2011

Written by and property of Gwenny Loman & Renée Pelk

“Relevant criteria in firm’s environment affecting IPO decision”

BRM Project – IKEA + IPO

Abstract
This research is aimed at developing a new model that should be able to determine for each privately owned company whether going public is a possibility for attracting new capital. Research upon IPOs resulted in variables of which a conceptual and hypothesized model were created. A meta-analysis and case study should determine the relevance and reliability of the model. Thereafter, a final model can be composed which can be applied to IKEA Group, our target company for the research, in order to obtain the final result; IKEA Group is qualified for an IPO, or not.

Table of contents

Introduction II

1. Rationale 1
2. Situational Analysis 2 2.1 Initial Public Offering 2 2.2 Advantages 3 2.3 Disadvantages 3
3. Theoretical Background 4 3.1 Initial Public Offering 4 3.2 Product market characteristics and performance 4 3.3 Industry characteristics 5 3.4 Initial underpricing 5 3.5 Hot and cold markets and IPO waves 6 3.6 Long-run performance 6
4. Conceptual Model 8 4.1 Hypotheses 9 4.1.1 Hypotheses Independent variables 9 4.1.2 Moderating Variables 9
5. Research design 11 5.1 Unit of analysis 11 5.2 Meta-analysis 11 5.2.1 The hypothesized model 11 5.2.2 The implementation 13 5.3 Case study 15 5.4 The implementation of the results 15
Bibliography 16
Appendices 20

* * Introduction
Introduction
The consideration of undertaking an IPO is one of the most important and one of the most difficult processes in the lifecycle of a firm. What are the main drivers for a firm to go public, and which trade-offs does this decision entail? In surveys, the most frequently referred motive for going public is to create optimal access to capital markets in order to obtain new finance opportunities (Roëll, 1996). As IKEA has accelerating expansion plans for the near future and the long-term, attracting new/additional capital might become necessary for them.
The decision to offer public equity, through an initial public offering (IPO), for the first time has generated considerable theoretical analyses. However, empirically it is one of the least researched matters in corporate governance. The lack of academic studies on this fundamental restructuring choice, as well as the recognition of this issue in the current financial press and among practitioners motivated us to explore which factors determine whether a privately held firm reorganizes via an IPO. Therefore, we are, in particular, interested in the effects of several criteria within the environment of a company on the ‘going public’ decision.
The nature of proof in this research is both explorative and descriptive. The first part of the research is composed with explorative proof, since we only made use of secondary data. The data is only describing scientific analyses regarding IPOs, after which a clear problem has been defined. By making use of this approach we determined which of the subjects were of extreme caution. Studying scientific literature in the analysis phase of this paper gave us the necessary framework of knowledge to base this research on. Naturally, contemplating all the information brought new fields of understanding. The second part of the research is constructed with explorative and descriptive proof. It describes both data and characteristics about the phenomenon being studied. The data and characteristics are tested through a meta-analysis and a case study. The cross-check enables us to draw better and more reliable conclusions. The objective of this paper is to develop a model, which shows the criteria that a company must meet, and gives an insight about the successfulness of an IPO, when a company considers to raise capital by changing ownership structure from privately-owned to publicly-traded. Therefore this paper addresses the question: What are the most relevant criteria of the firm’s products market characteristics and performances, and the industry details. Beyond the fact that we know that firms start out as a small company and decide at some point to go public, we know relatively little about the factors within the company’s environment that determine the successfulness of the ‘going public’ decision. So, we want to claim certain factors; which are criteria one has to pay attention to, when considering a capital growth strategy. A thorough understanding of these environmental factors underlying the going public decision is important not only for the firm’s viewpoint, but also for the exchangers.
Due to the lack of access and time, we were not able to obtain and evaluate primary data. The research upon IPOs is a rather complex and difficult investigation, because of the confidentiality of firms and underwriters, and the lack of data from companies before undertaking an IPO. Therefore, this research only incorporates and is limited to secondary research.

* The Research

1. Rationale
IKEA Group plans to expand its business to Asia. According to their chief executive, IKEA Group plans to continue the acceleration of its expansion on the Chinese market; IKEA has this target at 17 stores by 2015. Since 2008, it has opened 10 stores around China and during the past 2 years it has been proven that their business model of building their own stores does work there (Bloomberg News, 2010) (Want ChinaTimes, 2011). In addition to this expansion, the aim of IKEA Group is to triple the number of staff members by 2015. The executive manager adds that their expansion plans ‘Go West’ after 2015 (CIIPA, 2011).
The expansion of a company is a costly process. Therefore, it is necessary to create an understanding of the challenge to raise additional/new cash to finance these required capital expenditures in order to expand the business. Normally companies deliberate an ample of financing options before they even think about considering going public. The most common way to raise additional capital is by attracting debt . Besides, for many companies the seeking of alternative funding sources, private placements or venture capital may also prove of interest (Deloitte, 2010).
IKEA Group’s financial report of FY10 (2011) shows there is 44.7% debt in relation to equity, which provides a debt-to-equity ratio of 80.7%. However, the Home Furnishings & Fixtures industry average is 54.5% (IClub Central, 2010). Relying exclusively on debt rather than equity, can be a high-risk strategy for growth companies (PhillipCapital, 2010). By incurring debt, the company is subjected to potential significant financial obligations. A downturn in your business or an increase in interest rates could make it difficult to meet your payments (Deloitte, 2010, p. 4).
The combination of the three first paragraphs and their mentioned facts, creates the conclusion that the best way for IKEA Group to raise additional/new capital could be issuing equity. One way of doing this is changing IKEA’s ownership structure from a privately held firm to a publicly traded firm.
There are millions of private companies throughout the world. Very few of these private companies will graduate to the major league of publicly held businesses (Evans). According to Pagano et al. (1998) cross-sectional and cross-country dissimilarities signify that going public is not a stage that all companies eventually reach, it is merely a choice. Therefore, it should be understood why some companies decide to use the public equity market to raise additional capital and why others do not. As a result, this study analyses whether the strategic business decision; ‘going public’, by undertaking an Initial Public Offering (IPO), could be a successful solution to raise new capital for IKEA International’s expansion plans.
In a nutshell, an IPO can be defined as the moment at which a formerly private company converts itself into a publicly traded business by offering its shares to the general investing public (IPOInfo) (PhillipCapital, 2010). The main argument to go public should be to initiate a growth of the business through increased capitalization (Evans). Nevertheless, this on itself does not justify IPOs, since bank loans or private equity placements could equally-well fulfil the need for funds (Benninga, Helmantel, & Sarig, 2005, p. 116). Hence, there are likely other drivers that support the ‘going public’ decision. For instance, issuing public equity improves the firm’s policy to do acquisitions and mergers. This might become an additional or decisive reason for IKEA to eventually undertake an IPO.
The decision to go public evinces a trade-off between the advantages of being a publicly traded company and the related costs over the long-term. Public ownership can provide significant benefits for a company and its shareholders, but it has many disadvantages as well (Deloitte, 2010). By investigating the process of going public, considering the pros and cons, a decision can be made whether this is the right ambition for IKEA International to raise new capital. At first sight, the alteration from private to publicly held company appears to be relatively straightforward, but major business transformations, like the ‘going public’ decision, desire thorough planning, preparation and persistence.

