How does a company decide what share price to set for its IPO?
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If I were to give an educated guess I’d suppose it has to be with a Dividend Discount model and a Comps model for pricing
By throwing darts at a board filled with random prices.
IPO listing share price = accepted valuation of company / number of shares you want to issue
Change around the variables as you want to arrive at the desired value.
I am not in IB, but I would say comps, fundamentals of the company (financials, etc) and market conditions.
The MD and business owners agree on a sale price. The grunts in the bullpen reverse engineer a DCF intrinsic valuation and find comps to support said sale price.
Serious question, I've seen so many IPOs fall massively on the listing day, does this mean the banker fucked up or is it the business owners mistake, also what are the reprecussions?
It means it was sold for the tip top valuation. Those who were not drinking the IPO Kool Aid wouldn’t dare pay the ipo price.
Think of it this way. When a company goes public, they get capital from shareholders for the first time. How would a ceo react if they set a price and the stock doubled in trading the same day. They’d likely sue the IB for underpricing the ipo to make the crony customers buying the stock rich. The ceo is a lot happier when it sells and trades sideways or goes down in value. It means they got the best possible price.
I recall the FB IPO very well. Stock dipped by half shortly after it was listed. Words like lawsuit, valuation fraud, and class action were the yahoo finance clickbait. But as you can see, the intrinsic value was there and even if someone bought in at the IPO price, they likely made out just fine.
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