5. The Going-Public Process 50

The “road shows” represent a critical part of your company’s selling efforts, since it is here your management team promotes interest in the offering with the institutional investors. This can be a very grueling process since the span of time can last up to two weeks with a number of presentations a day. In addition, you can not discount the fact that in an active market it becomes more difficult to pique institutional investors’ interest if they are going through three to five “dog and pony” shows a day.
Undoubtedly, your underwriters will play a significant role in preparing your management team for these presentations. Additionally, some companies have sought assistance from professional investor relations organizations. Although you may have a good “story” to tell, these advisors can help focus it to an investor’s orientation.
Negotiating and signing the price amendment and the underwriting agreement
By the time the registration statement has been filed, your company and the underwriter have “generally” agreed on the securities — both in number of shares and dollar amount — to be sold. However, as mentioned in Chapter 4, the final price at which to offer the securities to the public, the exact amount of the underwriter’s discount, and the net proceeds to the registrant have not yet been determined. The negotiation and final determination of these amounts depend on a number of factors, including past and present performance of your company, current conditions in the securities markets, and “indications of interest” received during the road show.
For example, in establishing an offering price, the underwriters will look at a multiple of earnings or cash flow based upon that experienced by similar companies. These multiples may be applied to the company’s most recent
results of operations or projected future earnings based upon the outlook of the company’s growth curve. The underwriter will also examine the current stock market price and multiples of companies comparable to your company.
Timing also plays as important a part as any other factor in determining the final offering price of the shares. Almost any company that went public during the late 1960s and mid-1980s (great bull markets) would have done so at a higher offering price than in the mid-1970s (the worst bear market since the 1940s). In addition to cyclical market factors, particular industries go through “hot” and “cold” periods. Unlike the private sale of stock, where negotiations can be in the form
of face-to-face meetings, stock sold through the public market is often priced by market psychology.
Another consideration is the anticipated aftermarket share value. That is, after a period of trading, the stock should settle at an aftermarket share value,
and ideally, the offering price should reflect a discount from this aftermarket share value. In other words, the initial offering price should allow for a small appreciation of the price per share in the aftermarket immediately subsequent to the IPO. An offering at the high end of a range may not provide adequate investor return, resulting in a weak or depressed aftermarket, while pricing at the low end may result in a run-up immediately following the offering (thus lost opportunity for the company or selling shareholders).
PricewaterhouseCoopers LLP Roadmap for an IPO

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