* The Research

2. Situational Analysis
Currently IKEA International is privately owned by the Stichting INGKA Foundation, which was established in 1982 by the founder Ingvar Kamprad (IKEA Group, 2011). When IKEA wants to become a publicly traded company several independent variables need to be investigated (mentioned in the theoretical background). The going public decision is a rather complex decision, which aims for thorough understanding of the working knowledge of some of the technicalities of the process.
IKEA operates on the home furniture market. In order to investigate the possibility for IKEA to undertake an IPO, an in-depth understanding of the competitors’ performance has to be clarified. As mentioned in the Rationale, IKEA currently has a debt-to-equity ratio of 80.7%, while the industry average is indicated to be 54.5%. When the decision to go public has been made, the capital structure – the composition of a corporation’s securities used to finance its investment activities (Ross, Westerfield, & Jaffe, 2005) – of IKEA will change. IKEA makes use of the policy of owning the land and buildings wherever it operates. This results in continuing changes on the balance sheet; fixed assets grow along with their investments (International, 2011).
According to the financial report of FY10, IKEA wants to expand in Asia. The aim of IKEA is to have 17 stores across China by 2015 (Fangfang, 2011) (Want ChinaTimes, 2011). Next to these plans, it developed plans to expand to Japan. IKEA already tried to enter this market introduce its stores in Japan in the mid-1970s, however, the project failed. In 1986 they abandoned the Japanese market (Lane, 2007a). In 2006 IKEA re-entered Japan and successfully opened a store at the outskirts of Tokyo (Lane, 2007b). In an article in The Economist (2011) Mikael Ohlsson, President and Chief Executive Officer, states that there are expansion plans for central and eastern Europe as well.

2.1 Initial Public Offering
When retained earnings and debt funds are deficient, an IPO becomes one of the most realistic and convenient manners to protect the enduring growth of the business (TCG, 2011). The strategic advantage of going public is very much alike to the strategic advantage of debt (Titman, 1984) (Zhdanov, 2007); An infusion of new money admits the company to diminish the amount of outstanding debt, reinforce (new) product development and/or carry out expansion plans. In addition to facilitating the required capital for the investment opportunities, an IPO improves the company’s liquidity (Amihud & Mendelson, 1986). Besides, going public enhances the firm’s public profile and due to the derivative wide media coverage, the recognition and visibility of the company’s products will increase around the world (awareness). Another advantage is the improved credibility with business partners, however this benefit derives from the disadvantage that a publicly traded company must disclose information on a continuing basis. As you can see public ownership can bring eminent benefits to the firm and its equity holders. Yet advantages have reversions and that is why the existence and the effect of the disadvantages need to be well-understood.

2.2 Advantages
Selling public equity has several advantages. In addition to assisting the process of financing new investments, an IPO improves the liquidity of a company (Amihud & Mendelson, 1986) and diminishes the uncertainty of valuation of the firm (Dow & Gorton, 1997) (Benveniste & Spindt, 1989). In reference to the last advantage, the costs of a subsequent seasoned equity offerings (SEOs) will be lower (Derrien & Kecskés, 2007).
Issuing equity allows customers to infer the firm’s product quality from its stock prices (Stoughton, Wong, & Zechner, 2011) (Helwege & Liang, 2001) and advances the merger and acquisition tactics (Lyandres, Zhdanov, & Hsieh, 2010). Nevertheless, the last benefit also has its drawback, because the likelihood of becoming an acquisition target increases as well (Zingales, 1995).

2.3 Disadvantages
Even though it is most of the time acclaimed as a solution and staunched way to raise funds for a company, the decision to undertake an IPO is not without drawbacks. When a company is not in the right position to implement this drastic strategy, it may actually damage the company more than it will help. Despite the fact that money flows in, the cost of going public is substantive; both introducing and on the continuing basis. According to Joubert (1992), companies should not be dazzled when the costs of the IPO is about 15% to 20% of the proceeds of selling stock. Therefore it is essential to take these costs and other disadvantages into account before a company accedes with such a step.
Being in charge of a private company differs vastly from running a publicly traded company. Even in a private company a certain level of ‘fiduciary responsibility’ (Deloitte, 2010) exists to shareholders, but in a publicly traded company all activities and choices will be more apparent than before undertaking the IPO. Privacy disappears due to the disclosure requirements. By filing all this information, competitors, investors and the public can have insight in sensitive company details, i.e. profit margins, major customers, management salaries. In certain situations this might even result in a meaningful competitive advantage for competitors, since they can (Campbell, 1979) (Yosha, 1995). Besides, these disclosure requirements can have enormous costs after undertaking the IPO, because top management must file to the Securities and Exchange Commission (SEC) on a quarterly and annual basis. Thus, a change in organizational structure (governance) is necessary to succeed. Since the change in governance structure an increased pressure to maintain a certain growth pattern will occur, because the main aim will be to create shareholder value. In addition to this, historical corporate governance failures and the ‘loss of investor confidence after the technology bubble’ (Park & Mezias, 2005) resulted in a reform of corporate governance rules; Sarbanes-Oxley Act in 2002 (SOXhelp, 2006). Due to this Act, the standards of corporate governance are much higher and concreter, therefore the costs of the continuity to remain a public company increased significantly.
The combination of the disclosure requirements and the Sarbanes-Oxley Act also has an effect on upper-level management, since they need to be closely involved in the financial processes in the company. Besides, the management board is likely to be occupied with little else during the entire IPO process and may last up until 2 years.
Another disadvantage of going public is the greater legal exposure (Deloitte, 2010). By offering shares to the public, the company exposes itself to the antifraud rules of the 1933 Act and 1934 Act (SEC, 2011). Other disadvantages include loss of control (Barclay & Holderness, 1989), flexibility and being subjected to outside monitoring (Holmström & Tirole, 1993).
Since the cost of equity is often greater than the cost of debt, it will tend to increase the total Weighted Average Cost of Capital (WACC) over time. This could limit the future growth of a company if the firm is unable to source new capital projects that will clear the higher WACC rate.

