IPO questions 1-9

1.Most companies offer an IPO for the primary purpose of raising capital in order to expand the
business, however there are multiple reasons a company may go public, paying debts or
spreading risks, being listed as public also makes the transfer of shares a simpler process and
gives and opportunity for founders and early investors to exit the company.
The Boston Beer Company went public with the aim of raising between $26 million and $34
million. They planned to use the capital to invest in new equipment and use the funds for
working capital.

2.A temporary group of broker-dealers and investment banks that come together to sell new
equity offerings or debt securities to investors is called an underwriter syndicate. Such syndicate
is formed by and led by a lead underwriter for any security issue. Usually a syndicate
underwriter is required when an issue too big for a firm to handle or it requires a lot of resources.
Through the underwriter syndicate, the resources of all firms can be used, which helps to spread
out the risk and allow the issuance to happen. Apart from the lead underwriter, there are other
participating members as well. The lead receives the largest portion of the issue along with the
main responsibility of dealing with the regulatory bodies. The stock's performance on the market
determines the profit/ loss of the syndicate. The method allows pooling resources, for which
competitors are added as well, and the risk is spread. With everyone a stake, competition is
unlikely to sabotage. Plus, the resources may be too large for a single bank to handle. So
competitor banks are added as well. The Boston Beer company went public by listing on Class A
Common Stock on NYSE, where the symbol SAM was used. Investment banks were involved in
the IPO back then as well.

3.The Boston Beer Company’s competitors; Pete’s brewing company and Redhook Ale brewery
had each gone public very successfully. Aside from watching the its competitors launch
successful IPO’s, the market for Initial public offerings had been booming in 1995 and in the
years leading up to Boston Beer’s IPO.
The market conditions pointed to a surge in stock value as from 1994 to September of 95, the
market noticed a growth of 37 percent. Analyst’s predicted the fourth quarter of 1995 to be the
largest ever for IPO’s with over $12 billion raised in stock offerings.
Apart from the estimates, prospective investors who missed out on the opportunity to buy stocks
of Boston Beer’s competitors during their initial offering were now banking on Boston Beer’s
offering.
Thus, it is safe to assume that the market conditions did significantly impact Jim Koch’s decision
to go public.
4. A roadshow is an event where representatives of a company (such as Boston Beer), usually
investment bankers, travel to different areas to meet and reel in potential investors and
stakeholders. Companies tend to present company information, financials, future endeavors,
financial performance, and other opportunities.
Banks typically utilize roadshows as a way to
market new financial products like stocks and other securities. However, roadshows are
especially pertinent for IPO’s. Roadshows are organized by banks so companies are able to not
only to pitch to potential investors, but also to further an interest in the IPO to maximize shares
sold.
Participants of a roadshow will vary based on different factors including the type of
roadshow and the type of company/bank involved. However, management from the company
and representatives of the underwriting institution will be the ones presenting and promoting,
whereas the audience tends to consist of institutional (such as hedge funds) and individual
investors. The company/bank ultimately presents and answers any questions with the attempt to
convince investors to buy securities.

5. The largest direct cost in most cases is the underwriting fees. Apart from this one, legal, tax
and accounting costs are important as well. Such fee are influenced by various factors including
the size of the firm, the complexity of the IPO, related offer issues and others. Printing,
registration with the SEC, filing costs including those with FINRA and exchange listing costs are
significant as well. The underwriting fee can be anywhere between 3.5 to 7 percent of the IPO
proceeds based on the bank's determination. Usually, the higher the value, the lower the
percentage of the fee charged. Plus, the higher the value, the greater the number of banks on the
deal as well usually.
The fees of going public have changed over time to a great extent. Back in the 1980s, the first
day average return was around 7 percent, which rose to 15 percent between 1990-1998 before
reaching an extreme high of 1999-2000 during the interne bubble, but have fallen since.
Research coverage has increased the costs over time plus the competition and types of services
offered and required have changed/ expanded, significantly increasing costs. It must be noticed
that while costs in some categories may have reduced, it may have increased in others such as
research. Back when Boston Beers went public, the case of the IPO fees were different than
today as well.

