Pricing an IPO is an important decision and has a direct impact on successful listing. However, the process of arriving at the right issue price involves the assessment of various factors. Key factors weighing IPO pricing decisions are company valuation, future growth potential, market environment, and investor demand. A thorough analysis of these factors helps the company to set a fair price for shares offered to the public.
Let’s discuss how are IPOs priced and the key factors that influence IPO pricing decisions;
1. Company Valuation
Company valuation denotes the current value of a company.
It is derived by analyzing the company’s current financial performance, including revenues, profitability margins, growth rates, and the value of tangible and intangible assets. It means how well a company has performed historically, and its future growth potential decides business valuation.
What Quantitative and Qualitative Factors Affect the Company’s Valuation?
- Financial performance of the company i.e., Profitability, revenues, and cash flow
- Sustainability of the business model
- Management competency and strategic initiatives
- Brand reputation and competitive positioning of the company
- The company’s future growth potential
There are various methods of company valuation – Discounted cash flow method, asset-based valuation, and comparable companies analysis. All of these methods value a company based on its financial performance or peers' valuation.
Whatever method a company uses for valuation affects IPO pricing decisions. Higher business valuation indicates that a company is highly valued, and fixes high prices for IPO.
2. Market Environment and Investors' Sentiments
The current market environment or investors' sentiments at the time of the IPO affects pricing. Let’s understand how.
The market performs well when sentiments are positive due to high buying interest, so companies going public can fix a high offer price, and therefore the best time for the IPO. Unlike it, when the market is negative, companies cannot price IPO aggressively.
Many macroeconomic factors affect market sentiments such as the rate of inflation, interest rate, economic growth rate or GDP, etc.
3. Industry or Sector Performance
The performance of the industry, a company belongs to affects pricing to a great extent.
If an industry performs well, it increases investors’ interest and demand for the companies within the sector. It leads to higher business valuation and IPO pricing.
Due to the positive outlook, investors will be ready to pay higher valuation multiples, such as price to earnings, price to sales, etc. This is because, companies in the sector will experience the fastest growth and thus, offer a return-promising opportunity for investment.
4. Demand for the IPO
How strong an IPO has been in demand affects pricing decisions to a large extent.
Merchant banker/lead manager conducts roadshows, marketing, and meetings with potential investors to assess how keenly they are looking to invest in the company or what is the demand for the issue.
The lead manager showcases the issuer company’s performance and growth potential to investors to generate more and more demand among investors. Higher demand by institutional investors boosts public confidence and demand by retail investors also increases, which leads to higher prices or vice-versa.
5. Peers Valuation
The issuer companies also check listed peers’ valuation and pricing of recent IPOs. Valuation experts identify comparable companies in the sector and check their share price valuation.
Notably, the company does not fix the same prices as listed peers and values its stock after analyzing factors such as business performance, leverage, growth rate, and competitive positioning.
Seek Expert Assistance for IPO pricing
Companies seeking listing hire the right investment banker who assists the company in valuation and pricing decisions. Merchant bankers are professional valuation experts who help you to fix an appropriate pricing for the IPO.
What investment banker do is they maintain balance between company’s fundraising requirements and investors needs to create a win-win situation for both these parties.
We at InvestorGain have a dedicated team of experts who connect you with the right merchant banker having good industry experience and track record. The lead manager will carefully analyze all the relevant factors to raise the required capital while setting an optimal price for the public issue.