* The Research

3. Theoretical Background
As appeared from the situational analysis, the need for additional/new capital is the dependent variable for IKEA’s expansion plans. The independent variables have been determined as the company´s market characteristics and performance, and industry details. These together should lead to the intervening (desired) variable; IPO, and not private equity issues, venture capital or issuing debt. Both independent variables contain several criteria, translated into twelve moderating variables in total, which are shown and explained in the conceptual model. The selected moderating variables are criteria addressed as the most important ones in the literature, of which the theoretical background is composed.
The combination of the independent variables determine whether an IPO is advisable and, ultimately, it could be determined whether it will be successful over the long-term. Therefore, a focused business plan is of high importance, because it contains potential future operating projections, which might give an indication of the company’s maturity and potential future earnings.

3.1 Initial Public Offering
An IPO is the legal action in which a formerly privately held enterprise enlists its securities with the Securities and Exchange Commission (SEC) for sale to the public investors for the first time (Sherman, 2005) (TCG, 2011) (Chemmanur, He, & Nandy, 2006). An equity security (share) symbolizes an ownership position in a company and provides the holder of this security (shareholder) a claim on its proportional share in the company’s assets and profit (Poitras, 2011). Thus the decision of going public disperses the ownership structure (Chemmanur & Fulgieri, 1999). The result is a dilution of the ‘current owner’ and a cut in the level of control. Through this decision the interests and opinions of shareholders must be taken into consideration during the evaluation of future decisions / investment opportunities.

3.2 Product market characteristics and performance
Various papers have been doing research about the dynamics of the firm characteristics around an IPO. In particular, Chemmanur, He and Nandy (2006) studied the relation of the firm’s ex ante product market characteristics and its decision to go public (likelihood). The theory acquired from the study implies that firms with a larger size, sales growth, total factor productivity, market share, and capital intensity are more likely to go public. In addition, firms operating in less competitive and more capital intensive industries, and those in industries characterized by riskier cash flows, are more likely to go public. Thirdly, firms with projects that are cheaper for outsiders to evaluate, and operating in industries characterized by less information asymmetry and greater average liquidity are more likely to go public (Chemmanur, He, & Nandy, 2006, p. 30). In line, Bhattacharya and Ritter (1983) and Maksimovic and Pichler (2000) argue that firms characterised by a larger existing market share, and those operating in an industry typified by a lower extent of competition are more likely to go public. Nevertheless, Chod and Lyandres (2010) argue that the benefits of an IPO for companies operating in an industry characterised by more intense competition are more likely to exceed the cost of undertaking this decision (Chen & Ritter, 2000) (Loughran & Ritter, 2004) (Benninga, Helmantel, & Sarig, 2000).
The combination of these two theories; (Bhattacharya & Ritter, 1983) (Maksimovic & Pichler, 2000), compared with Clementi’s (2002) theory, which implies that firms identified with greater productivity, output growth, and capital expenditures are more likely to go public (Pagano, Panetta, & Zingales, 1998), signify the optimum criteria of the product market characteristics during the consideration of an IPO. However, Pagano’s study investigates a sample of Italian firms, whereas it becomes difficult to generalize this to IKEA’s situation. Nevertheless, Chemmanur, He and Nandy’s (2006) findings are consistent with theory of Chemmanur and Fulghieri (1999) and the other mentioned theories.

3.3 Industry characteristics
Chod and Lyandres (2010) model with empirical knowledge that owners of public firms tend to hold more diversified portfolios than owners of private firms (Bodnaruk, Kandel, Massa, & Simonov, 2008) (Hansen & Lott, 1996) (Moskowitz & Vissing Jorgensen, 2002). They indicate that an IPO will increase the company’s market share and more so within industries characterised by stronger competitive interaction, larger demand for funds, and a smaller proportion of this uncertainty is systematic. Besides, they explain that going public is expected to adversely affect the values of an IPO firm’s product market rivals.
According to Yosha (1995) and Maksimovic and Pichler (2000) firm’s with a low level of confidentiality are less likely to go public.
When evaluating privately held firms, investors may perceive high debt levels as a potential risk factor, especially since these investors do not have wide access to other sources of reliable information that would be useful in evaluating these companies. Thus, private firms from highly levered industries may be viewed with an extra degree of caution (Brau, Francis, & Kohers, 2003).

