IPOs

[NameBack]



you are a great candidate for buying today's IPOs. they are just like your debt theories - who says they can't keep going up up up??

God, you're an idiot

 

[patrickBOOTH]



I don't think its as bad as you say it is. It is much better than putting a company in way over its head in debt.

But I think that this is why most IPO companies are a flop in the long run. Financing and capital structure sends signals to investors. If a company truly believed in their product or service they wouldn't have any qualms about debt financing. Outside equity, to some degree, says to me "having more money to do things with would be kind of cool, but if we waste it all and don't generate more earnings, meh, at least we can stick around with whatever earnings we do have."

 

[Valor]



My understanding, and this is from a couple of years back because IPOs are not part of my strategy in any way, is that the average return from an IPO is no higher, and often lower, than the market itself. That said, sure, you can get some unwanted ones, and that isn't all bad, because the important metric is not how much something is worth, but the discrepancy, in your analysis, between the price and the value, or how your appraisal differs from that of the bankers. Still, I don't know that I would ever suggest the fact that something is an initial offering as a reason to buy, anymore than I ever understood a premium put on splits back in the roaring 90s.

This is incorrect, according to Ibbotson, Sindelar and Ritter (1994), the average IPO is underpriced by 15% meaning you get 15% abnormal return over the market from the IPO price. There are lots of arguments for why the underwriter (I-Bank) underprices the security for the IPO despite their incentive to overprice (they get 7% of the money raised). I don't really want to get into their incentives but they generally do underprice and they actually don't profit from it, at least not significantly unless they bear the risk of holding the security for themselves which most underwriters don't.

The reason the stock price goes up after IPO (for "good" companies) can be attributed to information asymmetry. Basically, outsiders don't know about the company whereas insiders (the company itself and the underwriters) know about the company. Once more and more credible/sophisticated investors invest into the company, the market realizes what the company is actually worth more so the price rises. This is basically the gist of one of the theories on information diffusion.

 

[Valor]



But I think that this is why most IPO companies are a flop in the long run. Financing and capital structure sends signals to investors. If a company truly believed in their product or service they wouldn't have any qualms about debt financing. Outside equity, to some degree, says to me "having more money to do things with would be kind of cool, but if we waste it all and don't generate more earnings, meh, at least we can stick around with whatever earnings we do have."

Debt financing is risky and most people are in business to make a profit, they can't really realize that profit without an IPO or some sort of sale.

 

[patrickBOOTH]

Debt financing is risky, but it is cheaper than outside equity financing. Most companies seeking an IPO already have sales and are making a profit. Going public allows for capital for further growth, plus why would owners want to dillute their profits with shareholders? To me, if you have a profitable company and want to expand use internal equity (retained earnings), or debt. Otherwise you are diluting your own profit and creating a headache for yourself with activists, accounting standards, shareholders, lobbists. I would love to do a study to see if companies who seek outside equity actually see any real income growth. There are some small studies out there that say they in fact don't. I'd like to see what the hell they are doing with the capital raised through equity. I think it is largely wasted, that is why they didn't finance with debt.

 

[Beckwith]

It is inevitable that any popular “hot” company will go public, reiterating my prior statement. It is a way for inside shareholders to cash out and monetize their stakes. Now that there is a secondary market for shares of privately held companies to swap shares amongst non employees, there has been a rash of departures from Facebook for that reason, they are cashing out before the IPO. LNKD was a strange IPO, but backed up my theory as did the Chipotle. MCD wanted to monetize their stake in the company and sold their shares to the public, no money to Chiptole.

 

[Valor]

Well debt isn't strictly cheaper than equity it is up to a certain %. Debt financing is only superior to equity finance in vanilla corporate finance. In the real world only marsupialed banks will lend you really high amounts of money without there being a lot of equity cushion.

All of what you said is certainly reasons to not IPO, the biggest being the paperwork and costs associated with it, but lets be realistic, how else will you get your profit?

