rcent over the initial two weeks of trading activity and many lose value over that period.
Several factors are considered in both the setting of an IPO price and in the evaluation of an IPO price. Among these factors are the following: (1) the past performance of the issuing corporation, (2) current financial and marketing positions of the issuing corporation as of the date of the IPO, (3) the future outlook of the issuing corporation, (4) trends and conditions in the equity market at the time of the IPO issue, (5) the experiences of comparable corporation in the same industry as the issuing corporation, and (6) demand for stock in the issuing corporation (Raymond James Financial 1).
A traditional model applied to the pricing of an IPO is the comparable-firm approach (Bielinski 64). The comparable-firm approach is a four-step process. These steps are as follows:
1. Identify publicly traded companies similar to the issuing corporation.
2. Compare the relative performance and future outlook for the issuing corporation and the comparable public firms.
3. Analyze the market pricing mechanism for each comparable public firm.
4. Set a price for the issuing corporation IPO based on the findings of 2 and 3 above.
With respect to market pricing mechanisms, the valuation analysis must provide answers to three questions. First, which market multiples are used by the comparable firms for pricing? "Most consistently profitable companies tend to price off their P/E or price-to-cash-flow ratios, while unprofitable or unpredictable firms tend to price off book value" (Bielinski 65). Second, are any unique expectations or circumstances reflected in how the market prices each comparable firm? Factors such as "aggressive growth expectations, depression due to recent poor performance or a host of special circumstances (takeover rumors, pending litigation, valuable real estate holdings, a new patent application, an approachin...