3.4 Initial underpricing
Initial underpricing is very important when undertaking an IPO, as it is nearly always involved in the process. Shortly defined it is to say that underpricing occurs when the offer price of a share is lower than the price of the first trade. Normally underpricing is only temporary. There are multiple theories upon underpricing and the motive.
In comparison with empirical studies, the IPO underpricing literature presents a limited number of theoretical models, providing partial explanations of IPO underpricing. In most of these models, IPO underpricing is theorized as a consequence of informational asymmetries existing among the three major participants of IPO process, namely issuer, investor and underwriter (Wang, 1999).
Ibbotson (1975), Ibbotson and Jaffe (1975) and Ritter (1984) documented that IPOs experience an average underpricing of 15 per cent and that the amount of underpricing varies over time and across industries. This provides a calculation of the cost of going public (Varshney & Robinson, 2004). Any time a firm issues shares for less than they are worth, the new shareowner wins and the original owner loses.
Ritter (1998) revised the report ‘Initial Public offerings’ by Ibbotson, Sindelar and Ritter (1988). In this study, six hypotheses are explained (appendices II). All these explanations involve rational strategies by buyers. Looking at the long-run performance, irrational strategies can be explained. Ritter’s market-feedback hypothesis claims that the underpricing of an IPO is based on the truthfulness of the revealed valuations of investors. If there is a great deal of uncertainty about the value of an IPO the valuations of optimistic investors will be much higher than those of pessimistic investors. As time goes on and more information becomes available, the divergence of opinion between optimistic and pessimistic investors will narrow, and consequently, the market price will drop (Ritter J. R., Initial Public Offerings (modified version), 1998).
Furthermore, Ritter states the ‘winner’s curse hypothesis’. This hypothesis shows that some investors are at an informational disadvantage relative to others, which results in some investors being worse off. If some investors are more likely to attempt to buy shares when an issue is under-priced, then the amount of excess demand will be higher when there is more underpricing. Other investors will be allocated only a fraction of the most desirable new issues, while they are allocated most of the least desirable new issues. They face a winner's curse: if they get all of the shares which they ask for, it is because the informed investors don't want the shares. Faced with this adverse selection problem, the less informed investors will only submit purchase orders if, on average, IPOs are under-priced sufficiently to compensate them for the bias in the allocation of new issues. Michealy and Shaw (1994) have a consistent theory, which tests the empirical implications of several models of IPO underpricing.

3.5 Hot and cold markets and IPO waves There is being spoken of Hot and Cold markets for undertaking an IPO. It is a discussion of when to go public, due to the market conditions at the time. A hot IPO market has been characterized in the literature by an unusually high volume of offerings, severe underpricing, frequent oversubscription of offerings and, at times, concentrations in particular industries. In contrast cold IPO markets have much lower issuance, less underpricing and fewer instances of oversubscription (Helwege & Liang, 2001). Helwege and Liang (2001) found that most industries’ hot markets occur at about the same time - when the market for IPOs in general is hot. It is never the case that the overall market for IPOs is hot as a result of only one or two industry’s issuance, and it is very rarely the case that any industry is hot when the overall market is cold. Dr Kangmao Wang (1999) states that a cold market is usually associated with a depressed economy in the business cycle and makes most investors risk neutral. In a hot market, overall risk aversion coefficient of general investors are higher. In the hot market, many IPOs compete for funds and as a result, a higher underpricing is required for the hot market than in the cold market. Furthermore, Dr Wang (1999) discerned that interest rates decline as the number of IPO’s increase, indicating a hot market. Helwege and Liang (2001) actually implicate in the conclusion of their study that hot markets are not accurately characterized by the clustering of a single industry. Rather, many industries tend to have hot markets at around the same time. Theoretical models of underpricing, as a signalling mechanism, characterize hot markets as periods when a greater number of high quality firms choose to go public (Allen & Faulhaber, 1989). In these models, firms are drawn into hot markets because offering prices are closer to their true (higher) valuations, and they are able to avoid the undervaluation of cold markets. As stated in ‘initial underpricing’ (1.3.3), Allen and Faulhaber (1989) argue underpricing to be a benchmark for a firm’s quality, which would then influence the time of going public as well. However, if you would have a good performing business it should not necessarily matter whether to go public in a hot or cold market, as you would be able to recoup the underpricing loss either way. For their theory it could be concluded the ‘hot market’ is created by high quality business’ going public at the same time. According to Ibbotson, Sindelar and Ritter (1988) a hot market is associated with more IPO volumes than the cold market. Observations showed that the cycle of hot and cold markets comes in waves. Dr Wang (1999) confirms Ibbotson, Sindelar and Ritter’s association and matches this with his earlier mentioned theory on the link between interest rates and hot and cold markets.

3.6 Long-run performance
Investigations upon the long-run performances are mostly done in regard of underpricing. This would be one of the few testable performance indicators, due to the fact that market conditions and investors play a big role in the performance of a firm which undertakes an IPO. However, there does seem a relation between underpricing and long-run performance, mostly colliding with a poor performance.
Ritter (1998) states several hypotheses in his article ‘Initial public offerings’ regarding long-run performance. Firstly the ‘impresario hypothesis’ which argues that the market for IPOs is subject to fads and that IPOs are under-priced by investment bankers (the impresarios) to create the appearance of excess demand, just as the promoter of a rock concert attempts to make it an "event." This hypothesis predicts that companies with the highest initial returns should have the lowest subsequent returns. There is some evidence of this in the long run, but in the first six months, momentum effects seem to dominate.
Secondly the ‘window of opportunity hypothesis’ which predicts that firms going public in high volume periods are more likely to be overvalued than other IPOs. This has the testable implication that the high-volume periods should be associated with the lowest long-run returns.
Thirdly the ‘divergence of opinion hypothesis’; One argument is that investors who are most optimistic about an IPO will be the buyers. If there is a great deal of uncertainty about the value of an IPO the valuations of optimistic investors will be much higher than those of pessimistic investors. As time goes on and more information becomes available, the divergence of opinion between optimistic and pessimistic investors will narrow, and consequently, the market price will drop, as is stated in initial underpricing 3.4.
The long-run underperformance of IPOs is not limited to operating companies going public. Investors in a closed-end fund IPO pay a premium over net asset value (the market value of the securities that the fund holds), because commissions equal about 7 per cent of the offering price. Thus every $10.00 invested at the offering price buys only $9.30 of net asset value. Given that closed-end funds typically sell at about a 10 per cent discount to net asset value, it is difficult to explain why investors are willing to purchase the shares at a premium in the IPO (Ritter J. R., Initial Public Offerings (modified version), 1998).

