Essay Sample on Valuation and Corporate Finance Transactions

2021-05-25 23:19:12
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1511 words
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George Washington University
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Creative writing
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One of the key requirements of any given business is to have adequate capital to help it carry out its mandate of providing goods and services to its clients. There are various ways in which business or companies use to raise the capital needed. Some of these ways range from the use of credit facilities from the financial institutions to personal contribution. It is, however, problematic for companies to access a large amount of capital through some other means such as credit facilities from banks because of the high rate of interests. It is in light of this truth that different strategies are adopted as part of raising capital. One of the most effective means of doing this is by the use of the Initial Public offers (IPO). Initial public offers have been used by different companies as tools to raise vital finance that constitute ordinary share capital. With such an important activity taking place, many issues have to be considered both by the company going public as well as potential investors and current owners of the company. We will look at three companies that have carried out initial public offers within a period of three years. We will also seek to investigate the pricing, trend and subjective factors such as overpricing of the shares or under-pricing of the shares.

The year 2014 was marked as one year with the largest number of IPO recorded in history according to an IPO consultant Renaissance Capital. Some of the companies that issued IPO in the same period include Alibaba, Lending Club and King Digital entertainment (Inc.com, 2016).

Terms used in IPOs

Date of listing: This refers to the date in which the shares of a given company planning to conduct an IPO are listed and made public.

Date of offer: This refers to the first date in which the shares of the company are traded for the first time after listing.

Book runners: They are experts in financial accounts who are employed with the task of coming up with the best price to trade the shares of a given company that is planning to go public.

Issuer: This refers to a legal entity that has been given the mandate to transact securities of a given company during an IPO.

Underwriter: They are companies or other financial entities that closely monitor the sale of securities or shares from a company such as Alibaba or any other issuer company. They also have the mandate of working closely with the book runners in coming up with the best price to buy or sell securities from the issuer company and resell to the investors through their distribution networks. They are paid the underwriting fee for their role in facilitating the IPO. They also earn from profits accrued when they sell the securities or shares to the investors.

Reasons for IPO

There are several reasons why companies such as Alibaba decide to go public. One of them is the fact that by using the IPO, the company can obtain more funds or equity at a lower interest rate as compared to conventional means such as loans from financial institutions. Another aspect is the fact that IPOs offer the companys stock more liquidity as long as there is high demand. This also gives the shareholder a feel of how it means to be part of the ownership process.

AlibabaStarted in the year 1999, Alibaba is a Chinese e-commerce company that prides itself as one of the biggest e-commerce company in the world. The company offers both business-to-business, consumer-to-business, and consumer-to-consumer sales to its customers that are spread all over the world (Alibaba Group, 2016). Alibabas initial public offer is taunted as one of the largest IPO issued in the world with the company issuing more than 320.1 million shares in the public offer. Past IPOs by the company had only raised $21.8 billion which had a price of $68 billion before the new offer was made by the company. Commensurate after the offer was made, the companys shares traded at $92.70 a share which marked a 38% share value increase recorded by the New York stock exchange (Alden, 2016). The net worth value of capital invested in the company also increased from the previous $22.1 billion hitting an all record time of $25 billion. The image below ascertains the share increase spike that was made immediately the company traded its shares the next day after issuing its shares.

Image showing Alibabas share spike by 38% after trading in the first day on issuing IPO;

Source: The New York Times.

Current price of Alibabas shares; 2015 and 2016

The price of Alibabas shares plunged close to an average of 27.5% in the year 2015 from the initial offers price bringing into question whether the company would be able to retrace it share value up past the speculated $100. The share price of the company achieved the $100 value target in the November of 2014 closing at $120. The current price of the company averages a price of $73.08 (the year 2016 average) which is $27 short of its $100 share price target over the two-year period (Forbes.com, 2016). This price change confirms a 30% share value reduction since the company issued its IPO in 2014 (Chandran, 2016). Some of the issues cited to cause the companys woes include high competition, Chinas currency devaluation and reducing profits over the years.

