiple approaches. It also explores the costs and benefits of going public and anomalies associated with IPO underpricing.

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    Jet Blue

    Uploaded by

    Damian Arias
    455 views3 pages
    This case examines JetBlue's decision in 2002 to price its IPO during a difficult time for the airline industry. It outlines JetBlue's innovative strategy and strong financial performance in its first two years. The task is to value JetBlue's stock and determine if the proposed $25-26 per share price range is appropriate. The case allows students to practice valuing early-stage companies using discounted cash flow and market multiple approaches. It also explores the costs and benefits of going public and anomalies associated with IPO underpricing.

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    JetBlue-[1]

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    This case examines JetBlue's decision in 2002 to price its IPO during a difficult time for the airline industry. It outlines JetBlue's innovative strategy and strong financial performance in its first two years. The task is to value JetBlue's stock and determine if the proposed $25-26 per share price range is appropriate. The case allows students to practice valuing early-stage companies using discounted cash flow and market multiple approaches. It also explores the costs and benefits of going public and anomalies associated with IPO underpricing.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    455 views3 pages

    Jet Blue

    Uploaded by

    Damian Arias
    This case examines JetBlue's decision in 2002 to price its IPO during a difficult time for the airline industry. It outlines JetBlue's innovative strategy and strong financial performance in its first two years. The task is to value JetBlue's stock and determine if the proposed $25-26 per share price range is appropriate. The case allows students to practice valuing early-stage companies using discounted cash flow and market multiple approaches. It also explores the costs and benefits of going public and anomalies associated with IPO underpricing.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 3

    Case #28

    JetBlue Airways IPO

    Synopsis and Objectives

    This case examines the April 2002, decision of JetBlue management to price the
    initial public offering of JetBlue stock during one of the worst periods in airline history.
    The case outlines JetBlue’s innovative strategy and the associated strong financial
    performance over its initial two years. The task is to value the stock and take a position
    on whether the current $25–$26 per share filing range is appropriate. The case is
    designed to showcase corporate valuation using discounted cash flow and peer-company
    market multiples.

    The case provides opportunities for:

    • Review the institutional aspects of the equity issuance transaction.


    • Explore the costs and benefits associated with public share offerings.
    • Develop an appreciation for the challenges of valuing unseasoned firms.
    • Hone corporate valuation skills, particularly using market multiples.
    • Evaluate the received explanations of various finance anomalies, such as the IPO
    underpricing phenomenon.

    Suggested Questions

    1. What are the advantages and disadvantages of going public?


    2. What different approaches can be used to value JetBlue’s shares?
    3. At what price would you recommend that JetBlue offer their shares?
    JETBLUE AIRWAYS IPO VALUATION

    Evidence on IPO Underpricing

    Winner’s Curse. Uninformed investors’ demand rationed for good firms and not for
    poor firms due to informed investors’ participation in only good IPOs. Underpricing
    gives uninformed investors normal return.1

    Evidence: In countries where share allocation is transparent (e.g., Singapore and Finland)
    investors receive more shares of overpriced offerings such that average profits are zero.2

    Monopsony. Small number of underwriters following any particular industry allow for
    potential monopsony profits.3

    Evidence: In support, the severe average underpricing of 1980 was concentrated wholly
    among a few regional underwriters within the petroleum industry.4 Against support,
    underwriters that take themselves public tend to underprice themselves.5

    Lawsuit Avoidance. To avoid litigation for misrepresenting stock to shareholders,


    firms/underwriters discount initial price.

    Evidence: In support, offerings before the Securities Act of 1933 (which holds companies
    responsible for misrepresentation) tend to be less underpriced than offerings after 1933.6
    However, firms that are sued following their IPO tend to be just as underpriced as firms
    that are not sued.7

    Reputation. Firms better able to access capital markets in future if “leave a good taste”
    in investors’ mouth.8

    1
    Kevin Rock, “Why New Issues Are Underpriced,” Journal of Financial Economics, 15 (1986), 187-
    212.
    2
    Francis Koh and Terry Walter, “A Direct Test of Rock's Model of the Pricing of Unseasoned Issues,”
    Journal of Financial Economics, 23 (1989), 251-272; and Matti Keloharju, “The Winner's Curse, Legal
    Liability, and the Long-Run Price Performance of Initial Public Offerings in Finland,” Journal of Financial
    Economics, 34 (1993), 251-277.
    3
    David Baron, “A Model of the Demand for Investment Banking Advice and Distribution Services for
    New Issues,” Journal of Finance, 37 (1982), 955-976.
    4
    Jay Ritter, “The Hot Issue Market of 1980,” Journal of Business, 57 (1984), 215-240.
    5
    Chris Muscarella and Michael Vetsuypens, “A Simple Test of Barons's Model of IPO Underpricing,”
    Journal of Financial Economics, 24 (1989), 125-135.
    6
    Seha Tinic, “Anatomy of Initial Public Offerings of Common Stock,” Journal of Finance, 43 (1988),
    789-822.
    7
    Philip Drake and Michael Vetsuypens, “IPO Underpricing and Insurance Against Legal Liability,”
    Financial Management, 22 (1993), 64-73.
    8
    Franklin Allen and Gerald Faulhaber, “Signaling by Underpricing in the IPO Market,” Journal of
    Financial Economics, 23 (1989), 303-323; Thomas Chemmanur, “The Pricing of IPOs: A Dynamic Model
    With Information Production,” Journal of Finance, 48 (1993), 285-304; Mark Grinblatt and Chuan-Yang
    Hwang, “Signaling and the Pricing of New Issues, Journal of Finance, 44 (1989), 393-420; and Ivo Welch,
    Seasoned Offerings, Imitation Costs and the Underwriting of IPOs,” Journal of Finance 44 (1989), 421-
    Evidence: Little empirical support has been found for a relationship between
    underpricing and subsequent offerings.9

    Censored distribution. Underwriters correctly price on average, but stock stabilization


    efforts remove the left-hand side of non-stabilized first-day distribution of returns—
    leading to average positive performance.

    Evidence: A disproportionate number of IPOs have first-day returns of zero. IPOs with
    first-day returns of zero tend to experience negative returns over first month, suggesting
    they are temporarily held above their true value.10

    Bandwagon. If investors pay attention to IPO demand of other investors, bandwagon


    effects can create excessive demand for some offerings.11

    449.
    9
    Narasimhan Jegadeesh, Mark Weinstein, and Ivo Welch, “An Empirical Investigation of IPO Returns
    and Subsequent Equity Offerings,” Journal of Financial Economics, 34 (1990), 153-176; and Roni
    Michaely and Wayne Shaw, “The Pricing of Initial Public Offerings: Tests of Adverse Selection and
    Signaling Theories,” Review of Financial Studies, 7 (1994), 279-313.
    10
    Judith Ruud, “Underwriter Price Support and the IPO Underpricing Puzzle,” Journal of Financial
    Economics, 34 (1993), 135-151.
    11
    Ivo Welch, “Sequential Sales, Learning, and Cascades,” Journal of Finance, 47 (1992), 695-732.

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