*
The Research

4. Conceptual Model
The conceptual model is the mental image which corresponds to entities and its essential features, which determine the application of terms and thus play a part in reasoning (Jaspars, 2011). The main hypothesis inclined the dependent variable; attracting new/additional capital. For this research there is a desired intervening variable, representing the IPO. In regard of the intervening variable, the independent variables are assembled; Product market characteristics and performance and industry details and performance. Research upon the independent variables prompted the moderating variables, as displayed in the model.
For each individual variable a hypothesis is composed, which are initiated in subsection 4.1, hypotheses. These hypotheses engender a hypothesized model (Figure 2). Subsequently, the meta-analysis should determine the relevance of both the conceptual and hypothesized model, whereafter a cross-check shall initiate the quality and reliability. This investigation should provide a revised model, containing all relevant variables.
Figure 1 Determination of all variables
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The Conceptual Model

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Renée Pelk and Gwenny Loman, 30 November 2011 – own supplement

In the theoretical background there are several descriptions of variables, which are not included in the conceptual model. They concern initial underpricing, hot and cold markets and long term performance. These variables do not have a direct pre-IPO effect, and are only applicable when the actual IPO decision has been made. At that stage they are very important as there needs to be indicated when to go public and what the consequences are of timing the going public decision. However, they are not applicable to the aim of this research. When further investigating the actual going public decision for a firm, the same approach would be used to set up a separate model for these variables.
4.1 Hypotheses
Attracting capital can be done in several ways. The objective of this paper is limited to the strategic decision of going public through an IPO. All previously mentioned theories in the theoretical background, excluding the ones mentioned to have an influence on the post-IPO determinants, lead to testable predictions. Numbers of papers (theoretical background) indicate that certain criteria, defined as moderating variables, influence this decision. Therefore the main hypothesis is established as follows:
H: An Initial Public Offering is the best way for IKEA to attract new capital, since they possess the most relevant criteria.

4.1.1 Hypotheses Independent variables
In order to determine the most relevant criteria for the revised model, we will use a meta-analysis and a case study. A meta-analysis is a statistical analysis of a large collection of analysis results for the purpose of integrating the findings (Glass, 1976). In other words, it is the analysis of analyses. Further explanations about the analyses can be found in chapter 5 – research design.
Chemmanur, He and Nandy (2006) imply that the decision of going public is related to the product market characteristics and performance. This statement is consistent with Gompers (1996), Maksimovic and Pichler (2000), Yosha (1995). Therefore, one of the most relevant factors on the decision to go public is indicated to be the characteristics and performances of the market. The result is two verifiable hypotheses, which ultimately engenders the result of the main hypothesis.
H1:The firm’s product market characteristics and performance indicate whether the firm will benefit from undertaking an IPO.
The second verifiable hypothesis is linked to the industry details and performance. Mitchell and Mulherin (1996) indicate that several factors of the industry have a direct connection with the likelihood of a company to make the decision to go public. According to our analysis, we know that this theory is consistent with Pagano, Panetta and Zingales (1998), Stoughton, Wong and Zechner (2011), Maksimovic and Pichler (2000), Bodnaruk, Kandel, Massa and Simonov (2008), Hansen and Lott (1996) and Moskowitz and Vissing Jorgensen (2002).
H2:The firm’s industry details and performance indicate whether the firm will benefit from undertaking an IPO.
4.1.2 Moderating Variables
The first indicator, within the variables indicated as product market characteristics and performances, is purposed as the firm’s size. Gompers (1996) indicates that companies with a smaller size and a younger age are less likely to go public. His findings are consistent with Chemmanur, He and Nandy (2006), Chemmanur and He (2010), Yosha (1995) and Maksimovic and Pichler (2000). In addition, Chemmanur, He and Nandy argued that sales growth, capital intensity and total productivity factor are indicators for firms to understand whether or not undertaking an IPO is advisable (Clementi, 2002) (Bhattacharya & Ritter, 1983) (Maksimovic & Pichler, 2000).
H1': The firm’s size is a dynamic around the IPO, which indicates whether the firm will benefit from the decision.
H2': The firm’s sales growth is a dynamic around the IPO, which indicates whether the firm will benefit from the decision.
H3': The firm’s capital intensity is a dynamic around the IPO, which indicates whether the firm will benefit from the decision.
H4': The firm’s total product factor is a dynamic around the IPO, which indicates whether the firm will benefit from the decision.
Bhattacharya and Ritter (1983) and Maksimovic and Pichler (2000) imply that a company with a larger existing market share is more likely to go public. Their argument is that the company’s benefit of the scale of expansion will be greater. Their theory is consistent with Bodnaruk, Kandel, Massa and Simonov (2008), Hansen and Lott (1996) and Moskowitz and Vissing Jorgensen (2002). Besides, Chod and Lyandres (2010) describe that the degree diversification of the company’s product portfolio is connected to the likelihood of going public.
H5':The firm’s market share is a dynamic around the IPO, which indicates whether the firm will benefit from the decision.
H6': The firm’s degree of product portfolio diversification is a dynamic around the IPO, which indicates whether the firm will benefit from the decision.
The industry details are also implied to be a variables affecting the decision to go public or not. According to numerous literature (e.g. (Chod & Lyandres, 2010) (Brau, Francis, & Kohers, 2003) (Bodnaruk, Kandel, Massa, & Simonov, 2008) (Hansen & Lott, 1996) (Moskowitz & Vissing Jorgensen, 2002)) the decision is depending on the industry concentration; the level of competition. In contrast to Bhattacharya and Ritter (1983) and Maksimovic and Pichler (2000) Besides, they all indicate that the riskiness of the company’s cash flows compared to industry opponents is determining the chance that an IPO will be successful. Most of the analyses in literature add that the ease at which an outsider can evaluate the company is a depending variables for a strategic equity offering decision. Another variables: Maug (2001) signifies that information asymmetry is a relevant dynamic in the deliberation of the decision (Bodnaruk, Kandel, Massa, & Simonov, 2008) (Hansen & Lott, 1996) (Moskowitz & Vissing Jorgensen, 2002) (Helwege & Liang, 2001).
H1²: The firm’s level of industry competition, is a dynamic around the IPO, which indicates whether the firm will benefit from the decision.
H2²: The level of risk for the cash flows is a dynamic around the IPO, which indicates whether the firm will benefit from the decision.
H3²: The costs for outsiders to evaluate the firm is a dynamic around the IPO, which indicates whether the firm will benefit from the decision.
H4²: The level of information asymmetry is a dynamic around the IPO, which indicates whether the firm will benefit from the decision.
H5²: The level of confidentiality is a dynamic around the IPO, which indicates whether the firm will benefit from the decision.
(Chod & Lyandres, 2010) (Mikkelson, Partch, & Shah, 1997) (Lowry, 2003) (Amihud & Mendelson, 1986) (Pagano, Panetta, & Zingales, 1998) The mentioned researchers in literature argue that one of the most important features for an IPO is the demand for funds should be intense, whereas those firms are more like to go public. The main reason that they indicate is the increase in liquidity of the firm’s, whereby it thus raises the firm’s value. (Bodnaruk, Kandel, Massa, & Simonov, 2008) (Hansen & Lott, 1996) (Moskowitz & Vissing Jorgensen, 2002)
H6²: The desire for funds is a dynamic around the IPO, which indicates whether the firm will benefit from the decision.

