Presidential election results not linked to S&P500

The Tippie School at U. of Iowa run electronic markets to trade futures contracts that represent expected outcomes of real events. 2012 presidential race contracts were used to track the expected election winner. A student pointed out that the Republican victory contract was negatively correlated (=-.83) with the S&P close, and incorrectly concluded that the markets rose in anticipation of the Democrat winner. Correlation is not causation. Both data series have secular trends; it is incorrect to analyze time series data like this. Without going too far into technical details, you must instead analyze first differences (changes in prices) or returns. As it turns out, even with a large sample (18 month of daily trading), there is no significant correlation between the likelihood of either party winning and the S&P500 close using proper methods. Furthermore, lags (e.g., the change in Republican likelihood today affects the S&P tomorrow) are insignificant. That is not to say there is no correlation, but rather one cannot conclude that the correlation is different from zero. While it is likely the stock markets have a party preference, we cannot find it in these data.

Iowa 2012 Presidential Markets and S&P Close

Busy IPO bankers – Good or Bad idea?

When a restaurant gets busy, your waiter covers more tables and you get less attention but perhaps the food is fresher given the high volume, right? Does the same hold for your IPO banker? In a research paper we are presenting in academic circles, Dr. Craig Dunbar and I study ~1700 IPOs and find that that IPO volumes do matter. When IPO markets are busy IPO price ranges are more likely to be adjusted across the board, but when a particular bank is busy it is no more likely to adjust the offering price. However, when busy banks do adjust the range, they adjust prices up (not down) just before the offering, and their IPOs tend to have a greater first day pop. That is, they leave more money on the table — good for investors, not so good for issuers. Two explanations come to mind. Perhaps busy bankers are too busy to adjust the price of their IPOs. Or, when a banker is juggling too many deals it sells them at a discount to reduce its pipeline? In the latter explanation, the issuer is competing with other issuers for the banker’s limited attention. Have you ever been seemingly “rushed” through a meal? Issuers should consider whether to choose an investment bank with too many other deals competing for attention span.

RBS Citizens uses IPO to bring M&A bid

News that RBS plans to divest its RBS Citizens Financial group is an opportunity to discuss two interesting uses of the IPO. First, RBS has been unsuccessful in attracting a merger or buyout (M&A)_offer, and so instead they may sell to IPO investors. M&A offers come from sophisticated buyers (e.g., competitors) while IPOs attract investors from across the spectrum. Should investors be interested a deal that does not attract sophisticated buyers? Bear in mind that my commentary has nothing to do with RBS Citizens specifically, but rather this general category of IPOs.  A second key use of the IPO is also at play. RBS is using the (threat of) IPO filing to better their negotiating position and to attract an M&A bid. Filing creates a real option — the option to exercise the IPO in lieu of a satisfactory M&A bid. This is known as “dual-tracking”, and research (e.g., Lian & Wang, 2007) shows that firms using the IPO option increase the acquisition premium by some 58%. When used and timed properly, dual tracking can be a very successful tactic.

Should Microsoft buy Sony?

After seven years at Microsoft (NASD: MSFT) my wife left last week for HP (NYSE: HPQ) and so I will finally discuss my thoughts! I am on record with hundreds of students in my classrooms predicting that Microsoft would buy Nokia and then “should” buy Sony (NYSE: SNE). That was two years ago. Isn’t Sony too big? Sony’s market cap in Jan 2014 is ~US$19B while Microsoft is ~US$300B. That is a very doable size. The Sony brand and the Sony consumer electronics design capability could help Microsoft engage the consumer and compete with Google and Apple. However, Microsoft waited…a long time…they bought (part of) Nokia after a several year precipitous decline in handset market share. Following the same playbook, Sony’s handset share has fallen and now we see Microsoft and Sony working on a Windows Phone deal. A major obstacle to an acquisition is that Playstation and Xbox own too much of the gaming console market. Why not spin off the Playstation group and buy the rest of Sony?…or again wait around long enough and we will see Steam, Nintendo, and perhaps the TV makers steal enough gaming market share that regulators will allow PS and Xbox to combine. Microsoft needs to make some bold moves in the consumer space, else leave it for good and focus on the business side.