The part of an IPO that every company wants to know is how much money they are going to get. The company, its advisors, and the underwriter will determine the amount of money that can be raised. Once the amount of money that needs to be raised is determined, the price per share is going to determine the amount of shares that will be offered to the public. The first part of the pricing analysis includes comparing the company with other companies that are similar and are in the same industry. The impact of the added capital from the IPO also needs to be evaluated with respect to its impact on the financial condition of the company and operating results.
Other factors that need be evaluated include current trends, timing of the issue, investor confidence levels, central bank policy, industry trends, and national/international developments. In addition to these, the following items should be looked at:
Accounting polices and their impact on reporting
Back orders (or the pipeline)
Cost of capital
General and administrative expenses as a percentage of sales
Historical and projected growth rate of sales and earnings
Off balance sheet financing
The company itself
Cost of production
Experience and quality of management
Growth opportunity in geographic or technological terms
Is it a regional or national company?
Percentage of sales the largest customers account for out of the total sales
New product development from conception to production as opposed to the rest of the industry
Raw material suppliers
The scope of the product line as compared to the industry leaders
Years the company has been in operation
Liabilities and lawsuits
National, state, or local legislation, both positive or negative
Patents, trademarks, licensees or proprietary knowledge
Last but not the least, a fair market value of the company’s equity will be determined using the appropriate inputs. All of the factors mentioned above will help in arriving at a realistic estimate of the companies future earning and cash flow potential. Based on the projection, and the discount rate, a fair market value for the equity will be determined. In later chapters, we discuss in detail how to determine the fair market value of a company’s total equity or an individual stock.