* The Research

5. Research design
This part of the research describes the approach of testing our conceptual model. Due to the fact there is a desired intervening variable – the IPO – thorough research is required in order to determine the outcome of the stated main hypothesis. A detailed description of the process will provide a perception of how the actual research would be conducted.

5.1 Unit of analysis
The unit of analysis is determined as the IPO and more specifically, its earlier determined moderating variables. One approach to examine the variables is performing a meta-analysis. However, DeCoster (2004) states that meta-analysis cannot draw conclusions because only significant findings are published and thus used in meta-analyses. Therefore, we apply a cross-check to the analysis; a case study shall be part of the research as well. The combination of the two approaches shall lead to the absolute exclusion of irrelevant variables and, more importantly, to the inclusion of all relevant variables.
For the analysis we assume that the model is applicable to all private companies – which includes IKEA Group – that consider undertaking an IPO, and thus want to become a publicly-traded company.
5.2 Meta-analysis
In order to verify the most relevant IPO criteria, a meta-analysis will be used. Meta-analysis is the statistical analysis of a large collection of analysis results for the purpose of integrating the findings (Glass, 1976). In other words, it is the analysis of analyses and a statistical technique for summarising, and reviewing previous quantitative research. By using meta-analysis, a wide variety of questions can be investigated, as long as a reasonable body of primary research studies exist. Selected parts of the reported results of primary studies are entered into a database, and this "meta-data" is "meta-analysed", in similar ways to working with other data - descriptively and then inferentially to test certain hypotheses (Neill, 2006).
Meta-analysis is used to provide information supporting a specific theoretical statement by translating theory into data and combining these. Egger and Philips (1997) state that different statistical methods exist for combining the data, but there is no single “correct” method. The actual performance of a meta-analysis is a complicated, time-consuming process. The most common use of meta-analysis has been in quantitative literature research. These are review articles where authors select a research finding that has been investigated in primary research under a large number of different circumstances (DeCoster, 2004).
A hypothesized model is developed (subsection 5.2.1) on which the meta-analysis is based. In subsection 5.2.2, ‘The implementation’, the process of the meta-analysis applicable to our research will be described. The descriptive approach could be translated into a explorative approach when performing the actual research. Providing a time line for a detailed planning is excluded from the implementation, due to the lack of knowledge on the actual performance of a meta-analysis.
5.2.1 The hypothesized model
The conceptual model provides the dependent, independent and moderating variables, which are necessary for the conclusion of the investigation. This model can be translated into a hypothesized model (Figure 2). Applying the model in its current condition would mean that all variables need a positive outcome for a firm to be suitable for an IPO. The meta-analysis will determine whether the variables are relevant for the model or not and can influence the hypothesized model. This should lead to the composition of a revised model, solely including the relevant variables.

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Renée Pelk and Gwenny Loman, 3 December 2011 – own supplement

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Renée Pelk and Gwenny Loman, 3 December 2011 – own supplement

Figure 2 Consequences of an Initial Public Offering
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Hypothesized model

Figure 2 Consequences of an Initial Public Offering
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Hypothesized model

5.2.1.1 Explanation of the hypothesized model
The hypothesized model (figure 2) shows the consequences of an IPO, thus, all the criteria that need to be taken into consideration in order to determine whether there is the possibility for a firm to undertake an IPO. In total the model exists of four stages.
The IPO is our unit of analysis, thus the starting point in our model – stage one. The derived independent variables are the second stage, as they represent the main criteria for an IPO in this research. The independent variables exist of twelve moderating variables in total, which shows as the third stage in the model. The plusses show the relation between al variables. Adding everything up, it should lead to attracting new capital – stage four. The arrow from stage four to stage one is the confirmation of resulting stage four by performing stage one.

5.2.2 The implementation
Several steps need to be undertaken to provide a reliable, correct meta-analysis. Before starting a meta-analysis, a clear procedure needs to be set up. If a good procedure is lacking, the quality of your analysis could diminish. A seven-step strategy can be applied in order to structure the analysis (Picciano, 2008): 1. Select a topic for the meta-analysis 2. Set up the criteria for selecting studies for the meta-analysis 3. Determine the statistical procedure to be used to summarize/synthesize the studies 4. Review the literature for studies that meet the criteria 5. Code the studies that meet the criteria 6. Analyse/summarize/synthesize the results of the studies 7. Report the results
For all steps shall be described how they would be implemented, in order to show the reliability of the process. This will be necessary for the explanation and descriptive conclusion of this research.

5.2.2.1 Step 1: Select a topic for the meta-analysis
The selected topic for the meta-analysis is the IPO and its resulting variables. As earlier broached, the selected independent and moderating variables are criteria addressed as the most important ones in the literature of which the theoretical background is composed.

5.2.1.2 Step 2: Set up the criteria for selecting studies for the meta-analysis
The criteria for selecting the studies for the analysis are based upon the conceptual model of which the hypothesized model is composed (subsection 5.2.1). The moderating variables shall all, separately, be analysed. Thus, the studies that shall be included must have a certain degree of relevance regarding the variables. The degree of relevance is assessed upon the following criteria: * All studies must concern IPOs * Information upon the moderating variables must flow from hypotheses in line with the hypotheses for the independent variables – otherwise there is the possibility of other forces influencing the moderating variables, which could then falsify our independent variable whilst supporting the moderating variable.
For this research 16 studies are taken into consideration for determining the variables and provide the relevant information concerning IPOs in general. By selecting the studies relevant for the meta-analysis, multiple studies are likely to be excluded. This due to the fact that the variables initial underpricing, hot and cold markets and long-term performance are not included in the conceptual model. These variables are not relevant for the aim of this research, as is stated in the conceptual model. Therefore, merely an x percentage of all studies included thus far will be of relevance for the meta-analysis.
There are several procedures for selecting the relevant studies. For example; computerized indices, this procedure would allow us to locate articles relevant to our analysis (DeCoster, 2004). This approach could be applied for selecting the relevant studies per moderating variable.

