JetBlue Airways IPO Valuation
In July 1999, David Neeleman announced his plan to launch a new airline that would bring “humanity back to air travel.” Despite the fact the airline industry had 87 new-airline failures in U.S. over the past 20 years. Neeleman’s plan convinced a group of investors and quickly raised $130 million from venture-capital community. This is the way JetBlue Airways established. With its strong capital base, JetBlue acquired a fleet of new Airbus A320 aircraft and focused on low-cost, point-to-point service to large metropolitan areas with high average fares or highly traveled markets that were underserved. This strategy brought JetBlue Airways an excellent position in the beginning phase. JetBlue Airways started to expand aggressively and remained profitable even after the terrorist attacks of September 2001 by insisting on its low-fare strategy. In April 2002, barely two years since established, JetBlue meet its initial public offering (IPO). The initial price range for JetBlue shares was $22 to $24, but facing sizable excess demand, the management increased the range as $25 to $26. After the whole process of IPO including SEC review and comments, roadshow, pricing, tombstone advertisements, JetBlue finally launched in NASDAQ at $27/share as initial pricing, closed at $45/share on the first day of trading. With the proper strategy in IPO process, JetBlue make a huge success on its IPO. Questions
Why JetBlue Airways can still remain profitable while most airline companies facing decline after 911 terrorist attacks? JetBlue had made significant progress in establishing a strong brand image as a safe, reliable, low-fare airline that was highly focused on customer service and enjoyable flying experience. In addition, JetBlue’s target market that focusing on large metropolitan such as New York, Florida, Buffalo is very efficient and well positioned. What are the important factors in the final IPO valuation?
First, the professional opinions from the lead underwriter Morgan Stanley is every important to JetBlue’s successful IPO. Second, the company’s excellent performance and profit give investors great confidence to invest their money. Third, the level of interest in the IPO expressed by investors& financial analyst way better than similar airline IPOs. Fourth, JetBlue’s roadshow convinced a lot of investors to believe that the company has a bright future and great potential. Why JetBlue accept $27/share as IPO price as they already know most IPO stock price will increase more than 25% percent? Why not $30? Or even more? In management’s view, a successful offering entailed not only raising the short-term capital needs, but also maintaining access to future capital and providing positive returns to the crew members and others involved in directed IPO share purchases. In addition, as an underwriter, Morgan Stanley need to make the IPO price underpriced, so it can increase its own profit margin. Recommendations
The company can still increase the initial price a little bit because its financial report and indicators are all excellent, so even increase the price to $30 per share would still be OK to attract enough investors. But $30 dollars would be the top limit cause in most cases, the IPO price range is $10 to $20. The higher price would lead to smaller profit gap and also hurt the underwriter’s profit which the company still needs to cooperate with during secondary equity issue. Lessons Learned
Narrow down your target market will be very helpful during business beginning phase. IPO pricing is an art, it’s not only about raising short-term money, but also long-term development. Roadshow is very important, it will not only attract potential purchasers during IPO process, but also helpfully improve price performance in the aftermarket. Remaining Questions
What are the advantages and disadvantages of going public? What is the best price/shares range for IPO price? The higher the better or the...
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