6. There are a plethora of advantages and disadvantages for a company going public in general.
To start, companies would be able to generate more capital. This infusion of capital can facilitate
endeavors for the company. Next, going public tends to further a company’s reputation as going
public suggests a sense of visibility and strong financial performance. Another commonly known
advantage deals with liquidity, as selling shares will increase liquidity for investors. Finally, an
advantage that can better a company’s workers as a company going public are able to magnetize
strong employees by offering employee stock options. On the other hand, going public does have
certain disadvantages. In essence, going public translates to selling shares of a company which in
turn will dilute current shareholders’ stake in that company. In addition, we can observe in
stricter regulation and compliance requirements as the company starts a relationship with the
SEC. Finally, it is a possibility that the dynamics of a company could change (specifically its
ownership structure). But in general, an IPO is extremely time-consuming and tends to be costly.
This is why it is important to understand both the advantages and disadvantages of going public.
Speaking for Boston Beer in particular, the same advantages and disadvantages can be observed
in a more specific manner. The advantage of capital applies to Boston Beer as they were
attempting to raise about $26 million to $34 million (after costs and expenses) for equipment,
working capital, and other corporate needs. But, we can also observe a disadvantage as the
dynamic of the company did change. Boston Beer was originally a limited partnership but was
dissolved in November 1995 (before the IPO). Another disadvantage is the time and cost, as
observed as it took around two months for the SEC to approve Boston Beer and having to hire an
underwriting firm.

7. In IPO underwriting, the underwriter will attempt to get its connections to offer commitments
to purchase the shares involved in the IPO. The underwriter itself receives some shares as a
compensation. In best efforts underwriting, the underwriter will agree to give the best effort he
can personally to sell as many IPO shares as possible. On the other hand, in commitment, the
underwriter only guarantees the sale of a block of shares or it will purchase any unsold shares
itself. The greenshoe option focuses on over-allotment. Here, the underwriter is granted the right
to sell more shares than are initially planned by the issue to the investors if there is a higher than
expected demand for the security. Boston Beers has no public information regarding the type of
option it used when going public.

8. Porter’s Five Forces analysis includes discussing the threat of new entrants, threat of
substitutes, bargaining power of suppliers, bargaining power of customers, and intensity of
competition in the industry.To start, the threat of new entrants is low. As the beer industry is
highly competitive, it would be difficult to break into. The popularity of craft breweries re-
emerged in the 1990’s, which was originally being fulfilled by imported beers. But, domestic
craft brewers utilized higher-quality ingredients. In addition, with all the negative aspects of
imported beer such as lower quality, shipping times, and costs, domestic craft breweries were
able to dominate the market. In only ten years (from 1995), Boston Beer became “the largest
craft brewer in the United States.” Considering this information, the threat of new entrants is
unlikely.
Next, the threat of substitutes is interesting to observe. There are many alternatives to
beer in general such as wine, liquor, etc. However, it is not a realistic substitute as beer is a quite
different product. Not only this, but Boston Beer’s marketing approach focused on their beer’s
high-quality ingredients and brewing process. Furthermore, Boston Beer is able to appeal to a
certain customer base by invoking a sense of patriotism. Therefore, it can be stated that the threat
of substitutes is medium to low. 
The bargaining power of suppliers is a bit different as Boston
Beer uses special ingredients for their craft beer. On the other hand, because Boston Beer is an
established company with a good reputation, they may be able to successfully negotiate on their
behalf. Therefore, the bargaining power of suppliers seems to be medium.
Moving on to the
bargaining power of customers, as the beer industry is highly competitive as previously stated,
the bargaining power of customers is pretty high. But, Boston Beer also has a deep-rooted
history in craft beer and quality ingredients, and is able to appeal to customers (as previously
stated). “In 1994, Boston Beer established a 26 percent market share in the craft beer industry
and its sales volume was higher than the next six largest domestic craft breweries combined.”
Based on this information, the bargaining power of customers can be observed as
medium.
Finally, we have the intensity of competition in the industry. There are so many beer
companies that have been established, that the intensity of competition in the industry should be
quite high. However, once again, Boston Beer holds a large market share. They distribute their
products in “50 states, the District of Columbia, Puerto Rico, and seven other countries.” In
addition, Boston Beer had a research and development facility that plays a large factor in their
success, as they “had utilized the facility to develop new flavors and seasonal beers, and had 14
varieties of beer in the marketplace by 1995.” This is why the intensity of competition in the
industry can be considered medium. To conclude, while this industry is extremely competitive,
Boston Beer is possibly able to resolve issues arising from the five forces due to their varying
products, established relationships, clever marketing strategy, and overall quality ingredients and
brewing.

9. Boston Beer’s post IPO performance was a disaster for investors as after one year, the share
price dropped from $15 a share to $11.75 a share. However, the company’s performance in the
years following the initial offering was up to par. The company sold 961,000 barrels in 1995, up
from 714,000 barrels the previous year. Similarly, Boston Beer saw a $36.5 million increase in
revenue from 94 -95, and an increase from $4.75 million in 1994 to $5.9 million in 1995. The
drastic rise in sales did begin to slow down post 1996-97.
In the short term, Boston Beer’s offering was not successful and it took up till 2005 to rebound
above the initial share price of $15. From the current day perspective, Boston Beer thrived in the
beverage market by buying out and expanding internationally, subsequently performing well and
having its best year yet in 2021.