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Comment by jldugger | Hacker News Reader

And yet finance 101 disagrees.

Yes, market cap should be independent of number of shares, and the market cap = # of shares * $ per share formula still holds, which is why many prefer to think about market caps rather than accounting units.

But it's also the case that a firm issuing a share for the price of $15, increases book value of the firm by $15, and this directly offsets the resulting shareholder dilution. Arguing it was impossible to find buyers at 24 dollars a share is a bit silly, given that the market immediately did just that.

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Let's say that HarryCo, my own personal widget company, was IPOing. I'm selling 100 shares in the IPO.

Goldman Sachs would like to buy 50 shares for $14 each. Morgan Stanley would like to buy 50 shares for $15 each. Barclays would like to buy 50 shares for $16 each.

Citizen Bob would like to buy 5 shares for $24 each.

So what happens? HarryCo IPOs at $15 (the maximum I can get to cover all 100 shares) and then immediately pops to $24 when Bob buys 5 shares from Morgan Stanley.

I did not leave $900 "on the table" in my IPO because there wasn't enough demand to sell 100 shares at $24.

You missed the last part:

> And then immediately crashes back to $16 because there are no other buyers willing to buy at $24.

Which obviously didn't happen.

A lot of your hypothetical hinges on GS / MS buying at 15 and holding at prices below 24. Which is a lot like saying they actually value it at 24, but were somehow allocated shares at a bid lower than that. IMO, Google did it right with the Vickrey / second price auction, and apparently this has been formalized OpenIPO: into https://en.wikipedia.org/wiki/OpenIPO

If we assume that GS and MS have a reserve price of 24, as evidenced by the market open, then their strategic 15 and 16 bids do represent money left on the table.

Fact is Goldman Sachs - and maybe other banks - were allocated shares with a priviledged price during the FB's IPO as they were working on the IPO while buying stocks for their own clients. I know this was a special IPO, but my guess is that it is likely to happen for others

The special IPO is the one where that _doesn't_ happen.

I'll grant that that's the commonly-accepted way to look at market cap, but I think it leaves out a crucial assumption: "Given the current supply and demand for/of the firm's equity".

But I think that's not always a great assumption, because sometimes things happen that don't affect firm fundamentals (profit, revenues, margins) but do affect valuation, like changes in interest rates, shifting investor sentiment on the sector, a lighthouse investor publicly stating their intention to buy/sell, etc -- all of these things change market cap without altering the business per se.

All this to say, I think the simple CAP=SHARES*PRICE formula is too simplistic. I think it's more accurate to think in terms of ranges of what the firm's equity might be worth, and realize that it's a highly subjective assessment based more on aggregate opinion, than some hard objective law of physics.

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