AcF350 Course outline

Department of Accounting and Finance

Lancaster University

AcF350 Career Skills in Accounting and Finance

Project Stream – Initial Public Offering

Autumn 2018

Course Outline
This course outline provides details of the taught element of AcF350, list core reading materials,
and sets out the detailed project requirements. Those electing to take this project stream will be
given an additional extensive list of supplementary suggested readings later.

1. Project topic
When a privately-held company decides to sell shares to general investors for the first time, it is
called an initial public offering (IPO). IPOs are often used when:
 closely-held companies need to raise fresh capital;
 founders and initial shareholders, e.g., venture capitalists, desire to cash in their stakes in a
company;
 governments want to privatize state-owned enterprises.

An IPO is among the most important corporate events. It brings noticeable benefits to the company
and shareholders, but also incurs considerable costs, both one-off and ongoing. More significantly,
it often involves a fundamental shift in a company’s relationship with its stakeholders, and has
ramifications to its corporate strategies.

An IPO is equally significant to investors, analysts, and investment banks. Investing in IPOs can
potentially bring excellent returns to investors, but may also expose them to considerable
uncertainty. IPO-related activities are one of major revenue sources of investment banks,
accounting firms, law firms and consulting firms. IPOs create new targets for financial analysts to
follow. At the macro level, a healthy flow of IPOs expands the breadth of stock markets, indicative
of their proper functioning in an economy, while a crowd of IPOs is symptomatic of overheating of
stock markets. Moreover, institutional knowledge, theories, and techniques of IPO and related
issues are essential to those who are aspired to a professional career in the financial industry.
2. Course overview
You will be required to attend five two-hour lectures. They will provide an introduction to
background, institutional knowledge, literature, and key analytical methods relevant to the project
stream.

During the duration of the project, you will:

 undertake independent research to develop commercial awareness in relation to the case
company;

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 search and review the academic, regulatory and professional literature on key aspects of
IPO;
 undertake and report research on key issues regarding the case company’s IPO pricing.

3. Course objectives
A primary objective of this course is to build on previous career skill developments in years 1 and
2. In particular, the following skills will be further developed: commercial awareness, the retrieval
and handling of information, planning and problem solving, ability to tackle complex and
unstructured issues, professional scepticism, time management, and written communication. A
secondary objective is to develop specialised knowledge in the area of IPO (focusing on financial
analysis and valuation), and to link this to existing and concurrently developing subject-specific
knowledge in the areas of corporate finance (AcF214) and professional ethics (AcF318).

4. Learning outcomes
 To develop commercial awareness skills in the context of an individual organisation
 To develop transferable skills such as:
o information search skills;
o information review, critical evaluation and synthesis;
o time management;
o analytical skills;
o written communication.
 To gain knowledge of the influences of key corporate characteristics on the design and
implementation of IPO.
 To understand and anticipate judgments and decisions (likely) made by market participants
and other stakeholders.
 To become familiar with various methods of pricing IPO shares.
 To gain knowledge and understanding of the key findings from relevant strands of the
finance and financial analysis literature.
5. Course Administration
The relevant materials will be discussed in five classroom sessions and six surgery sessions.
Surgery sessions will take the form of meeting about the assignment in the course director’s office.
The course director is Dr Shantanu Banerjee. His contact details are as follows:
Room: C8, Management School
Phone extension: 93200
Email: s.banerjee@lancaster.ac.uk
Surgery session hours:
Tuesdays: 10:00-12:00
6. General comments on readings and literature search
A list of core readings for each session is provided in the lecture outline below. The reading
material for this course comes from a variety of sources: academic and professional journal articles,
academic and professional books, and professional literature. A detailed list of supplementary
suggested reading will be provided to those that elect for this project stream. Students will be
expected to follow up on a selection of these readings, depending on the issues that they choose to
focus on in their project. They will also be expected to use search skills to identify additional
relevant material.

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How to ‘read’ the assigned (and self-discovered) materials

There are several core readings per session and you are expected to read these in advance of the
session. Core items may be read several times over the course of your project; each time you are
likely to be reading for a slightly different purpose and therefore will engage with different parts of
the item and get different understandings from it (as your own knowledge changes).

7. Lecture outline
This section outlines the topic areas covered in teaching sessions, together with a list of readings
(split into core and additional). Papers listed under core readings will be distributed in sessions.

Sessions 1: Background and basics of IPO

Introduce background and institutional knowledge concerning IPO activities. Demonstrate how to
obtain IPO information. Also discuss issues in writing up the project; highlight key requirements.

Additional reading and resources:

Professor Jay Ritter’s website (both academic papers and professional articles):
http://bear.warrington.ufl.edu/ritter/
Library guide: ‘Finding business news’, available at: http://lgdata.s3-website-us-east-
1.amazonaws.com/docs/1369/334098/Business_news_2011.pdf
Fisher, C. (2004). Researching and Writing a Dissertation for Business Students. FT Prentice Hall.
Walliman, N. (2004). Your Undergraduate Dissertation: The Essential Guide for Success. Sage
Publications: London.

Sessions 2-3: IPO literature

Review the academic literature concerning IPO motivations, timing, and underpricing.

Core reading:
Brau, J., and S. Fawcett. (2006). Initial public offering: An analysis of theory and practice. The
Journal of Finance, 61 (1): 399-436.
Additional reading:
Ritter, J., and I. Welch. (2002). A review of IPO activity, pricing, and allocations. The Journal of
Finance, 57 (4): 1795-1828.

Sessions 4-5: Understand and evaluate analyst reports about IPO

Understand analyst reports for IPO companies; identify, analyse, and evaluate key forecasts of an
IPO company’s future performance; revise forecasts and update pro forma financial statements;
develop critical thinking ability, professional scepticism, and awareness of due diligence.

