Pradas Hong Kong IPO A Case Study
Read the above documents and the IPO book (e-copy available on Blackboard) to answer the following questions. You may wish to use external references/material from credible sources (such as financial press, journal articles):
(i) An IPO marks a strategic milestone for a company.
(a) What may have motivated Prada (Stock code ‘1913’) to go public?
(b) Why do you think Prada chose to list on the Hong Kong Stock Exchange? Were there any downsides of a Hong Kong listing?
(c) Why do you think Prada chose to conduct its IPO in 2011?
(d) What can you say about the primary and secondary shares sold in the Prada IPO? How did Prada plan to use the proceeds of the IPO?
(ii) What is an IPO over-allotment (Greenshoe) option? Describe the over-allotment option included in Prada’s IPO?
(iii) The underwriting investment bank takes on a central role in the IPO process. (a) What are the key tasks executed by the underwriter? (b) What are primary considerations when selecting an underwriter?
(c) Often, multiple underwriters are involved. In the case of Prada, a syndicate of 4 underwriters was involved in the IPO. What are the main motivations for syndication?
(d) How much compensation was paid to the underwriters of Prada? How does it compare to the average compensation paid to underwriters in US IPOs?
(e) What do you understand by ‘price-stabilization’ activities conducted by the underwriter(s)? Do you think the underwriters were involved in price-stabilization of the Prada IPO?
(iv) Describe what happens during ‘book-building’ of an IPO. What price range was used for book building of the Prada IPO? Why do you think Prada priced its offering at the bottom end of the book-building range?
(v) Without conducting formal valuation analysis and based on the information given in the case study and the IPO prospectus, discuss the pricing of the Prada IPO. Would you have invested in Prada at this price?
(vi) What are IPO lock-up agreements? Describe the lock-up agreement of the Prada IPO. How was the Prada lockup agreement different from that of other markets such as the US?
(vii) The diagram below shows the performance of Prada shares from June 2011 to June 2014. The first day of public trading of Prada’s shares was 24 June 2011. Shares were sold in the IPO at an offer price of HK$ 39.50. More information on daily share price movements is available in the Excel file (1913.HK share price).
Source: Yahoo Finance 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 Prada\’s share price performance (HK $)
Based on a visual examination of the chart above, how does the performance of the Prada IPO compare with average IPO performance documented by past empirical studies
i. in terms of the short term (1st trading day or the first week of trading)?
ii. and over the longer term (3 years)? Past studies have suggested a number of explanations for short-run underpricing and long-run underperformance of IPOs. Discuss the ones which you think are relevant to Prada’s case?
(viii) In the light of the main theories of capital structure, provide a discussion of the evolution of the capital structure of Prada in the initial three years after its IPO. You will find Prada’s Annual Report 2013 helpful in answering this question.