HOW TO ANALYZE AN IPO
Each year in the United States, about 5,000 companies relinquish private ownership and go public. They sell shares of stock in their businesses in order to raise money to fuel expansion. By selling shares of the business to investors who are eager to make a profit, private companies raised more than $50 billion in 1988 in the initial public offering (IPO) market. When done right, an IPO nets owners and investors many times their investment outlay in a relatively short period of time.
The simple worksheet described in this article can help entrepreneurs and investors analyze any public offering of stock. An entrepreneur can use this worksheet to determine how much of this stock he can convert into cash the year following the IPO. He can also use it to determine the number of shares to offer and the optimum percentage of ownership to retain. An investor can use the worksheet to evaluate the offering's share price, and also to analyze both the effect of various price-earnings ratios on the offering and the overall financial structure of the IPO.
For details on the rationale for a public offering, as well as the ground rules of IPO transactions, see the box "Why and How Companies Go Public" on page 58. Readers familiar with IPOs can dive right into the model. Instructions for building the worksheet appear in the setup box on page 59.
THE INPUT SECTION
The model is divided into two parts: input and analysis. The input section requires seven pieces of information, six of which are assumptions. The analysis section produces six …