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ID number:699529
Evaluation:
Published: 03.04.2004.
Language: English
Level: Secondary school
Literature: n/a
References: Not used
Extract

4. Bengier's most difficult challenge was to decide on the offer price for the underwriters. E-bay's short history and lack of a mature business plan complicated the use of valuation methods based on earnings forecast. Nevertheless, the fact that Ebay had earnings was an advantage in terms of valuation. Some other companies with no earnings could not use models based on economic fundamentals. They were relying on models such as Market cap per unique visitor, per page view, and per sales.
It is hard to set a price when there is no way to know how much the stock is worth because no one has bought it yet. Generally, the company and the underwriters want the stock price to go up, so they do not want to price the issue too high. However, if they underprice, even though new shareholders earn a higher return, the existing shareholders are not helped by that and it turns out to be a cost for them. See exhibit 9. Ebays case was different in the sense that internet companies were selling at prices much higher than the net tangible book value per outstanding share of Common Stock. The reason for this being the fact that Internet companies were selling potential growth, not current earnings. The advantage eBay had is that it could offer both potential growth and current earnings at the same time. A strong reason to not to be afraid of overpricing.

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