A few days back, Facebook Inc. changed its initial price offering (IPO) price band. The price of the shares eventually dwindled and investors have now filed suits against the company for not informing them about the fall in revenue growth estimates; in light of this new information they feel they have overpaid at $38 per share. Have you ever thought who decides this price band and what can you interpret from the price band?
How’s it decided?
An IPO price band is the offer price of a company’s shares. The lead managers of the issue decide the price band for any IPO. There is no specific or standardized calculation for it and is decided by looking at the company’s valuation and future prospects. The managers actually gauge the willingness of investors by announcing a price band and then investors make their bid. When the company receives bids, then it decides on a particular price for listing of the shares.
When is price band altered?
Since the price band can be decided weeks before the actual issue, there is a chance to change it if new information emerges. A price band is altered when the lead managers think that they did not accurately price the IPO initially. Say, if the IPO price is revised upwards, it usually means that the lead managers are now more bullish on the prospects of the company. It can be because of various reasons: The bids for shares received during the period when the issue was open was too high, some fundamental or general business environment of the business may have improved during the same time. Alternatively, managers may decrease IPO price band if they do not get enough bids on the price band announced. This may be because investors may deem the offer price band to be very high. Also, during the time the issue is open the business environment may change and business prospects may not remain strong.
In some cases, when there are few bids, companies withdraw the IPO.
Cues for investors
In case of an upward movement, either the company is trying to exploit a short sharp movement in the market to their advantage or are being too bullish on the growth prospects of the company. Alternatively, if the company has revised prices downwards it may be trying to push through the IPO to raise money anyway. IPOs are high risk stock investments and need a thorough analysis.