Skill Level Beginner
- It used to be that initial public offerings, IPOs, created millionaires overnight. Now, with the high values of many high-tech start-up companies, IPOs are creating billionaires overnight. For example, Mark Zuckerberg, the Facebook founder, was worth over $19 billion the day after Facebook went public. So just what is an IPO? Well, my rule of thumb is if you want to know what something is, just say it slow. An initial public offering, an IPO, is an initial public offering.
It's kind of what it says it is. It's the first offering to the public of shares or stock in a company. Microsoft, for example, went public on March 31st, 1986. The price for one share of stock on that day began at $21, at the end of that first day, the price had climbed as high as $35.50. By the way, if you'd purchased one share of stock on that day, today it would be worth over $19,000. Microsoft has split their shares nine times since 1986 in an effort to keep their stock price low.
One share purchased then would be the equivalent of 288 shares today, because of those splits. So how does a company go public? Here are eight common steps involved in the process. First, the company conducts what is called a bake-off to select an underwriter or underwriters. An underwriter guides the company through the IPO process. In the case of Microsoft, Bill Gates selected Goldman Sachs and Alex Brown to serve as their underwriters and help them go public.
Second, the underwriter benchmarks the company's financial statements with competitors. The financial statements are analyzed to determine how the company should be valued in light of stock prices of other similar companies that have already gone public. In the case of Microsoft, their financial statements were compared with companies like Lotus Development Company, which had recently gone public. Third, the underwriter sets the preliminary IPO price per share. Based on an analysis and a read of the markets at the time, the initial IPO price was set at $16 per share for Microsoft.
Fourth, the company and its underwriters hold what is called a roadshow to promote the IPO to large brokers and institutional investors. These roadshows are intended to generate interest in the company. Microsoft conducted an eight-city international tour as part of its roadshow. The fiftH step in the process is to build the book, what this means is to make a list of tentative orders to see what interest there is in the IPO. As a result of their book of tentative orders, the underwriter suggested that the initial IPO price for Microsoft be raised.
Step six in the process is to set the final IPO price. This is the price at which the stock of the company will begin trading to the public. This price is important because it determines how much the owners of the company will receive when they initially sell their stock. Once they sell their stock and the price goes up, those original owners do not get that increase in value. That increase in value goes to those who initially purchase the stock. So this final IPO price is critical to the original founders.
It determines how much they will initially be worth for all their efforts to get the company to this point. Step seven is to issue the shares. This is the big day. With Securities and Exchange Commission approval, the shares are ready to be sold. And finally, trading begins. As frequently happens with IPO shares, the price per share skyrockets during the first day of trading. In the case of Microsoft, the IPO price started at $21 per share and went up from there.
On that day in 1986, Bill Gates was suddenly worth $350 million. Here we are, over 30 years later, and Mr. Gates is now worth around $90 billion. Turns out he's done okay with his shares of Microsoft stock. But for every Microsoft, where a share purchased in the IPO for $21 in 1986 would be worth $19,000 today, there are dozens of less successful IPOs, such as the Globe.com. The Globe.com went public on November 13th, 1998, and its stock jumped a record 600% in the first day of trading.
Its final IPO price was $9 per share, and by the end of the first day, the stock closed at $63.50. But less than two years later, the stock was de-listed as the dot com bubble burst. The company went out of business in March of 2007. An initial public offering, an IPO, is the point at which owners get out of the company some of the sweat equity that they invested in building that company.
Q: Why can't I earn a Certificate of Completion for this course?
A: We publish a new tutorial or tutorials for this course on a regular basis. We are unable to offer a Certificate of Completion because it is an ever-evolving course that is not designed to be completed. Check back often for new movies.