5.2.1.3 Step 3: Determine the statistical procedure to be used to summarize/synthesize the studies
The summarising/synthesizing of the selected studies in step 2 would be done by the statistical procedure correlation coefficient. All relevant studies will be selected per moderating variable, each study shall be valued in a range from 0 till 10 based on the agreement upon our related hypothesis. A scheme could look as follows (it is a general set up with no direct relation to our variables in this case) (Base SAS 9.2, Procedures Guide: Statistical procedures, Third edition, 2010):
Figure 3 The concept of the correlation procedure Correlation procedure | 4 variables : 1, 2, 3, 4 | Simple statistics | Variable | # studies | Mean | Std deviation | Sum | Minimum | Maximum | 1 | X | X | X | X | X | X | 2 | X | X | X | X | X | X | 3 | X | X | X | X | X | X | 4 | X | X | X | X | X | X |

This allows us to quickly actuate the relevance of each variable. Therefore the levels of the outcomes need to be categorized in two conclusions: relevant or irrelevant.
5.2.2.4 Step 4: Review the literature for studies that meet the criteria
This part of the process is the most time-consuming. All studies need to be reviewed and selected, based upon the criteria in step 2. Thorough reading and evaluation allows us to narrow down the number of studies relevant for the research. 5.2.2.5 Step 5: Code the studies that meet the criteria
Coding the selected studies allows us to calculate effect sizes and provides a higher credibility for the meta-analysis. DeCoster (2004) provides six steps for coding the studies: 1. Decide which characteristics you want to code 2. Decide exactly how you will measure each characteristic 3. Write down the specifics of your coding scheme in a code book 4. Pilot the coding scheme and train the coders 5. Once you have a stable coding scheme you code the studies 6. Calculate the reliability of the coding for each item in your scheme
It is stated by DeCoster that you should always have a second coder, due to the reliability of the coding scheme.

5.2.2.6 Step 6: Analyse/summarize/synthesize the results of the studies
The coding of the studies would allow us to fill out the results in the correlation scheme, as described in step 3. Once the results are visible a range of relevance needs to be set up. As earlier stated, the final outcome will result in either a study to be relevant or irrelevant. By setting minimums and maximums for the degree of determination of the studies, an x amount could be excluded, whereafter needs to be determined what amount of studies per variable need to be relevant for the actuation of the variable.

5.2.2.7 Step 7: Report the results
By applying all criteria mentioned in the previous six steps, a selection of the variables shall be made. This selection could possibly accelerate a new, revised model, which would then be the result of the meta-analysis. The new model should then be equipped to apply it to IKEA Group and determine the outcome of our stated main hypothesis. However, since a case study shall be performed based on the hypothesized model, a combination of both investigations shall determine the final model.

5.3 Case study
In order to cross-check the information derived from the meta-analysis, we will analyse all the IPOs undertaken on the New York Stock Exchange (NYSE) from December 2006 to December 2011: all together 250 firms. For these firms that have gone public, annual reports, industry reports, 10K and/or IPO prospectuses will be collected. This way, all details about the moderating variables and independent variables should be known; either provided by the NYSE, banks and/or (segmented) market researchers.
The empirical findings derived from the case study will be reported in tables and statistics. It will describe the level of each moderating variable for each firm being taken public. The mean of all these variables will be determined and will suggest which variables are representative, because the descriptive statistics show the substantial variation in firm characteristics. So, the findings will thus signify which of the variables must be taken into account in the revised model.

5.4 The implementation of the results
The meta-analysis and case study should both provide a result with which the final relevance of the variables can be determined. Both approaches are dependent on the hypothesized model (figure 2). By assessing this model in two ways, criteria appearing irrelevant by one approach could be proven relevant by the other. This cross-check would allow us to combine results and draw a more integrated conclusion, which would result in composing a more reliable revised model. This revised model would enable us to draw a conclusion for our main hypothesis by applying it to IKEA Group.

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* Appendices
Appendices
Appendix 1 Consolidated balance sheet of FY10 IKEA - Equity and Liabilities
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The Balance sheet

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IKEA Group, annual report 2011, Fiscal Year 2010 (International, 2011)

Appendix 2 Hypotheses on initial underpricing
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Six hypotheses (a through g) on initial underpricing

a. The winner's curse hypothesis
An important rationale for the underpricing of IPOs is the "winner's curse" explanation. Since a more or less fixed number of shares are sold at a fixed offering price, rationing will result if demand is unexpectedly strong. Rationing in itself does not lead to underpricing, but if some investors are at an informational disadvantage relative to others, some investors will be worse off. If some investors are more likely to attempt to buy shares when an issue is under-priced, then the amount of excess demand will be higher when there is more underpricing. Other investors will be allocated only a fraction of the most desirable new issues, while they are allocated most of the least desirable new issues. They face a winner's curse: if they get all of the shares which they ask for, it is because the informed investors don't want the shares. Faced with this adverse selection problem, the less informed investors will only submit purchase orders if, on average, IPOs are under-priced sufficiently to compensate them for the bias in the allocation of new issues. Numerous studies have attempted to test the winner's curse model, both for the U.S. and other countries. While the evidence is consistent with there being a winner’s curse, other explanations of the new issues underpricing phenomenon exist.

b. The market feedback hypothesis
Where book building is used, investment bankers may underprice IPOs to induce regular investors to reveal information during the pre-selling period, which can then be used to assist in pricing the issue. In order to induce regular investors to truthfully reveal their valuations, the investment banker compensates investors through underpricing. Furthermore, in order to induce truthful revelation for a given IPO, the investment banker must underprice issues for which favourable information is revealed by more than those for which unfavourable information is revealed. This leads to a prediction that there will only be a partial adjustment of the offer price from that contained in the preliminary prospectus to that in the final prospectus. In other words, those IPOs for which the offer price is revised upwards will be more under-priced than those for which the offer price is revised downwards.

