IPO Question?
Richard asks:
I am not clear about the consequences of IPO of privately held company, when it goes public:
1. What’s a benefit from IPO for shareholders, who were the owners of the company before IPO?
2. Do their stocks get valued at the current market price?
3. What happens to market capitization after IPO? does it increase the same amount as IPO amount?
I am not clear about the consequences of IPO of privately held company, when it goes public:
1. What’s a benefit from IPO for shareholders, who were the owners of the company before IPO?
2. Do their stocks get valued at the current market price?
3. What happens to market capitization after IPO? does it increase the same amount as IPO amount?
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Whenever a private company goes public, this represents at least a partial sale of the previous owners’ interests in the business. There are numerous benefits. First, by selling some of the ownership to the public, the previous owners receive cash as the proceeds of the sale. Secondly, the valuation of the business now reflects a “public” valuation. Private companies generally sell for lower valuations than publicly traded ones. Third, the management of the newly public company can use the publicly created stock as “currency” for acquiring or merging with other businesses. A publicly traded stock (especially if it is over-valued by the market) is excellent currency to be used in buying other assets. So rather than rely on getting funding from banks or other suppliers of credit, the public company can utilize its stock. Similarly, if the market undervalues the stock, this provides an opportunity to buy back some of the undervalued stock.
2) Their shares will likely be split to reflect the public company. For example, if as a private business there were 10,000 shares outstanding and management sold off 40% of the ownership, 4,000 shares would not represent much of a public “float.” It is likely that the shares would be split 1000:1 leaving 4 million shares as the public “float.” The remaining 6,000 shares become 6 million shares valued at the then current market price.
3) The market cap is simply the value of the shares outstanding. After the IPO “re-prices” the value of the company, the value or the market cap coincides with the IPO price.
Hope that helps!
1. IPO’s raise capital for the business by basically siphoning off itself an asset to be sold. This is obviously a benefit for management because it gives them ALOT of cash, however the downside is that they are indeed selling fractions of their business to others-they themselves won’t prosper as much as they could’ve had they continued holding onto the business, but with so much cash coming in, it often offsets this.
2. Stocks are generally valued close to current market price… the company board sits down with its brokers and lawyers and decides how many shares it wants to sell at what price… obviously the more shares, the less they’re worth, but there are likely formulas for deciding the best initial selling price of shares.
3. Yes, market cap is essentially what the business is worth, and once shares are issued, if the whole company is up for grabs, the market cap becomes the number of shares times the price, which is what the businesses current assets and expected growth equates to… what people price/value the company as.
Hope I helped! if I need to clarify anything, please let me know.
Market capitalization is the market price of the stock times the number of shares issued. By definition, a privately held company can’t have a market capitalization because it’s not listed on a market.
All shares of the same class have the same value, regardless of whether they changed hands during the IPO or are still held by the founders.
The benefit to the original shareholders is: now they have a place to sell their stock or buy more. The company has access to new capital, so it can grow and make them rich.