Technical question about IPO
I just thought of problem while watching shark tank and I was wondering if anyone could guide me through this.
Scenario: A company wants to do an IPO and they want to sell 30% of their company. The company is valued at 100 million and they are authorized to issue 2,000,000 and it begins trading at $15.
To make it simple, lets say that they have no cash and debt. The EV of the company is 100 million. How would you see that by looking at the companies annual report, given that ?
15*2,000,000= 30,000,000 which is the amount that they issued to the public but it doesn't take into account what is not publicly traded.
Unless in IPO cases the company sells 100% of their company and elect to make a few of them public.
ie. Authorize 6,666,666,666 shares and issue 2,000,000 share to the public which would equal 30% owned by stockholders.
How would you approach this
You're thinking about it wrong.
It's the value of the shares that fluctuates, not the number of the shares. You have control of the company if you own majority of the shares, not the majority of the dollar value.
So if I own 5M shares, and I want to take 50% of my company public - I either can sell 2.5M of my shares or issue another 5M shares. Let's say the shares trade @$10/share
Let's use the first case as an example. In the annual report you'll see the share capital under equity in the BS. That value will be 50M (5M shares*10/share). Even though you only sold half the shares at $10/share, the rest are valued at that because it is what you would receive if you sell them.
I think the issue is that you're thinking of 100% ownership of the company as requiring ownership of 100% of the authorized shares. In fact, 100% ownership of the company requires ownership of 100% of the shares issued and outstanding. If the company later issues more of its authorized shares, and the 100% owner doesn't buy them, their ownership interest is diluted.
If a company wants to IPO 30% of its shares, that just means the other 70% is being retained by the current owners. They're all still "publicly traded" though (assuming for simplicity that there is only one class of shares).
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