Technical question - IPO pricing, please help
Hello, I was reviewing a guide and am confused by this question / answer:
Walk me through an IPO valuation for a company that’s about to go public.
- Unlike normal valuations, for an IPO valuation we only care about public
company comparables. - After picking the public company comparables we decide on the most relevant
multiple to use and then estimate our company’s Enterprise Value based on that. - Once we have the Enterprise Value, we work backward to get to equity value
and also subtract the IPO proceeds because this is “new” cash. - Then we divide by the total number of shares (old and newly created) to get its
per-share price. When people say “An IPO priced at…” this is what they’re
referring to.
I don't really understand this at all. First, for step 3, why would you deduct the proceeds? Shouldn't the pro forma share price = (status quo implied equity value + new proceeds) / (existing shares + new shares)?
Second, for step 4, isn't this circular? You need the price to get newly created shares and vice versa. I can't seem to get excel to solve something like this.
Most importantly, why is this not simply: (existing implied equity value) / (existing shares) = IPO price?
Would really appreciate some help!
what guide did this come from?
Verbatim from breaking into wallstreet
I believe for step 3, your guide meant that you will add the net cash proceeds from the offering to the current cash balance, which will then be subtracted from debt in the calculation of Pro Forma Net Debt. The net effect is that it will be added to Enterprise Value on the way to equity value, as you suggested. The guide is poorly worded. Your formula for pro forma share price is thus essentially correct. You should create a sources & uses table, as well, which should account for the allocation of proceeds (which are often used to pay down debt, repurchase existing shares, or close on a pre-negotiated acquisition).
As for circularity, your input should be "gross IPO size," so you are neither telling your model how many shares to offer, nor the price. Don't forget to lop off about 6-8% of the gross proceeds as underwriting spread and fees, then allocate the next amount to your pro forma equity calculation. There will be circularity between your share price and share count, but Excel can handle this easily via iteration.
The guide also says: If you were using P / E or any other “Equity Value-based multiple” for the multiple in step #2 here, then you would get to Equity Value instead and then subtract the IPO proceeds from there.
While Re-ib-ny's rational makes logical sense to me, it sounds like the guide in fact suggests to deduct IPO proceeds (=new cash) in the process of getting to Equity Value. Does anyone know why this, or if this is even correct?
Sorry for pushing such an old thread but I haven't found anything more recent on this subject.
Thanks and Happy New Year!
Sorry to push this - but if anyone can help that would be huge!
Also need explanation, if available
You subtract IPO proceeds to get the "Pre money"-equity value, i.e. the value of the company before the company is actually offered to the public. On a per-share basis, the value before/after the IPO will naturally be the same, but the total equity value will be higher after the IPO(but divided by a higher number of shares).
bump
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