How Company Fundamentals and Deal Structure Shape IPO Share Pricing
Summary
The document addresses whether a company’s total valuation changes when an IPO is divided into a larger number of lower-priced shares or fewer higher-priced shares. It describes the role of underwriters and their teams in assessing a company and selecting an offering price, while emphasizing that pricing decisions consider more than the arithmetic relationship between share count and price. Factors listed include the amount of capital sought, market capitalization, float, sector competition, debt, earnings, assets, liabilities, and business strategy.
The response illustrates its discussion with examples involving Lyft and Facebook, including analyst opinions, losses, and post-IPO share-price movement. It also claims that very low nominal share prices may be perceived as risky and gives rough price ranges as examples. These examples are anecdotal and the answer does not present a valuation model or rigorous evidence that a particular nominal price causes investor behavior. Its useful lesson is that IPO pricing reflects company fundamentals and offering objectives, while the number of shares alone does not determine company value.
Key ideas
- An IPO share price is set within a broader valuation and underwriting process.
- The amount of capital sought and the company’s market capitalization help shape the offering.
- Debt, earnings, assets, liabilities, float, and competitive conditions are among relevant considerations.
- Nominal share-price examples in the document are anecdotal rather than a general pricing rule.
- Changing share count and per-share price does not by itself change the company’s total valuation.
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Full text
# IPO Valuation: Share Pricing and Number of Shares # IPO Valuation: Share Pricing and Number of Shares Does the number of shares matter for a company to go public? Suppose a company ABC went public and the initial valuation of the company shares to be sold stands at \$5000. Now, it can sell 1000 shares worth \$5, or 500 stocks worth \$10. Which one should Company ABC choose? ## Answer by Emma Marcier (score 5, accepted) https://quant.stackexchange.com/a/44899 IPO valuation is super sophisticated. There is usually a Managing Underwriter, who has a team of analysts/asset pricers/investment bankers/lawyers/etc. with complicated terms and they go and value a company. They usually take control, assess and decide what share price is "suitable" for the company to go public. This team usually takes 7% commission and they love high-valuation companies with high risks. Example of `$LYFT` by Chris in the comment is just fantastic and here is LYFT ratings by analysts: > Apr-02-19 Initiated Seaport Global Securities Sell $42 Apr-02-19 Initiated Cross Research Buy Apr-01-19 Initiated Guggenheim Neutral Apr-01-19 Initiated Consumer Edge Research Neutral $73 Reference: LYFT Rating by Analysts Reference: IPO Prospectus for LYFT LYFT has `$43` net loss per share. Basically, these types of companies go public to reduce the risks and they will keep going down to a 52-weeks low, due to so much debts that they hold. There is usually a 6 months lock-up period that they cannot sell their shares. For such company, you cannot set a `$5` per share price because the company can become prone to bankruptcy. They usually double or triple that net loss price and send it "public". `$10-$20` is a good price range for high caps. However, a high-cap company has to be super healthy to go through such price range, such as Facebook which IPOed at `$19` and doubled to $38 in the first quarter. Another factor you might consider is the size of company, amount of money they want to raise and ratio of desired capital to market cap: - High Market Cap - Mid Market Cap - Small Market Cap There are also many investing/trading factors to consider such as `sector`, `industry`, `market competition`, `stock competition`, `exchange market`, `share float`, `debt to equity ratio`, `earnings per share`, `earnings per employee`, `assets/liabilities ratio` and so many other factors/ratios that are important. IPO share price also depends on the company's business strategy, if they want to be super public or just public. Companies that like to be super public are always in Media such as FAANG. This book might be helpful for you to take a look. #### \$5 Share Price `$5` is a high risk price, because it can easily drop to `$1-$2` and many investors are just not fond of such prices. #### \$10 Share Price `$10` is fine, which can drop to higher single digit (`$5-$9`). > In sum, IPO share pricing depends on so many financial, technical and strategical factors.
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