In most startups, half of your senior employees have basically made no money pre IPO and they're not going to be happy they worked their ass off for nothing since all of their money is in options.

Whoever funded your company in the venture/PE stage is not going to be happy sitting on their investment. Most of these firms have time horizons of 3-7 years so they absolutely need to cash out at some point.

Retained earnings is not nearly as much capital as IPO.

The fact of the matter is that once a company reaches a certain size, they IPO for one reason or another the only significant exception being Mars.

 

[Quadcammer]

as a rule, debt financing is cheaper than equity, but in some cases, it can obviously be reversed.

As to pricing. The price is formed partially based on the roadshow and investor interest at certain price points. That said, the IB is looking out for number 1. They need to unload the shares, so they'd rather underprice and be overcommitted then have to sit on it. Its not likely a company will agree to a best efforts equity offering. Not to mention, if you under price and you have overcommitment, you can exercise the greenshoe. Always looks better that way.

With respect to the gap at the open, its simply a trade imbalance. Therefore, the stock will open at a point where the specialist's book (at the NYSE anyway) is closer to balance.

IBs just have to balance their interests with the clients

 

[Texasmade]



Debt financing is risky, but it is cheaper than outside equity financing. Most companies seeking an IPO already have sales and are making a profit. Going public allows for capital for further growth, plus why would owners want to dillute their profits with shareholders? To me, if you have a profitable company and want to expand use internal equity (retained earnings), or debt. Otherwise you are diluting your own profit and creating a headache for yourself with activists, accounting standards, shareholders, lobbists. I would love to do a study to see if companies who seek outside equity actually see any real income growth. There are some small studies out there that say they in fact don't. I'd like to see what the hell they are doing with the capital raised through equity. I think it is largely wasted, that is why they didn't finance with debt.

The SEC has a rule that once you have so many different owners you have to IPO. A lot of times, a company will grant stock to key employees and as the grant to more employees, they'll eventually pass the automatic IPO threshold. No person is going to bear the 100% of the risk and essentially tie up all of their net worth in one company without an out to monetize some of their assets.

 

[patrickBOOTH]

I understand. Is there a minimum requirement of any kind for an IPO? Can my father, who owns a small business have an IPO on the otc market? Of course this is a silly question, but there must be a lot of IPO's of companies that aren't in the media every other day.

 

[Quadcammer]



I understand. Is there a minimum requirement of any kind for an IPO? Can my father, who owns a small business have an IPO on the otc market? Of course this is a silly question, but there must be a lot of IPO's of companies that aren't in the media every other day.

your father could definitely do so if he wished.

There are tons of public companies with no real business model, no real assets, and zip for earnings/revenue etc.

The murky areas of the OTC markets are a dumping ground for this junk.

 

[gettoasty]

Who knew about the FB IPO?

Anyone cashing in...?
Sounds exciting

 

[patrickBOOTH]



Who knew about the FB IPO?
Anyone cashing in...?
Sounds exciting

It blows my mind how there is such value seen in social networks.

 

[imageWIS]



It blows my mind how there is such value seen in social networks.

Depends on the social network. FB is pretty ******* solid because of the massive potential customer base... consider that every major company in the world with B2C sales has a FB presence. LinkedIn is a whole different story... but still has value.

At the same time, I'm not stating that these two companies should necessarily have the market cap that analyst would give them (when the LinkedIn IPO occurred, most of the people making the valuation had never actually used LinkedIn... ).

 

[patrickBOOTH]



Depends on the social network. FB is pretty ******* solid because of the massive potential customer base... consider that every major company in the world with B2C sales has a FB presence. LinkedIn is a whole different story... but still has value.
At the same time, I'm not stating that these two companies should necessarily have the market cap that analyst would give them (when the LinkedIn IPO occurred, most of the people making the valuation had never actually used LinkedIn... ).

It is advertising dollars, right? Is there a study that says how much revenue these companies generate through facebook ads? I have never once in my life clicked on an advertisement.

Edit: Oh yeah, seeing the reminder that facebook exists made me finally open it up and delete it today.