Question

 

These recent IPO examples have not been successful mostly due to the fact that they were issued too high a valuation. For example, Lyft’s stock price shortly after they went public was 15% below its IPO price at $61. Further, Lyft reported a larger than expected loss of $1.1 billion for the first quarter on top of a $910 million loss for all of 2018. However, it is also important to not judge an IPO by how it does in the first few months (e.g., Facebook). This recent surge is not surprising as, often, IPOs come in waves. As of right now, Lyft has no debt which is a very desirable financial position to be in. The current debt to equity ratio is .15 (debt that money that is borrowed compared to received credit). It is important to evaluate the company carefully to yield both short-term and long-term success. On one hand, IPOs can be described as “underpriced” in this case because it comes from a lack of foresight for the demand for the stock and the general uncertainty and risk among other factors (e.g., underwriters want to carefully examine and control the risk involved while also rewarding the investors fairly, and the fact that investor demand eventually drives the price up to its market value). On the other hand, like Lyft, a company can be overpriced because the company wants as much money generated as possible. Furthermore, the key to success is preparation. Planning the execution of the IPO under careful management is complex but critical. The better prepared a company is, the more efficient and less costly the process of going public can be.

 

Answer 1

 

The success of an IPO is dependent on many things but having said that, it all comes down primarily to the following two factors:-

1) The perception of potential investors about the future viability and profitability of the business. The first question all investors ask themselves while evaluating an IPO opportunity is the quality of business. If the company going for the IPO has build a durable competitive advantage for itself, the public will be keen on investing in the company. The factors that will determine are as follows:

• Market shares (competitive advantages)
• Viability of business model (existing or future monetisation expectations)
• Revenue growth at present and opportunities for future expansion
• Key operating metrics, such as user base, active users, audience reach, etc

Thus, the company should make sure before going for an IPO that it delivers its message to the publci about the viability and attractiveness of the business, which plays a crucial role in the success of the business

2) The second most important factor that determines the success/failure of an IPO is the valuation at which the IPO is priced by the company for subscription. If the investors are satified and attracted to the quality of business and growth opportunities, they may still not invest if the shares are priced too high given the opportunities for returns. Thus, the company and its underwriters must very carefully determine a price which gives its investors a good return based on the risk they are underatking by subscribing for the IPO.