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buddyjuf

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#1

I got a question about when a company goes public and releases stock...

10-12-2004, 08:42 PM

The price of the stock that the company puts out, rigth when it goes public (first hand).

who sets the price?

I was having a discussion with a friend where he said that they could release as much stock as they want, to get as much money as they want, but I said that that sounds a little farfetched and that they are only allowed releasing stock to which the the total value would be the same of the total value of the company

which one is it? or is it something different?

thanx!
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rollinthunder

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#2

10-12-2004, 08:43 PM

your friend is correct
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European Lee

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#3

10-12-2004, 08:44 PM

The price is set (i beleive) by the total value of the company at the time of floating as decided by the amount of shares issued and at what value.

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JakeR

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#4

10-12-2004, 08:45 PM

the underwriting bank sets the price, as they are the ones issuing it to the public. Lets say Lehman Brothers wants to take company X public, they evaluate the company at around 32$/share, they pay company 28$/share, and then unload the stocks to the public. They acquire the shares at a discount because they are taking the risk of underwriting the stock.

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xclusive

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#5

10-12-2004, 08:46 PM

jaker is right on the money...

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Fire

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#6

10-12-2004, 08:47 PM

Jaker beat me to it
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detoxed

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#7

10-12-2004, 08:51 PM

The problem is, people have to WANT to invest in your company and if you overvalue the stock, of course no one is going to buy it.
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JakeR

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#8

10-12-2004, 08:51 PM

also, most IPO's are handled by between 5-10 investment banks, with one or two banks taking on the biggest share of the action. But analysts from each bank dig around the companies previous reports, project dividends, etc to come to a price and then compare and contrast with the numbers all the other banks come up with

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JakeR

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#9

10-12-2004, 08:54 PM

Originally posted by detoxed
The problem is, people have to WANT to invest in your company and if you overvalue the stock, of course no one is going to buy it.

thats not true at all. some inflated stock prices are inflated for a reason, say companies that are currently heavily invested in R&D and are looking bad on the financials, but have a solid product being developed within a year, etc.

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detoxed

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#10

10-12-2004, 08:55 PM

Originally posted by JakeR
thats not true at all. some inflated stock prices are inflated for a reason, say companies that are currently heavily invested in R&D and are looking bad on the financials, but have a solid product being developed within a year, etc.

So what I said was true... you cant overvalue the stock.. as in more than people are willing to pay, not based on financials.
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buddyjuf
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#11

10-12-2004, 08:55 PM

Originally posted by JakeR
the underwriting bank sets the price, as they are the ones issuing it to the public. Lets say Lehman Brothers wants to take company X public, they evaluate the company at around 32$/share, they pay company 28$/share, and then unload the stocks to the public. They acquire the shares at a discount because they are taking the risk of underwriting the stock.

but how does the bank evaluate the money? what aspects of the company make the bank set that specific price?

can they value a stock at more than the company is worth in assets? (company is worth 500 000$, they releast 2.5 million $ of shares)
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JakeR

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#12

10-12-2004, 08:58 PM

Originally posted by detoxed
, not based on financials.

i take it you dont own stock

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#13

10-12-2004, 08:58 PM

the investment banking dept of the brokerage firm hired to price the issue (ie take it public) set the price per share and decide how much capital to raise by issuing a certain number of shares in the primary market (the IPO holders)

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JakeR

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#14

10-12-2004, 09:02 PM

Originally posted by bdjuf
but how does the bank evaluate the money? what aspects of the company make the bank set that specific price?

can they value a stock at more than the company is worth in assets? (company is worth 500 000$, they releast 2.5 million $ of shares)

its a complicated analysis, a lot of factors involved, growth for instance, also, is the company planning on paying dividends, or are they going to re-invest thier retained earnings to increase the growth rate, etc etc, list goes on and on.
My partner and a couple of our employees are ex-investment bankers, just hearing the work stories made me cringe, one field I'm glad I never got into.

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Shoehorn!

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#15

10-12-2004, 09:04 PM

Originally posted by JakeR
the underwriting bank sets the price, as they are the ones issuing it to the public. Lets say Lehman Brothers wants to take company X public, they evaluate the company at around 32$/share, they pay company 28$/share, and then unload the stocks to the public. They acquire the shares at a discount because they are taking the risk of underwriting the stock.

That's the way it works.
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buddyjuf
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#16

10-12-2004, 09:05 PM

Originally posted by JakeR
its a complicated analysis, a lot of factors involved, growth for instance, also, is the company planning on paying dividends, or are they going to re-invest thier retained earnings to increase the growth rate, etc etc, list goes on and on.
My partner and a couple of our employees are ex-investment bankers, just hearing the work stories made me cringe, one field I'm glad I never got into.

gotcha, so it's not a negociable figure, it's pretty much "what the company is worth", right?
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#17

10-12-2004, 09:37 PM

Originally posted by bdjuf
but how does the bank evaluate the money? what aspects of the company make the bank set that specific price?

can they value a stock at more than the company is worth in assets? (company is worth 500 000$, they releast 2.5 million $ of shares)

I don't think there would be too many people interested in buying shares for $2.5 Mill if the company is worth $0.5Mill

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KRL

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#18

10-12-2004, 09:39 PM

The investment bankers at the primary underwriting firm determine the price for the offering coordinated of course with the company's major shareholders.

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FlyingIguana

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#19

10-12-2004, 10:00 PM

bankers set the price. they do valuations(can use comparables) to determine what the company is worth. they price and market the stock.

bankers guage the interest in the stock by doing whats called 'road shows' where they pitch the company to various large investors(institutions like pension funds, mutual funds, etc).

its all based on the demand for the stock and not really on some form of actual valuation, which is why you see more ipo's in bull markets because there's more demand which means a higher price to book value.

if the issuing company wants to set the price higher than what the bank says it should be based on demand, they'll have to sell less shares. there's only so much demand for a stock.
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paxton

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#20

10-12-2004, 10:05 PM

...unless you're Google...

then you have some crazy dutch auction to price your shares - but only after you make ill-timed comments in playboy magazine before the IPO (quiet period).

Last edited by paxton; 10-12-2004, 10:06 PM.

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colpanic

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#21

10-13-2004, 12:40 AM

One part you guys haven't said that is somewhat important.

Their valuation of the shares is based on a price they are confident will allow all the shares to be sold.

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FlyingIguana

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#22

10-13-2004, 07:31 AM

Originally posted by colpanic
One part you guys haven't said that is somewhat important.

Their valuation of the shares is based on a price they are confident will allow all the shares to be sold.

ie based on demand
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