8. Project requirement
In recent years there is a wave of IPOs by “new-age” companies, whose technologies and
businesses have profoundly changed our lives, and also challenged traditional players in the field
(please see the list at the end of the Outline). You are to take the role of a financial analyst in a
reputable investment bank and to prepare a report assessing the pricing of one (1) of these IPOs
(i.e., the case company). Your report is to comprise the following three sections:

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1. An overview of IPO (15%)

This section overviews the case company’s IPO. The topics may include, but is not limited to,
business model (how resources and capabilities are converted into value), industry and business
environments, strategy, organization and management, customers, corporate finance and
performance, stock market conditions, etc. Additional information may include the key features
of the offering, such as offering size, share allocation, and trading arrangements, etc.
2. A practitioner-oriented review on the IPO literature (20%)
In this section you will succinctly review the IPO literature, with the focus on the issues relevant
to the case company’s IPO. The review is intended for investors with sufficient business,
economics, and financial knowledge, not for academic readers. You are required to cover at
least four articles/books relevant to the case company’s IPO, of which at least one article must
be selected by yourself. Qualified articles can be from academic and/or professional journals,
but neither newspapers nor business magazines. Your review should synthesize the contents of
your readings, comment on common issues and/or conflicting points. Credits will be given for
identifying the practical implications of the contents of the readings for the case company, and
for phrasing the review in a way that is appropriate to your readers.
3. A critical evaluation of an analyst report on IPO (50%)
This section critically evaluates an analyst report issued for the case company shortly after IPO.
It is composed of:
a. A summary of key points raised by analysts. You need to paraphrase analysts’ points, not
to copy/phase; keep the summary concise.
Analyst report. Collect one analyst report about the case company shortly after the IPO
(from reputable brokerage houses; reasonable length, but not too long; make sure the
report contains pro forma financial statements). Analyst reports are available from Thomas
One (see the summer computer session slides for more detail; posted on Moodle).
b. Evaluation of at least two forecasts by analysts. Use quantitative and qualitative
information to substantiate your evaluation.
Forecasts by analysts. Analysts forecast a company’s accounting numbers in future years
(indicated by “E”), which can be found in pro forma financial statements in an analyst
report. A forecast concerns future and can be: (i) an accounting item, e.g., revenue, net
profit; (ii) a ratio calculated from accounting items, e.g., net profit margin, return of
equity; (iii) growth rates of an accounting item, e.g., revenue growth, profit growth.
Optional: You could examine forecasts over several years (when data is available).
Multiple years of the same forecast count as one.
Evaluation. In order to evaluate whether a forecast is reasonable (or too optimistic/
pessimistic), you may compare it with the case company’s own past, its competitor’s, its
industry’s average, or the forecast in another analyst report. You may also refer to key
points in Part (3.a) and/or relevant information in Part (1).
Optional: You may collect a second analyst report, and compare the first analyst report
with it in the evaluation.
Optional: You may supplement analyst reports with information from prospectus, news
articles, and the case company’s conference calls (preferably predating the IPO date).
c. Revision of forecasts. You will propose new forecasts for the two forecasts evaluated in
Part (3.b). At the most basic level, you can simply state whether the new forecast (e.g.,
revenue) would be higher/lower than the one made by the analyst. If possible, you can also
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use explicit assumptions and provide new numerical forecasts (show calculation in an
Excel worksheet and submit with the rest Excel appendices). Briefly explain why the new
forecasts are more appropriate than the ones provided by the analyst.
Optional: You may update the pro forma financial statements with new forecasts, and
revise any other item(s) that may be affected by new forecasts. Do for at least two years.
d. Conclusion. Summarize the key insights about the case company and comment on whether
the price movement after IPO is justified.
4. Bibliography and appendices (lack required elements will result in a loss of marks)
Bibliography (required): It should include all articles, books, and other outside sources cited in
your report, ordered alphabetically by the author’s last name. Follow the example in this outline
for the format of reference.
Appendix A (required): The front page from the analyst report(s) from which you use for Part
(3). The complete report should be submitted separately.
Appendix B (required): Show the pro forma income statement and balance sheet from the
analyst report, with at least one actual year and two forecasted years. If you evaluate ratios
(including growth rates) in Part (3.b), show the calculation of those ratios.
Appendix C (optional): The pro forma financial statements under new forecasts. Clearly
indicate which items have been updated with new forecasts, which have been revised because of
the updates, and which remain unchanged.
Use the excel templates on Moodle for Appendices B – C. All excel spreadsheets (including any
additional ones) should be put in a single workbook and submitted electronically.
5. Presentation and writing (15%)
The report must be written in proper English and with full sentences. It should be formatted
neatly and professionally, without excessive decoration.
You may discreetly use tables and figures to illustrate points and substantiate arguments.
However, they are not to substitute proper discussion and exposition in the main text. All tables
and figures should be numbered, and with captions and notes (when applicable).
All calculations and certain quantitative details (to be announced later) should be placed in
appendices and be referenced in the main text.
Optional: You may include an introduction (or executive summary) and/or a conclusion.
Word limit: 3,500, excluding tables, bibliography, and appendices.
Electronic submission only via Moodle (no hard copy is required for this topic)

9. List of IPOs
Choose one from the list as the case company. Click the company name to open the full prospectus
(internet connection is required)

First trading date

Name of IPO company Offer price ($) Ticker (DD/MM/YYYY)
Alibaba 68 BABA 19/09/2014
Groupon 20 GRPN 03/11/2011
Facebook 38 FB 17/05/2012
Snap 17* SNAP 02/03/2017
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Twitter 26 TWTR 07/11/2013

* From the exchange, instead of the prospectus.