How are IPOs valued?
Hi guys,
how are IPOs valued? DCF or just by plain comps?
If a company wants to go public to raise fresh capital, for instance to build a new factory, should you value the company as it is now or according to its business plan which reflects the IPO proceeds and their use (the new factory)? The first approach would be pre-money valuation, the latter post-money, right?
Let's say the company wants to raise USD 100 mil. in order to build the factory. Given its business plan incorporating the revenues etc. generated by this new factory, we arrive at an EqV of USD 1 bil. (since this valuation incorporates the IPO proceeds, it's post-money and the company should be willing to offer 10 % stake to investors, right?)
Thanks! Adam
It depends. Short answer is comps are what is used most, or DCF if it's a pre-rev company or won't be cash flow positive for many years. Usually you look at 1-year forward multiples (at least in my industry) and then pick a year to value that off of, then discount back as needed. So if you are pretending an IPO is happening 12/31/18, you look at what comps are trading at for CY2019, and apply that to CY2019 numbers for your company (no discount needed since you are already looking at 1-year forward). But say you can get the analysts to value off of CY2020, you apply the multiple to CY2020 numbers and then discount that a year.
Ultimately what happens in an actual IPO though is you create a dynamic cap table that looks at what options exercise and all that depending on a per share price or if anything converts with a qualified financing event such as an IPO (or if that would require a min $ size, usually would be fine). Then you divide the offering size by the fully diluted offering size to get to a per share price. You build up to EV after creating a sensitivity table (say per share spits out $10, so you sensitize to show $9-11) to figure out your implied multiples based at each share price off of which CY you / the analysts are using.
Thanks.
Speaking of the forward multiples... in sake of consistency, you always apply forward multiples to future earnings, for instance you've got 1YF EV/EBITDA so you apply this at this year expected EBITDA for you company, 2YF EV/EBITDA at EBITDA predicted for FY+1 etc. (and in this case you've got to discount that, right?)
Let's say you have a 1YF EV/EBITDA multiple, you apply it on your company's expected EBITDA for 2018, you arrive at some EV - now should you discount it a half year back, if we want the valuation as of now?
Yeah that's the right idea. But in banking, usually you try to value a company on when you think a transaction will close. So ~6 months from now would be year end and that's not unreasonable for how long a process would take. So you'd just be apples to apples and have everything with valuation as of 12/31/18 - DCF would be from 2019 onwards only, wouldn't need to discount pub comps off of 2018, etc.
Valuing IPOs? (Originally Posted: 04/21/2010)
I was reading a bookm about IPOs and for the valuation, it basically explained comps and DCF in detail. My questions i, do the comps/DCF differ when valuing the IPO or secondary offering of a company?
Maybe, you include a risk premium in the cost of equity? Maybe multiples wouldn't give a good picture as due to the current capital raising, a company wouldn't really be a comparable (exceptional circumstances)?
Thanks
bump
multiples do give a good indication of how much capital you would raise in your IPO, as long as the comparables you pick are companies in similar business, and in similar business &economic cycle.
IPO Valuation - Government? (Originally Posted: 08/10/2010)
Say you're valuing an IPO for a company based in China to list on an American exchange. Using public company comparables, would you only compare against companies that are also American listed, or could you also compare it to companies listed on the Chinese exchanges? The companies you are using are similar in all the other aspects: industry, size, geographic location of the operations: China, the only difference is where the shares are listed.
I'm curious if the government imposed capital controls and restrictions on foreigners investing in RMB denominated stocks would result in a poor or inaccurate comparison.
Chinese multiples are pretty ridiculous; if you're marketing it to American investors, I would benchmark it against comparable American companies or dual-listed foreign companies' valuations in the US.
It depends on how strict they are and the Chinese have never struck me as being terribly strict. I would use Chinese companies for comps but figure in the political/transnational risk and discount appropriately.
On paper, it seems reasonable to assume that it is better to compare against american listed, because multiples tend to vary a lot between different stock exchanges. Don't know how it is on practice, though.
Now that I think about it, what method/program do people use when checking the multiples of comparables? I mean, on Bloomberg I could make a list of companies and check their multiples one by one, but isn't there any function which allows me to do this faster, and perhaps visualize a historical graph of these multiples? Or perhaps another program must be used?
The U.S. equity markets have on average the highest P/E multiples of any country, compared to Japan, Britain, Germany, etc.
Just something to add to the pot.
Valuing IPO (Originally Posted: 04/11/2015)
Hey everyone! I am happy to be a part of the community that I have learned so much from. There are however couple of issues regarding my assignment that I cannot find an answer to, so I was wondering if I can seek some help.
Basically, I am given three years of financial statements of a soon-to-be IPO. I was told to forecast 5 more years, find the post-money value with DCF and establish the % of ownership after the IPO comes in place (the company is certain to receive 200 million from the IPO). My first question is how to find this value and relevant percentages?
What I did is calculate the DCF after IPO getting a post-money value and then adjusted the books for future 5 years WITHOUT the money from IPO to get the pre-money value. Say, this numbers are 1000 (for the value after IPO) and 800. According to this, IPO created additional 200 in value and thus the firm is now controlled 20% by external investors and 80% by the initial owners. Is that correct?
My other task is to "value the equity of the firm" against other competitors using LTM multiples. Can I really use Equity multiples for this comparison, given that I don't have the price of the stock for the case firm? Or should I rather use enterprise multiples?
Thanks and cheers!
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