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There’s a lot of misinformation on this site about IPOs and the IPO process. For simplicity, I’m going to lay out the most relevant parts of the process. While this is how the process generally goes, certain steps or details may vary by deal, sector, market, and bank.
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The main participants:
Issuer (Company)
Issuer’s counsel
Underwriters (Banks)- investment bankers (coverage) and Equity capital markets (ECM)
U/W’s counsel
Company Auditor
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Issuer (Company)
Issuer’s counsel
Underwriters (Banks)- investment bankers (coverage) and Equity capital markets (ECM)
U/W’s counsel
Company Auditor
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There are several levels of underwriters but we will focus on the Bookrunners, specifically the Active Bookrunners. This can be 1-3 banks that are doing the bulk of the work to help the company prepare for the IPO. One bank is the lead (lead left).
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A company’s pre-IPO structure typically determines how much prep work there is to do. If PE/VC backed, they are more institutionalized, meaning they have better organized information, audited financials, good corporate model, investor presentation, governance, and staff
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This also means they may have valuation marks that can be used to help inform the valuation range that the company goes to the market with but the private value is by no means automatically indicative of a PUBLIC market valuation. This is important
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How are banks hired? Existing relationships, relevant expertise, and capabilities to help the company in its life as a public co.
The company will hold a “bake off” over 1-2 days where they invite certain banks to pitch to lead the IPO and/or be a bookrunner.
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The company will hold a “bake off” over 1-2 days where they invite certain banks to pitch to lead the IPO and/or be a bookrunner.
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The co will provide certain info to the banks so each can present a value range. This is where the gamesmanship comes in: pitch a high value that might be a stretch and set expectations too high OR pitch a reasonable value and risk not being picked to lead or participate?
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Some companies can be explicit that they place the most weight on the value being pitched, which is silly because the BANKS DON’T DETERMINE THE VALUE. THE MARKET DOES.
The value presented is the bank’s OPINION of where the market will value it and where a deal can get done
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The value presented is the bank’s OPINION of where the market will value it and where a deal can get done
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After the lead banks are selected they have a kick-off meeting and drafting sessions to create the S-1. Depending on how much work the co has done and wants to pay its lawyers, this can take anywhere from a few weeks to a few months.
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Drafting sessions are very, very long but there is plenty of coffee, drinks, and snacks. Most of the time is spent on a few sentences or paragraphs with the lawyers and bankers arguing over use of adjectives and certain statements being made. Very carefully worded document
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Behind the scenes the lead bank(s) works with the company on its financial model and investor presentations. The 1st is a testing the waters presentation and the other is a roadshow. The TTW is taken from the roadshow but it has certain info removed so nobody gets in trouble 11/
Let’s talk valuation, the hot button topic here in Twittersphere and where many outright false statements and accusations have been broadly shared
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Rule of thumb is that there is an “IPO discount”. This is a discount on the value to entice investors to participate in the IPO. Typically 10% is what’s targeted but it can vary. It’s the price of admission into the public markets. Banks are upfront about this with the issuer
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The banks use typical valuation methodologies to arrive at a range of values. If the issuer has public peers, those probably influence valuation the most. If peers are trading at 20x fwd sales, you’re probably not going to command a 30x multiple AT IPO.
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Determining the offer range goes back and forth and is rarely, if ever, a fun conversation. No matter what value you propose, management or someone on the board thinks it should be higher. It doesn’t mean they are wrong, it’s just there is a pricing dynamic with an IPO
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The research analysts will also provide their views on value to the bankers. This is also informed by public comps and talking to investors generally about their views on the market, certain sectors and companies. The pricing range cannot be wildly off from the analyst’s 16/
If a company does a testing the waters presentation then the qualitative feedback from those meetings will help inform valuation but TTW feedback is pretty benign anyways so not that helpful 17/
The range reflects a few things: appropriate value for the company based on public comps, other valuation methods, market conditions, and most importantly where the underwriters believe investors will “do the work” and a full deal IPO can be priced. 18/
What doesn’t happen is the banks thinking it can price at $40 but instead tell the issuer they should offer at $24-26. Despite what some here would have you believe, it just doesn’t happen that way, folks. Banks want the highest price possible that can get a deal done 19/
After some back and forth and looking at mkt conditions, an offer range is presented. The company then discusses with their board for approval. A range cannot go on the cover of the prospectus without company approval. 20/
During the roadshow indications of interest come in. They can be sized in various ways “100,000 shares at $24 / 20,000 shares at $26” or “15,000 shares at market”. This “book building” will inform how the deal is going and if demand is high enough, the range can be increased 21/
The ECM teams of lead banks will look at order book to determine the MAXIMUM price where they can price a full deal (all the shares being offered), have sufficient remaining demand for the greenshoe and for the deal to trade well. 22/
If all goes well it prices in the range, or at the top. If it goes really well they will go back to accounts to talk them up in price and can come back with a deal price higher than the most recent range. This is rare but has happened more frequently in this market 23/
The lead bank ECM team presents an offer: “we are pleased to offer you a deal to price 20 million shares at $30 per share” and then they talk about the book - anchor accounts, certain investors, concerns, feedback, etc. The Co has a pricing call with its board for approval 24/
Company can request certain investors get bigger or smaller allocations (grudges are real) but mostly the final share allocation is left to the banks to determine. The deal is announced and it starts trading the next day. The end. 25/
Not the end - so, is the IPO process broken? absolutely not. Companies are getting public and investors are doing well. Can it be improved? Sure but it is on the margin most likely.
The IPO pops have been large lately but deals are also pricing well above initial ranges
The IPO pops have been large lately but deals are also pricing well above initial ranges
It’s not fair to say banks are intentionally mispricing deals to the tune of intentionally letting them run 50-70%. Those numbers are insanity and probably irrational.
A stock’s close price doesn’t mean a deal could’ve priced there. That’s not how the public markets work.
A stock’s close price doesn’t mean a deal could’ve priced there. That’s not how the public markets work.
Want to improve the pricing process to ratchet prices much higher? Cool, tell that to the mega billion and trillion dollar money managers that you need to anchor your IPO and see how that goes.
Last thing I’ll add is an IPO isn’t a value maximizing event. It’s a single point in time for a company and the goal is to get public and raise $ by selling a % of total shares, not all.
If a company wants to maximize and realize full value then they should sell the company.
If a company wants to maximize and realize full value then they should sell the company.
