IPO Valuation - What is the process?

For IPO valuation do you use public comps but no DCF or precedent transactions? Why?

Equity/debt pitch books – what is the process, the steps needed to complete the financing?

Indices – which ones are best to follow - the ones in your country only?

New to this area so any pointers would be extremely helpful.

Thanks!

Comments (38)

10y 
drexelalum11, what's your opinion? Comment below:

Why wouldn't you use a DCF or precedents? You are telling a company how much it is worth - if it is worth more in a trade sale, they should know that (unless you think the IPO would pay more, in which case, they shouldn't know that). In an IPO, trading metrics are more relevant because that is what the company is going to be valued on.

Equity/debt books vary massively based on what is being pitched, or if there even is any pitching - HY debt differs from IPO differs from IG debt differs from FO.

Relevant indices will be local and sector.

10y 
hopesanddreams, what's your opinion? Comment below:

Couldn't you use precedent to see how much other IPOs were valued at for similar companies? O are only M&A records kept?

DCF - couldn't you figure out the value of the firm then se whether the current stock price is over-valued or under-valued?

Metrics - do you have a resource which explains the metrics and why they are useful please?

Equity book - suppose an IPO is being pitched. or a secondary capital raise. Can you give me an example or point me to a resource that can help please.

Got in on the indices. Thanks!

  • 1
10y 
drexelalum11, what's your opinion? Comment below:

Current trading is going to be more relevant than IPO comps - yes, you could show, but, firstly, IPO comps are going to be rarer than M&A, because IPOs are rarer. Secondly, current public multiples are more relevant than past multiples (which is essentially what a prior IPO shows). You could make an IPO discount point here, but that is something the ECM guys will go by experience on rather than actually quantifying.

DCF is generally included, but unless a company is trading at insane multiples, it is always going to be the highest valuation.

At the end of the day, you already know what value you think the company can go for, so are going to try to triangulate to that point, and are going to use whatever metrics are necessary (and make them up, if need be).

Components of an equity book would still vary, but let's say it's an IPO pitch - you'd probably have marketing pages, sector/market update, investment case for the company, valuation, key investors in the sector/country, proposed timeline, etc.

10y 
hopesanddreams, what's your opinion? Comment below:

Few more ques if you don't mind.

Understood on the IPO. But how about other equity offerings. e.g. suppose a company is issuing stock again (so its a secondary time they are issuing stock). Do you still use public com pans and include the same companies comp from before? Also did you mean market value (e.g. enterprise value) is more useful then comps?

Is it true IPOs are always undervalued? How would one undervalue it? Just use the lower end of the football valuation pitch?

So its similar to M&A - the seniors know the value and you have to try and mould your analysis to that figure? :D

  • 1
10y 
hopesanddreams, what's your opinion? Comment below:

Whiskey5 - why is DCF = enterprise value for IPOs? (i understood the rest of the post). Genesis - someone posted a similar question on M&I and it says you only use public comps... can you explain please?

10y 
hopesanddreams, what's your opinion? Comment below:

drexelalum11 - can you explain why? I never knew that DCF = Enterprise Value...

10y 
hopesanddreams, what's your opinion? Comment below:

wow - thanks for this!!! just realised what i asked was a stupid question. :S btw is the IPO stuff on this website relevant or is there another website for ECM stuff? thanks

10y 
MoneyKingdom, what's your opinion? Comment below:

M&A past transaction comps are used in determining value in IPO situations, however, they are used as a secondary/tertiary source of information.

Best Response
10y 
TorontoMonkey1328, what's your opinion? Comment below:

This is true, but the only difference for private company is there is no "observable" (equity) beta, because company isn't public. So you have to approximate one with comps (unlever comps, average for asset (industry) beta, relever for company equity / levered beta).

Precedent transaction doesn't necessarily make sense unless the company is a credible M&A target (dual track process) but you wouldn't show that in an IPO. If that is the case, you would show that to the company's management (if you had potential buyers).

10y 
HelloSunshine, what's your opinion? Comment below:

Find some comparable companies off Capital IQ and get their betas off Bloomberg. Unlever them and then take a mean or median, and then relever it to your firm's capital structure (do a Google search for the formula for levered to unlevered).

Use the annual report for cost of debt, either through interest expense divided by interest-bearing debt or explicit rates paid on loans. Then calculate the WACC as you normally would.

10y 
Cornelius, what's your opinion? Comment below:
taylorman_23:
Find some comparable companies off Capital IQ and get their betas off Bloomberg. Unlever them and then take a mean or median, and then relever it to your firm's capital structure (do a Google search for the formula for levered to unlevered).

Use the annual report for cost of debt, either through interest expense divided by interest-bearing debt or explicit rates paid on loans. Then calculate the WACC as you normally would.

so much for edgar, sec.gov, yahoo! finance and marketwatch.

heh..capitaliq. i wonder why all analysts haven't been outsourced/replaced yet.

We're about to enter a Great Depression. Don't you want a president who's already dressed for it?

------------ I'm making it up as I go along.
  • 1
10y 
hopesanddreams, what's your opinion? Comment below:

Yes - market equity is the current stock price of the company (use Bloomberg, yahoo etc to find this) multiplied by the total shares outstanding (found on their 10-K or annual report etc).

When working out enterprise value you can adjust the figure to include preferred stock, options etc.

For the debt (or any figures) - keep it consistent and its best to use the latest figures. I was told to use LTM figures from when the IPO was completed. To calculate LTM you may need 2007 and 2008 reports.

