Let’s dig deeper into the IPO pricing process we provided an idea about the factors determining the price range, but I want to add a few additional technical details that should give a clearer picture.
Please remember that there is one important difference between institutional and retail investors. When retail investors place an order, they can only indicate the maximum price at which they are willing to buy the company’s shares. They can’t declare interest in buying different amounts of shares at various price points. This is one reason investment bankers like retail investors, are price-insensitive when an IPO attracts the attention of retail investors. This creates a decisive momentum in the book-building process. Institutional investors understand that investment bankers prefer allocating shares to retail investors because they will likely hold the shares in the long run and sustain the stock price in the days after the IPO.
Typically, the roadshow is an intense period when many meetings are organized, and investment bankers and management travel across several locations to make themselves available. One may think it’s best to arrange a meeting at any location to save time and provide evidence of intense interest in the IPO. But this is not necessarily true, considering the risk of receiving a challenging question from one investor and having all other investors hear that question in the same way.
One hasty answer by management, for example, can create unnecessary confusion. Therefore, the roadshow is a series of one-on-one and group presentations. The retail offering begins when investment bankers and the firm have decided on a maximum IPO price. The book-building process ends during that time, and investment bankers, the company’s management, and ownership have a final meeting to determine the IPO price. During that discussion, all factors mentioned earlier are considered, including DCF valuation, trading of comparable companies, market sentiment, and ownership goals. These aspects are essential, but the most important indicator of a suitable IPO price is the book of demand.
