The effect leaving money on the table at IPO has on future performance for Tech companies

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Clarke, Darren
Issue Date
MBA in Finance
Dublin Business School
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The definition of a successful Initial Public Offering (IPO) is a point of fervent debate among analysts in the financial sector. Many analysts are of the opinion that a successful IPO is defined by the size of the IPO pop in price on the first day. Other analysts believe that if there is a large pop in price then money is left on the table as the company under prices the IPO and misses out on potentially raising more money. This is even more prevalent when a company is in a new industry like technology, social media or internet. Companies in these industries are new and often have no profits but a rapidly expanding user base with the possibility of large future revenues and profits. These companies are difficult to value using traditional revenue or profit based metrics. Therefore pricing an IPO is more difficult for these types of companies and their IPOs are often under priced in the hope of a pop. The purpose of this study is to investigate whether an IPO pop is beneficial in the long term to companies in aforementioned industries. This study focuses on the following companies that went public between 2011 and 2015; LinkedIn, Facebook, Twitter, GoPro, Alibaba and Box Inc. To implement this study, data was collected from the share price of each company after their IPO. Their performance is measured against one another and analysed in tandem with the amount that each company under priced their IPO. The results indicate that although an IPO is an important part of a company’s growth and has an impact in the short term, the longer term share price is affected by revenues, profits and growth prospects that are announced at earnings reports. Therefore leaving money on the table does not help share price performance in the long term.