business-haroun/mba/ch64.org

Section 11 | Lesson 64 - how an IPO works

• Links
• notes
  • Mary Meeker – Internet Trends Report
    • Key Facts
  • how to value companies without revenue
    • facebook vs instagram
      • facebooks value for subscribers
      • instagram value for subscribers
    • whatsapp
      • change in growth rates
      • subscriber value
  • valuation methods depend on the industry
    • short term drivers based on company
      • definitions
      • notes
    • long term drivers
    • additional valuation methods
  • example of IPO
    • Goldman Sacks Divisions
      • Investment Bankers
      • Equity Capital Markets (ECM)

Links

• TOC | Business
• S12:L64 course video

notes

Mary Meeker – Internet Trends Report

Mary Meeker, formerly a partner at Kleiner Perkins, is known for publishing the Internet Trends Report, one of the most influential annual reports on internet usage, the digital economy, and technology adoption.

Key Facts

• Report Name: Internet Trends Report (also known as Meeker Report)
• Published: Annually, starting in the mid-1990s

• Content includes:

  • Global internet usage
  • Mobile trends
  • Digital advertising
  • E-commerce
  • Social media growth
  • Emerging technologies such as AI, cloud computing, and voice interfaces
• Originally released by: Kleiner Perkins
• Later reports released by: Bond Capital (Meeker's own VC firm, after leaving Kleiner Perkins in 2018)

how to value companies without revenue

• valuation for high tech companies without revenue is based on subscribers

facebook vs instagram

facebooks value for subscribers

\begin{equation} \text{value per Subscriber} = \frac{\text{Facebook Market Cap}}{\text{Facebook Users (Subscribers)}} \end{equation} \begin{equation} \text{value per Subscriber} = \frac{\text{\$231,000,000,000}}{\text{1.4 billion subs}} \end{equation} \begin{equation} \text{value per Subscriber} = \text{\$165 per subscriber} \end{equation}

instagram value for subscribers

\begin{equation} \text{value per subscriber} = \frac{\text{instagram acquisition price}}{\text{instagram subs}} \end{equation} \begin{equation} \text{value per Subscriber} = \frac{\text{\$1,000,000,000}}{\text{100,000,000 subs}} \end{equation} \begin{equation} \text{value per Subscriber} = \text{\$10 per subscriber} \end{equation}

whatsapp

• facebook is mostly first world companies
• whatsapp has penetration in third world
• facebook messenger sucks ass

change in growth rates

• facebook was losing subscribers
• whatsapp was growing

subscriber value

number of subscribers

700,000,000

price bought

20bn

price / subscriber

28$

valuation methods depend on the industry

short term drivers based on company

industry	driver
consumer tech	subscribers
enterprise tech	revenue
semiconducter tech	earnings
hotels	revpar
industrials	earnings & volume
telecommnications	arpu
retail	earnings & SSS
biotech	FDA approval

definitions

revpar

revenue per available room

arpu

average revenue per users

sss

same store sales

notes

• same store sales

  • investors want to see that the individual stores grow organically
  • e.g. mcdonalods started staying open all day, and profits skyrocketed

• fda approval is necessary for biotech

  • no approval no profit
  • once you get it, it's printing money
  • stocks go up or down a ton depending on approval

long term drivers

earnings and cash flow

additional valuation methods

example of IPO

1. microsoft offers to buy company for 1bn

   • reject it bc too low
   • want to go big

2. talk to our VC Sequoia for advice

   • they recommend we talk to Goldman sacks

3. Goldman Sacks recommends we bring in other banks

   • reasons

     • this going to be a large IPO
     • Sequoia wants to spread it out
     • we will have a better job negotiating a good deal if we have more banks

   • banks

     • Morgan Stanly
     • UBS

Goldman Sacks Divisions

Investment Bankers

• underwrite the IPO

  • legal documents

  • excel valuation

    • what valuation you should use

  • list all the risks "IPO Perspectous"

    • all risks have to be disclosed
    • also called an S-1

Equity Capital Markets (ECM)

1. write 20 page sales memo for the GS sales team

   • condense information in the S-1 Perspectous

2. train sales team how to market the deal

   • pros & cons

     • always bring up the risks
   • integrity is key

3. call clients

   • mutual funds

     • Fidelity
     • Citadel
   • hedge funds

4. after orders are submitted ECM decides how many share each client gets

   • Goldman and the company doing the IPO negotiate on this

     • Goldman will fight for their own clients

     • companies typically want long term shareholders

       • the clients who understand them

       • companies can always track investors who sell shares

         • SEC law that mutual funds have to disclose every three months what their long positions are
         • companies that don't flip tend to get more shares
5. Traders then distribute shares to the clients
6. Goldman wires the IPO proceeeds to the company minus the fees.