Insight into the IPO

By Jonathan Higuera
March 11, 2008 01:45 PM

Visa’s decision to move forward with an initial public offering sparked a flurry of media interest last month -- and for good reason. The credit card processing giant could raise more money than any other IPO issued in the U.S. to date.

Visa proposes selling 406 million shares for a price between $37 and $42 per share. And if underwriters buy an additional 40 million shares, the total value of the IPO could be as much as $17 billion. Currently, the largest IPO in U.S. history occurred in 2000, when AT&T Wireless Group raised $10.62 billion.

Visa’s move also comes during a slumping U.S. economy, which has led many other companies to postpone their plans to go public.

Still, for business reporters, if just for the Visa story alone, it is always a good time to brush up on a few IPO basics.

Below are some IPO tips and facts every reporter should know.

1. Not every investor can participate. Shares are usually reserved for only the best customers of the bank underwriting the issue and, of course, company insiders such as the management team and employees. Underwriters also get to buy in, usually at a discounted price. Many readers get excited about the prospect of an IPO for a company they are bullish on but most will never get in at the opening price.

2. Know the difference between the “opening price” and the “offering price.” The opening price is the price the stock will start trading at on the open market. The offering price is what the underwriters and company insiders will pay for the stock.

3. IPOs can be risky, especially after the lockup period ends. The end of the lockup period, a time when company insiders are prohibited from selling shares of the stock, could put downward pressure on the stock value.  The period, mandated by the SEC, can be anywhere from three months to 24 months.

4. Flipping.  Flipping may be allowed for investors who are not affiliated with the company going public. But the practice is frowned upon, and it could get some investors blacklisted from future IPOs.

5. Know the underwriter. It is important to identify the underwriter because it will play a key role in deciding the opening stock price.

6. Inform about the numbers. Let your readers know how much money is expected to be raised by the IPO and how the money will be spent. Visa, for example, plans to set aside $3 billion of the proceeds to pay legal expenses stemming from antitrust and unfair pricing claims from merchants. A much larger amount could be shared by Visa’s member banks.

7. Don’t get sucked in by the road show. As part of the IPO process, company officials go around to institutional investors making the case why their company is worth investing in. It’s a pure marketing ploy designed to draw in investors and  may not be a true reflection of the company’s value.

8. Read the company’s S-1 filings thoroughly. This could provide important information on the company’s prospects, management capabilities, risk factors, financial performance and other clues to its future. Be especially wary of companies with no historical track record to back up their claims.

9. Compare the offering price to the book value. The book value is     derived by dividing the company’s net worth by the number of shares. This gives you an idea of whether the price being asked for is fair and realistic.

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Copyright © 2008 Donald W. Reynolds National Center for Business Journalism