Industry consolidating IPOs

Muge Tiryakioglu, Purdue University

Abstract

This study examines the performance of industry consolidating IPOs by using a sample of 58 firms that conducted a roll-up IPO over the 1994–1999 period and 55 build-up IPOs that went public between 1983 and 1999. Results indicate that the long-run stock price performance of roll-up IPOs significantly underperform several market benchmarks, including build-up IPOs, in the three years after going public whereas the stock price performance of build-ups is not significantly different from that of the market. However, the poor stock price performance of roll-ups is not accompanied by poor accounting performance. The operating performance of roll-ups improves significantly in the year after the IPO whereas the operating performance of build-ups shows significant increases in the years both before and after the IPO. Cross-sectional analyses suggest that the ownership of founding companies is positively correlated with long-run stock returns of the roll-ups but that it has a negative relationship with operating performance. The ownership of all executives and directors is positively correlated with both the stock price performance and operating performance of build-up IPOs. Despite the importance of the continued involvement of insiders in the business, both founding companies and sponsors decrease their ownership stakes significantly in the years following the IPO and it is found that the sale of shares is not related to the stock price performance of roll-ups. Sample companies undertake aggressive acquisition programs after their public offerings to continue with industry consolidation. While the stock price reaction to announcements of subsequent acquisitions are positive, this positive reaction is driven by the earlier announcements. All post-announcement stock returns are significantly negative whereas pre-announcement returns are positive, suggesting that the sample companies time their acquisitions to coincide with periods of superior performance. Overall, it is concluded that roll-up IPOs have failed to deliver on their promise of creating shareholder value through consolidation and that their performance is not representative of industry consolidators in general: build-up IPOs have performed at par with the market in the three years of going public.

Degree

Ph.D.

Advisors

McConnell, Purdue University.

Subject Area

Management|Finance

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