  • 1
10y 
cipits, what's your opinion? Comment below:

I understand that market equity is current stock pirce x total shares outstanding.

However, during the IPO, there was no stock price available (bloomberg , yahoo and etc)

what i can get from the prospectus is the offering price (which is not a market price as well) x total shares outstanding.

thats why i am confused which number to use.

thank you for the help .. tho.

10y 
hopesanddreams, what's your opinion? Comment below:

I'm quite sure you just take the current stock price - since its gone through the IPO this means that it will have a stock price now... then use the LTM figures to figure out the other parts.

This is a good question actually. Anyone else got some input?

Edit: just seen this: http://macabacus.com/valuation/comparable-companies i think your supposed to use comps only...

10y 
cipits, what's your opinion? Comment below:

You can do that for Post Money valuation. What if pre-money valuation.

Even if you use post money valuation, the cash, debt will be changing.. since most companies will pay down their debt and increase their cash after IPO.

Its better to use pre-money because the other components of EV will not change. Just need to figure out what is the market equity value.

Input will be much appreciated.

Thanks.

  • 1
10y 
bankforyourbuck, what's your opinion? Comment below:

If you just want a direct answer to your question, then yes.

WACC is the discount rate used in your DCF in order to value the firm. Fundamentally, the valuation methods are the same from one thing to the next. Pricing an IPO requires far more than just finding the firms value, however. It as much an art as it is a technical skill.

edit: ah, I think I know what you were getting it... it seems odd to use WACC for a private company that may not have any market equity in its cap structure. In that case I think you would just look at comps for Beta's/cap structure, or use a target cap structure.

I'm not in yet in IB though...

10y 
Curious Kong, what's your opinion? Comment below:

You need to value the company, among other things, to set an appropriate initial selling price. Things change in rare cases where companies, such as Google, allow investors to bid on the initial price. Either way, some sort of analysis and valuation will need to be done to determine if the IPO is worthwhile.

I'm not sure about WACC to be honest.

edit: Didn't see above poster's answer before I commented.

10y 
sherborn, what's your opinion? Comment below:

Totally agree with anemonen, its all about fake Louis bags.

Valuing an IPO depends on the funding it has received. Especially in times like these where the debt markets haven't opened up, an IPO taking on debt funding may be difficult. In that case, I would assume that a large amount of your funding would be through equity- therefore your WACC is mainly equity based. Someone can correct me if I'm wrong, but you could take a comp beta and apply it to your equity portion of the WACC to determine an estimated WACC

  • 1
10y 
Stringer Bell, what's your opinion? Comment below:

Sent you a PM, hit me back with any questions.

Ace all your PE interview questions with the WSO Private Equity Prep Pack: http://www.wallstreetoasis.com/guide/private-equity-interview-prep-questions
10y 
msf09jn, what's your opinion? Comment below:

Stringer Bell,

Would you be so kind as to provide me the IPO template too please.

10y 
Quomodo, what's your opinion? Comment below:

Want an answer to this too...are these news articles referring to market cap or enterprise value?

When you look into the abyss, the abyss also gazes at you..
10y 
-.-, what's your opinion? Comment below:

Voluptas commodi quod soluta aliquam. Aut omnis laudantium qui voluptatum ipsa sunt labore. Commodi sapiente perferendis qui voluptatem velit doloribus. Saepe quam aliquam officia at repudiandae ducimus suscipit. Nulla id vitae error qui.

Voluptatem rerum sed voluptas ut asperiores dolorum. Dicta qui dolor corrupti consectetur modi animi. Libero vel molestiae eos laborum quae quia. Dolores est ut ad accusamus autem aut.

3y 
monkey985, what's your opinion? Comment below:

Iure praesentium sit perferendis. Vitae omnis vitae id harum rerum sit facilis.

Qui et qui dicta soluta nisi qui qui sit. Exercitationem hic tempore at. Dolor illo temporibus quo neque earum.

Ipsam ut nesciunt sit sed sit quo. Voluptatem animi aperiam provident ipsam occaecati fugiat quia. Harum pariatur odit at corrupti dolorem dolor odit. Hic unde reprehenderit qui voluptates dolor magnam.

Start Discussion

Popular Content See all

Career Advancement Opportunities

January 2023 Investment Banking

  • Lazard Freres (+ +) 99.5%
  • Jefferies & Company (▽01) 99.1%
  • Lincoln International (▽01) 98.6%
  • Financial Technology Partners (▽01) 98.1%
  • William Blair (▲08) 97.7%

Overall Employee Satisfaction

January 2023 Investment Banking

  • Canaccord Genuity (▲04) 99.5%
  • William Blair (▲04) 99.0%
  • Lincoln International (▲09) 98.6%
  • Jefferies & Company (▲06) 98.1%
  • Financial Technology Partners (▲09) 97.6%

Professional Growth Opportunities

January 2023 Investment Banking

  • Lazard Freres (▲15) 99.5%
  • Financial Technology Partners (▲09) 99.1%
  • Lincoln International (= =) 98.6%
  • Jefferies & Company (▽03) 98.1%
  • William Blair (▲01) 97.7%

Total Avg Compensation

January 2023 Investment Banking

  • Director/MD (6) $592
  • Vice President (23) $401
  • Associates (135) $262
  • 3rd+ Year Analyst (9) $194
  • 2nd Year Analyst (80) $172
  • 1st Year Analyst (257) $171
  • Intern/Summer Associate (42) $166
  • Intern/Summer Analyst (185) $91