April 2014 Newsletter Article

New Wayne State University Research Examines IPO “Ecosystem”

[Photo Courtesy Jonas Smith]

by Steven Townsend

When well-known companies prepare for an initial public offering (IPO) of their stock, the global markets stand up and take notice. While last spring’s IPO of Facebook disappointed many analysts and investors, it still raised $16 billion for the social media giant.

New research by Kun (Carl) Liu, an assistant professor of management at Wayne State University’s School of Business Administration, and his colleagues, reminds potential investors to use the wealth of information made available in the IPO process to also take a close look at those partners on which the IPO firm relies – the other companies in what he calls the IPO “ecosystem.”

Depending upon its specific uniqueness and structure, the relationship between the IPO firm and its “transaction partner” can actually generate more value for the market than the two firms can generate independently.

Sticking with the Facebook example, Liu and colleagues note that the company’s pre-IPO filings indicated a heavy reliance on revenue from social media gaming developer Zynga. As a result, Zynga shares soared 30 percent in the days following the release of Facebook’s Form S-1.

Potential investors must beware, however, as multiple dependent relationships can reduce the valuation effect for transaction partners. Conversely, overdependence by the partner on the IPO firm can lead to vulnerability for both entities.

Liu’s advice to analysts and investors alike is to follow the entire process with a cautious and critical eye.

“Be more careful when looking at these dyadic relationships,” Liu says. “Examine the strengths and weaknesses of the transaction partners as well as the IPO firm and be prepared to reallocate assets as new information becomes available.”

 

NOTE TO EDITORS: The article, titled “Information diffusion and value redistribution among transaction partners of the IPO firm,” is available online in the Strategic Management Journal here.