The Management and Performance of Social Media Initial Public Offerings (IPOs): A Case Study Analysis

The Management and Performance of Social Media Initial Public Offerings (IPOs): A Case Study Analysis

Piotr Wisniewski (Warsaw School of Economics, Poland)
DOI: 10.4018/978-1-5225-0559-4.ch001
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Abstract

Social media companies have increasingly used global stock exchanges to raise fresh capital needed to expand and commercialise their business models. Despite the soaring proliferation of social media interactions and improving economic fundamentals, many of the high-profile IPOs have underperformed on debut and in secondary trading. This chapter seeks to identify success and failure factors of social media stock market flotations from the operational, industrial and financial perspectives. The research features flagship social media IPOs comprised by the most representative social media Exchange Traded Fund (ETF), the Global X Social Media Index ETF (SOCL), which replicates the price and return performance of the globally recognised Solactive Social Media Total Return Index. The analysis sums up the early evidence of IPO organisation with regard to social media issuers and posits three decisive factors in this process related to: flotation timing, pricing and pre-IPO business integration. The research offers some practical recommendations for future social media IPOs as well as directions for further academic studies at the interface of social media industrial, economic and capital market activity. The following takeaways concerning social media IPOs emerge from the study: 1) Staging and timing: social media companies should mull flotations when a clear-cut path toward cash generation and accrual profits is observable (chronically cash deficient and unprofitable social media tend to underperform on debut and in post-IPO trading) and amid protracted bull markets so as to raise the odds of a propitious IPO climate; 2) Organisation and management: the success of social media going public decisions is a function of seamless IPO organisation (including conservative pricing, share dilution tied to envisaged liquidity and capital expenditure as well as trading and clearing system reliability); 3) Issuer characteristics: social media IPOs are facilitated by businesses commanding a dominant position on the home market, having a diversified core business (including exposure to non-media operations), coming on the stock market either as industry trendsetters or in the wake of successfully executed IPO benchmarks; 4) Factor coalescence: no isolated factor discussed in this chapter can fully explain the performance of a social media IPO – it is rather their combination and interconnectivity that can comprehensively attest to the success or failure of a going public strategy employed by a social media company. From the investment standpoint, the case study analysis demonstrates that a case-by-case (rather than sectoral) approach needs to be adopted for investors seeking to derive gains from social media IPOs, as passive exposure to the entire industry (e.g. via index tracking) is not per se a guarantor of market competitive investment performance.
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Background

Social media are emerging as one of the most innovative segments of information technology. Despite opaque economic fundamentals and limited records of existence in the public market domain, the outlook for online creating and sharing user generated content is generally viewed as promising. Figure 1 summarises the key drivers of social media’s envisaged economic expansion.

Figure 1.

Key drivers of social media’s current and anticipated growth

Source: Own elaboration.

The history of social media as a commercial concept is limited (in practice dating back to the turn of the millennium). Initially, social media had been viewed as grassroots collective initiatives with modest business relevance. Gradually, the sector has attracted commercial attention in two major ways (or their combinations):

  • Social media as a facilitator of existing offline or online business operations, including the use of social media data in the investment management process (McGuire, 2013);

  • Social media as an investment asset per se (through exposure to individual equities, but also collective investment forms, e.g. mutual- and exchange traded funds).

Additionally, the asset management industry has recently begun to eye opportunities provided by the widespread take-up of social interconnectedness (Stratford et al. 2013; Radeljic, 2013). Accordingly, by far more strategic emphasis is necessary from this industry to commercialise social media channels (McGuire, 2013). In accordance with concepts posited by Bültmann et al. (2012) the learning curve of asset management organisations gradually embracing social media (as the new frontier of business origination and development) is passing through the following stages (synthesised in Figure 2.):

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