Question

In: Finance

I wanted to bring to your attention the fact that not always a company going public...

I wanted to bring to your attention the fact that not always a company going public uses an underwriter. Can you think of a company who has done this? The answer may not be in the forefront of your mind. I am referring to Spotify. This firm when going public did what is called a direct listing. What does this mean you may ask? In simple terms, the firm chose not to use an intermediary investment bank and sold their shares directly to the public.

Why would a company choose to go directly to the public? Also, when doing this so, who sets the initial price of the stock?

Solutions

Expert Solution

Going public refers to a private company's initial public offering (IPO), thus becoming a publicly traded and owned entity. The main reason companies decide to go public, however, is to raise money - a lot of money - and spread the risk of ownership among a large group of shareholders.

An IPO and the result of being a public company may provide significant advantages to the company and its stockholders. These include cash infusion, ability to “mint coin,” easier future access to equity and debt markets, liquidity for pre-IPO stockholders and institutionalization of the company.

Direct Listing: While many companies choose to do an initial public offering (IPO), in which new shares are created, underwritten and sold to the public, some companies choose a direct listing, in which no new shares are created and only existing, outstanding shares are sold with no underwriters involved.

There are two primary ways in which the price of an IPO can be determined. Either the company, with the help of its lead managers, fixes a price ("fixed price method"), or the price can be determined through analysis of confidential investor demand data compiled by the bookrunner ("book building").

In simple terms, the stock price of a company is calculated when a company goes public, an event called an initial public offering (IPO). After a company goes public and starts trading on the exchange, its price is determined by supply and demand for its shares in the market.

The stock prices are determined by the law of demand and supply. If the demand is higher than supply, then the stock price will go up, however, if it's vice vera then the stock price will go down. Usually, analysts use tools like discounted cash flow and Economic value additions for stock valuation.


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