Lending Club

Founded ten years back in the year 2006, the Lending Club is a peer to peer personal company that was marked as the first company to register in SEC after registering its offerings. The company serves its main purpose that entails the issuing of loans to the secondary market. Lending club raised more close to $870 million in its initial public offer in the year 2014 (Inc.com,). The shares of the company increased by 56% of the first day of trading after issuing its IPO reaching an all-time $23.43 from the previous price of $15 (Inc.com, 2016). The companys net worth the first day of trading reached $8 billion which is was a considerable increase in the value of the company. The current share price of the company is at $5.53 which confirms a sharp decrease in the share price over the two-year period. The firms all-time high price over two-year period was in the December of 2014 where the share price had hit a price of $27.98 (Forbes.com, 2016). The companys share price in 2015 averaged at $15 which portrayed weakening operations in the company. The difference between the all-time high and current price of the share price is close to $22 which is an 80% share difference.

GoProStarted in the year 2002, GoPro began its operations as a company manufacturing cameras and video editing software including video applications (Gopro.com, 2016). The company issued its initial public offer in 2014. The companys share price increased considerably with a 30% spike in its first year of trading. The number of shares issued by the firm totaled 17.8 million which were all subscribed fully to the amazement of the investors. The firms share price currently retails at $18 which is close to 63% share price decrease over the two year period.

The above graph reflects the stocks price change after the IPO in 2014 spiking and a reduction in the year 2015 to a price of $24 and a further decrease below $24 in the current year 2016.

Conclusion

Based on the valuation of those companies, it is evident that they all shared similar traits such as having their share prices increase before the date of issue. After the issue, the shares increased slightly before decreasing in prices. After two years, the value of these shares has plummeted to low levels. It is therefore, advisable that anyone wishing to trade in these stocks to consider dealing with them on a short term. Dealing with them in this manner will earn one a profit as they are bound to increase in price. Having the shares in a long term will be a big risk for any investor as the shares of these companies have a history of decreasing in value after a given time after the date of issue.

References

Alden, William. (2016) "Alibaba's Shares Close Up 38% On First Day Of Trading". Dealbook, http://dealbook.nytimes.com/2014/09/19/live-blog-tracking-the-giant-alibaba-i-p-o/?_r=0.

"Alibaba Group".(2016). Alibabagroup.Com retrieved from

http://www.alibabagroup.com/en/global/home.

Alibaba Group,(2016). "Alibaba Group". Alibabagroup.Com. http://www.alibabagroup.com/en/about/history."Alibaba Shares Decline in Second Day Of Trading". CNBC, 2016, http://www.cnbc.com/2014/09/22/alibaba-the-biggest-ever-ipo-after-more-shares-sold.html.Chandran, Nyshka. (2016). "Open Sesame? Alibaba One Year On From IPO". CNBC. http://www.cnbc.com/2015/09/21/a-look-at-alibaba-one-year-after-its-ipo.html.

Forbes.com. (2016). "Can Alibaba's Stock Price Recover And Rally Back Above $100?". Forbes.Com, http://www.forbes.com/sites/rogeraitken/2015/08/14/can-alibabas-stock-price-recover-to-triple-digit-us100-levels/#6ea3c0120e61.Forbes.com. (2016). "Lending Club's Stock Has Been Shattered, Now It's A Buy". Forbes.Com, http://www.forbes.com/sites/kenkam/2016/06/23/lending-clubs-stock-has-been-shattered-now-its-a-buy/#1a8c23424173.Gopro.com, (2016). "About Us - Gopro - Makers Of The World's Most Versatile Camera". Gopro.Com., https://gopro.com/about-us.

Inc.com,. (2016). "Lending Club's Blockbuster IPO Raises The Bar For Financial Startups". Inc.Com, http://www.inc.com/maria-aspan/lending-club-blockbuster-ipo.html.Inc.com,. "The 10 Biggest Ipos Of 2014". Inc.Com, 2016, http://www.inc.com/jeremy-quittner/biggest-ipos-of-2014.html.Lendingclub.com. (2016). "The Leader In Peer To Peer Lending: Loans And Investing | Lending Club". Lendingclub.Com

https://www.lendingclub.com/.

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