IPOs and business valuation: How it works

One of the biggest measures of business valuation is a company's initial public offering, when it makes its stock in the firm available for the public to purchase shares and raise more capital. In some cases, over-hyped companies have seen sizable IPO's fall significantly in the weeks and months following. Many business valuation experts are currently debating some well-known online companies which have yet to go public but are likely to do so in the not-to-distant future. In a recent article for Forbes, Robert Stammers, an investment educator and CFA, said that the IPOs of Twitter, Groupon and Facebook were among the most highly anticipated and have stirred debate about their actual value. He points to Lou Kerner, an analyst at Wedbush Securities, who estimated that Facebook, which has more than 500 million users worldwide, would be worth $113 billion if it went to market. Stammers writes that figuring out how much a company's IPO will be worth can be difficult, given the plethora of different factors. "There's significant debate about how much each of these currently private companies is actually worth," he wrote "In fact, valuing IPOs, like valuing any security, is part science and part art. The value that is ascribed to a company before it goes public is oftentimes dramatically different from pricing in the secondary market after the IPO." He pointed to a number of different reasons that investors took into account, including the "lifestyle stage," how big the company is, how many executives own shares, the impact of short-term investors and tax issues. He goes on to write that highly anticipated IPOs for trendy websites such as Facebook were not necessarily a sure bet for investors. The Financial Times reports that Facebook will go public by late 2012, according to a source close to the company. In an interview with the newspaper, Lisa Buyer, an industry consultant, said that the tech firm could afford to wait until it went public because it was making enough revenue to support current operations. "There are so many things you don’t have to do until you take public shareholder money," Buyer said in an interview with the newspaper. "You don’t have to take investor phone calls or show up at investor conferences."