c. The bandwagon hypothesis
The IPO market may be subject to bandwagon effects. If potential investors pay attention not only to their own information about a new issue, but also to whether other investors are purchasing, bandwagon effects may develop. If an investor sees that no one else wants to buy, he or she may decide not to buy even when there is favourable information. To prevent this from happening, an issuer may want to underprice an issue to induce the first few potential investors to buy, and induce a bandwagon, or cascade, in which all subsequent investors want to buy irrespective of their own information. An interesting implication of the market feedback explanation, in conjunction with bandwagons, is that positively-sloped demand curves can result. In the market feedback hypothesis, the offering price is adjusted upwards if regular investors indicate positive information. Other investors, knowing that this will only be a partial adjustment, correctly infer that these offerings will be under-priced. These other investors will consequently want to purchase additional shares, resulting in a positively sloped demand curve. The flip side is also true: because investors realize that a cut in the offering price indicates weak demand from other investors, cutting the offer price might actually scare away potential investors. And if the price is cut too much, investors might start to wonder why the firm is so desperate for cash. Thus, an issuer faced with weak demand may find that cutting the offer price won’t work, and its only alternative is to postpone the offering, and hope that market conditions improve.

d. The investment banker's monopsony power hypothesis
Another explanation for the new issues underpricing phenomenon argues that investment bankers take advantage of their superior knowledge of market conditions to underprice offerings, which permits them to expend less marketing effort and ingratiate themselves with buy-side clients. While there is undoubtedly some truth to this, especially with less sophisticated issuers, when investment banking firms go public, they underprice themselves by as much as other IPOs of similar size. Investment bankers have been successful at convincing clients and regulatory agencies, including the Office of Thrift Supervision (in the case of mutual savings bank conversions), that underpricing is normal for IPOs.

e. The lawsuit avoidance hypothesis
Since the Securities Act of 1933 makes all participants in the offer who sign the prospectus liable for any material omissions, one way of reducing the frequency and severity of future lawsuits is to underprice. Underpricing the IPO seems to be a very costly way of reducing the probability of a future lawsuit. Furthermore, other countries in which securities class actions are unknown, such as Finland, have just as much underpricing as in the U.S.

f. The signalling hypothesis
Under-priced new issues "leave a good taste" with investors, allowing the firms and insiders to sell future offerings at a higher price than would otherwise be the case. This reputation argument has been formalized in several signalling models. In these models, issuing firms have private information about whether they have high or low values. They follow a dynamic issue strategy, in which the IPO will be followed by a seasoned offering. Various empirical studies, however, find that the hypothesized relation between initial returns and subsequent seasoned new issues is not present, casting doubt on the importance of signalling as a reason for underpricing.

g. The ownership dispersion hypothesis
Issuing firms may intentionally underprice their shares in order to generate excess demand and so be able to have a large number of small shareholders. This disperse ownership will both increase the liquidity of the market for the stock, and make it more difficult for outsiders to challenge management.

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Jay R. Ritter, Initial Public Offerings, Contemporary Finest Digest (1998)

Appendix 3 Variables after the IPO decision
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Initial underpricing, hot and cold markets and long-run performance after the IPO decision in theory

Hot and cold markets can have a particular influence on the timing of going public. Furthermore, a relation between underpricing and the market condition is defined. The relation between underpricing and long-run performance thus is indirectly related to the market condition.
Throughout the report hot- and cold markets are broached. Multiple theories provide criteria and consequences for undertaking IPO’s in either hot or cold markets in which is determined what it means for a firm to undertake an IPO in that particular market. Allen and Faulhaber et al. (1989) stated that a firm undertaking an IPO in a hot market is linked with the high quality of the firm. There would be fewer information asymmetry, thus a lower risk for investors.
However, firms undertaking an IPO in a hot market, would face more underpricing and higher underperformance on the long run as well (Helwege & Liang, 2001). Initial underpricing is a nearly unavoidable factor of undertaking an IPO. It is a thoroughly researched subject in IPO reports and many varying hypotheses are stated. IPOs coming to the market when interest rates are relatively high are more likely to be under-priced as well. This proposition is consistent with Allen and Faulhaber’s suggestion (1989) that an IPO discount may be used by issuers as an incentive to attract investors from alternative investment vehicles (Wang, 1999).
Even though there are no direct criteria related to underpricing, an estimation of the level of underpricing can be made. Several authors came with models to estimate the amount of underpricing. Wang (1999) states that underpricing is theorized as a consequence of informational asymmetries existing among the three major participants of the IPO process; issuer, investor and underwriter. They become the independent variables in introducing a pricing strategy for an IPO.
Hot market IPOs would tend toward higher industry market-to-book ratios and have a significantly higher proportion of firms that have negative earnings (Helwege & Liang, 2001). As firms have the option to time the IPO, it may be that the relatively strong firm market-to-book ratios of cold market firms reflect a higher selectivity (Helwege & Liang, 2001). Multiple researches have indicated that firms going public in a hot market suffer the lowest long-run returns. Ritter (1998) made this testable upon the ‘window of opportunity hypothesis’.
Therefore is can be concluded that the statement of Helwege and Liang holds a great deal of the truth. It is said that a hot IPO market has been characterized in the literature by an unusually high volume of offerings, severe underpricing, frequent oversubscription of offerings and, at times, concentrations in particular industries. In contrast cold IPO markets have much lower issuance, less underpricing and fewer instances of oversubscription.
All these factors determine the long-run performance of an undertaken IPO and need to be considered carefully when implementing the strategy for an IPO.
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Sourcing is applied within the written part

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[ 1 ]. If the intervening variable – the IPO – were not a desired variable, the model and research would be completely different. However, the rationale states the options for our dependent variable – attracting new capital – which lead us to the composition of a conceptual model with a desired intervening variable.
[ 2 ]. In the Appendices (X) are the effects of the variables in theory explained
[ 3 ]. Construction of our data base required us to verify all moderating variables. We will eliminate the firms, which have been delisted or have unreliable data on the moderating variables.
[ 4 ]. Approximately. This number has been indicated by Rabobank (Jansen, 2011).
[ 5 ]. E.g. Market Manager Partners Databases – database with firm-level characteristics.