IPO University

When investment bankers decide how to price an IPO, they study the valuations of similar, already public companies. These are called comparables. The pricing range indicated in the registration statement or in the prospectus reflects the proposed valuation of the IPO relative to the comparables. It is critical to select good comparables. Bankers sometimes point to comparables with high valuations, but knowledgeable investors do their own homework. If an IPO is the first company in its industry to go public, investors base a valuation on analogous companies, historical transactions of comparables, and a DCF analysis. Companies that had no direct comparables at the time they went public include Yahoo! and Amazon.