What is an IPO and why is it such a big deal? Is this a good idea for JetBlue? Explain.
When a privately held company makes its stock available to the general public for the first time on a securities exchange, this is known as the company’s Initial Public Offering (IPO). The IPO can consist of an initial issue of either debt or equity. The IPO process is also referred to as a private company “going public”. There are numerous benefits associated with going public. IPO benefits include enlarging and diversifying a company’s equity base, allowing cheaper access to capital, improving public image, attracting better management and employees through stock options, enabling transfer of company ownership through mergers/acquisitions, and
The profit in 2001 was actually really good for the small airline, since it was right after 9/11 and the airline industry had collectively lost $9 billion that year.
While JetBlue was a profitable company they wanted to keep getting bigger and expand their business. They already had startup infused cash from investors totaling $175 million, but they wanted to continue their upward trajectory and offset portfolio losses. In 2002 they began looking at the possibility of going public. JetBlue was already a profitable company, showing they could make it as a small carrier by keeping costs low, and customers were happy they had a profitable business plan going forward, but they wanted to take the chance of becoming even bigger, so they decided to make plans for an IPO. Morgan Stanley, the underwriters for JetBlue, as well as JetBlue management had a price range for their IPO of $22-$24 a share. They had sizeable excess demand of 5.5 million shares, and the group believed the demand of the stock exceeded supply so they raised the IPO to $27 a share. The demand was so strong when it opened that the first shares actually sold for $32 a share, approximately 20% higher. By the end of day 1, shares closed up 66%; the biggest IPO jump that year. After the first day JetBlue had a market capitalization of $1.8 billion. Analyzing first day IPO numbers, and the infused cash