An IPO valuation has two hidden pieces. First is the valuation of the company set by the bankers that the company hires to sell its story (or, “pitch”) to would be shareholders (mutual funds and hedge funds, first, of course). Second is the valuation the company scores on its very first day as a publicly traded company. The valuation could be either what those fancy bankers said it would be, or higher/lower based upon what everyday investors who didn’t get the stock early in the pitch process think the company is worth.
As average investors, most of us will not be privy to the “pitch.” A pitch is done by an investment banking team that was hired by the company to sells its stock to mutual funds and other really rich investors. In the process, the bankers give presentations and wine and dine prospects in the hope that they “subscribe” to the IPO. The upside for the big investors is that they can get involved in a stock at a potentially low price. And hey, let the suckers on IPO day pay a higher price…right?
You won’t only find tombstones in creepy cemeteries. Actually, a tombstone is an exciting bit of information for people interested in investing in a particular stock. A tombstone is basically a written advertisement for the company that is going public, detailing all of the awesome banks who are working on the deal (sound smart: the “issue”) as well as some basic information about the company.
4. “Red Herring”
Not the kind you find in a can at the supermarket. A red herring is interchangeable with the more sophisticated word “prospectus.” The prospectus shares information with inquisitive investors about the company that is seeking to go public, most importantly the prospects of the company in the long-term. Can’t have the company going bankrupt in three months out of the blue, right?! The “red” part is derived from a line in the report stating that the company is not seeking to sell its stock before the actual IPO date — a line that is written in, you guessed it, red.
You would in no way be correct in thinking a bookrunner works at Barnes & Noble. Sorry. When it comes to an IPO, the bookrunner is the head investment bank that is in charge of running the IPO process. This bank gets to tell the other banks in on the deal what to do — and for that, likely earns higher fees and has its name placed at the top of the tombstone. We know, we know, it sounds morbid, but it’s an honor!