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Strategy


Don't Do An IPO!
 
 
Robert F. Mancuso, 07.22.09, 01:47 PM EDT

 
It's not the right time. It may never be the right time.

 The public markets--in particular, the public equity markets--have failed to live up to the expectations of dozens of chief executive officers who took their companies public in the last five years. As the stock market now begins to show signs of life, underwriters will start wooing dozens of companies once again with the siren song of the initial public offering. CEOs of privately held companies, be careful. There is a big gap between the myth of going public and the reality of being public. If the past is any predictor of the future, I caution you with these words: Stay private.

Typically you take your company public and immediately say, "Wow, I'm a smashing success." Why not? You've built a solid company that offers exceptional products and services. Your years of hard work and sacrifice have paid off. Your future is bright. You are crossing the finish line in a long marathon race. Once you get your IPO done, Wall Street will give you the respect you deserve. Your standing in the local business community will rise; colleagues and competitors will seek your advice. Furthermore, your personal holding of stock in the company will now reflect not the dubious value of a privately held company but the precise value of a publicly traded one. Every day you will look at that stock price with a sense of pride.

Despite the good life you see coming when you start an IPO, the reality is usually very different. The reality for most CEOs of IPOs is much harsher. According to the Dow Jones Private Equity Analyst 2009 Guide to the Secondary Market, "85% of the 76 venture-backed companies that achieved IPOs in 2007 (the best year for IPOs since 2000) are today trading below their IPO price. Most of the original constituents in these capital structures did not exit fully or at all at the time of the IPO." Furthermore, focusing on technology companies as an example, "the average time from first investment to IPO is likely to be ten-plus years. ... There are literally thousands of good, strong, growing technology companies for which there are no obvious IPO or M&A exits any time in the foreseeable future."

Of course, almost every company's stock price fell sharply in 2008. Some might argue that looking at the last five years does not give you an accurate picture of the market. However, I submit that it does. The Dow Jones industrial average fell 14.45% from June 2004 to June 2009, from 10,242 to 8763. The Standard & Poor's 500 fell 16.25%, from 1,122 to 940. If you look at the 10 years from June 1999 to June 2009, the Dow has gone from 10,799 to 8763, and the S&P 500 from 1,327 to 940. Why should IPO companies, the most vulnerable of all companies, be expected to do better than the biggest, most diversified and most well-established ones?

The reality is that in the public equity markets, size matters.

CEOs of smaller public companies, those with market equity values below $500 million, learn that as the bloom of the IPO fades, so does Wall Street's interest. That familiar phrase "hot IPO" speaks volumes. IPOs are supposed to rise like Fourth of July skyrockets. They're supposed to sparkle and impress. But once they stop growing, people lose interest. If the growth flattens or is interrupted by a down quarter, the consequences are severe. As the company's stock price falls, its value as a traded currency, one of the principal reasons to go public, is questioned. If it continues to fall, management stock options lose their ability to motivate existing management and to encourage new hires. As Wall Street analyst coverage drops, underwriters stop watching the company, and so the stock languishes. In a world of media saturation, it is hard for even well-performing businesses to get the attention they deserve. Companies that stumble in the public eye face an enormous challenge in regaining their former cachet.

Eventually the burden of public ownership--regulatory compliance, the risk of lawsuits, being targeted by activist shareholders, proxy fights--can overwhelm the benefits.

My advice: If you are the CEO of a successful privately held company, don't give in to the siren song of Wall Street until you look very long and hard at the numbers. Weigh carefully your risks against the possible rewards. Realize that those rewards are not locked in. They are good on the day you go public but uncertain thereafter. Talk to other CEOs who have gone public in the past few years. Seek the advice and counsel of those who have no vested interest, no bias in the outcome of your decisions.

And remember what Dorothy learned at the end of the Yellow Brick Road. To really know who the Wizard is, you've got to pull that curtain aside.

Robert F. Mancuso is chief executive officer of the Dellacorte Group, a middle-market private equity and financial advisory firm.


 
 
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