2
$\begingroup$

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?

Improve this question
$\endgroup$
2
  • 3
    $\begingroup$ Of course it matters. Lyft recently sold 37,500,000 shares at \$72 each, raising \$2.7 billion. If they had chosen to only sell one share, that share would need to be worth \$2.7 billion, which is clearly impractical. $\endgroup$
    – Chris Taylor
    Apr 2, 2019 at 10:44
  • 3
    $\begingroup$ Empirically, companies in the US tend to have an IPO price between \$5 and \$50, and the number of shares sold is determined in conjunction with the valuation sought, to give a price in this range. In this sense Lyft's IPO price was unusually high. $\endgroup$
    – Chris Taylor
    Apr 2, 2019 at 10:53

1 Answer 1

Reset to default
5
$\begingroup$

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

IPO LYFT Loss

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.

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.

Not the answer you're looking for? Browse other questions tagged or ask your own question.