Extended-form Case Study

Zoom and WeWork: understanding IPO underpricing

Published on September 29, 2021   8 min

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Hello and welcome to the case of Zoom and WeWork, understanding IPO underpricing. I'm Professor Michael McDonald, I'm a professor of finance at Fairfield University in Fairfield, Connecticut. Today I'd like to talk to you about a really interesting phenomenon in the capital markets, that is, the substantial amount of capital that's left on the table by IPO issuers.
IPOs (initial public offerings) are the first time that a company sells stock to investors. In an IPO, investors are, in essence, betting on the chances of a company succeeding in the future. Some companies succeed enormously - take Netflix or Amazon as examples - but then other firms struggle, Noodles or Groupon might be examples of these, at least based on their stock prices post-IPO. Investors have a difficult task, they have to try and predict what a company's future looks like, but without the benefit that is normally available to stock investors. That is, without the benefit of historical financials, or any kind of stock price history that you'd have when dealing with an existing company (or an existing stock, I should say).
IPO mechanics are fairly straightforward, but basically IPOs are sold by investment banks on behalf of the issuing company. In other words, a company comes to an investment bank looking to raise money, the investment bank then runs a 'roadshow', telling potential investors why the company will be a big success in the future. Based on the level of enthusiasm the investors show, the investment bank prices the IPO at the IPO price. That price is what investors who buy into the IPO pay, just before it goes public. In other words, the IPO price is not the same thing as the price the stock starts trading at on its first day of trading, it is the price that IPO investors pay to buy into the company before the firm actually begins trading. That's important.

Zoom and WeWork: understanding IPO underpricing

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