Does it Pay to Go Public?

IPORecently, a client pointed me in the direction of a very interesting Inc. article about the case for staying private. The author is the CEO of a privately held, family-controlled tech business, one that has name cache. He notes that being a public company is expensive and time consuming. He also believes that “the most critical benefit of staying private is the facilitation of a true focus on long-term goals.”

It’s not hard to argue that Wall Street is increasingly focused on short-term results, but does that mean that management teams need to adopt the same mindset? Maybe it’s a naïve belief, but some would say that if the stock market is working as it should, a company’s share price will reflect the company’s true value over the long-term.

The New York Stock Exchange predicts a busy year for IPOs in 2014, with about 150 to 200 new issues expected. Reuters points to first quarter IPO activity of $47.2 billion, a nearly doubling from this time last year and “the strongest annual start for global IPOs since 2010.”

Clearly, there are CEOs who still believe in taking their companies public, many in the technology sector. Perhaps they are in it for a large personal pay day, but perhaps they realize that it could be easier and less expensive to raise capital to realize their growth plans. Or perhaps, their Fortune 500 client base requires audited financials as a condition for doing business together.

The decision to go public is not an easy one, and it’s a decision that every company must weigh very carefully. If you’re contemplating an IPO to become like Hooli, the fictional tech company featured in the new HBO series “Silicon Valley,” it may not be the right move. But if you’re doing it to build something that can have a lasting impact, it might just be. Just make sure you surround yourself with good advisors to ensure a smooth process.

— Laurie Berman, lberman@pondel.com

Beware ‘The Wolf of Wall Street’

Focusing on con artists and greedy hucksters selling dreams that rarely come true, “The Wolf of Wall Street” is an entertaining, well-acted, comedic, and sadly, reasonably accurate film.
 
Although intensely exaggerated, the highly successful Hollywood extravaganza epitomizes the classic bucket shop investment bank, selling mostly worthless penny stocks via high pressure telephone solicitations, principally to unsuspecting individual investors, and tantalizing entrepreneurs who want to take their very small companies public.
 
From Charles Ponzi to Bernie Madoff, there is a long history of questionable behavior on Wall Street. The wolf, or rather wolves, never really left. In fact, the sordid creatures may be creeping back into the hood with the stock market’s stellar performance. According to one law firm, DLA Piper, even though 2013 saw the lowest number of SEC enforcement actions (68) in the past decade, word has it that this year and beyond, the SEC plans to bring record numbers of sanctions using new tools and resources.
 
In a bulletin to its clients and prospects, the law firm noted that whistleblower bounties and tips are on the rise and that the Dodd-Frank whistleblower bounty program is gaining steam, with informants potentially receiving as much as 30 percent of any monetary recoveries. On October 1 last year, the SEC awarded its largest bounty to date, $14 million, which itself may drive the number of tips higher in 2014.
 
Mid last year, the SEC’s enforcement unit announced it had formed the Financial Reporting and Audit Task Force, comprised of lawyers and accountants throughout the United States tasked with identifying issuer violations. This august group has a tool in its arsenal, affectionately known as RoboCop, which allows it to determine whether an issuer’s financial statements stick out from the pack. Other tools are supposedly in the works that will analyze text portions of annual reports for potentially misleading disclosures.
 
According to the bulletin, with the amount of new resources and tools the SEC is devoting to detecting financial reporting violations, an expectation is growing that the agency will bring a greater number of enforcement actions in the future. In June of last year, SEC Chair Mary Jo White said that in certain cases, the SEC will not settle unless the defendants admitted wrongdoing, so more companies, officers and directors may be testing the SEC’s allegations and legal positions by litigating and going to trial.
 
The largest number of enforcement actions in any one year during the past decade was 219 in 2007. We’ll see what happens in 2014. But wolves everywhere, beware.
 
— Roger Pondel, rpondel@pondel.com

Conversation: Potential Perils of Crowdfunding

Mary Jo WhiteThe Securities and Exchange Commission, through December 23, 2013, is seeking public comments on a proposal under Title III of the JOBS Act that would permit crowdfunding in connection with the purchase of securities. Nothing is perfect, and if adopted, investors and issuers alike will need to exercise caution.
 
Following is a tongue-in-cheek dialog between SEC Chair Mary Jo White, with comments taken verbatim from a press release issued by the SEC October 23, and a completely fictitious investor, expressing concerns:
 
Mary Jo:  I’m pleased that we’re in a position to seek public comment on a proposal to permit crowdfunding.
 
Investor:  What is crowdfunding?
 
Mary Jo:  Crowdfunding describes an evolving method of raising capital that has been used outside the securities arena to raise funds through the Internet for a variety of projects ranging from innovative product ideas to artistic endeavors.
 
Investor: Umm…I’m not sure I understand.  What does that have to do with securities?
 
Mary Jo:  Title III of the JOBS Act created an exemption under securities laws so that this type of funding method can be easily used to offer and sell securities as well. Securities purchased in a crowdfunding transaction could not be resold for a period of one year.
 
Investor:  Oh, I get it now.   You mean I soon will be able to take my hard-earned money and buy stocks in small, risky companies I never heard of?  Companies that may be run by rip-off artists.  Companies that have not been vetted by an investment bank. Stocks that will not necessarily trade in the public markets—not even on the OTC Bulletin Board?  And stocks that I may not even be able to easily sell?
 
Mary Jo: The Securities and Exchange Commission voted unanimously to propose rules under the JOBS Act to permit companies to offer and sell securities through crowdfunding.
 
Investor: Huh?  Maybe I don’t get it after all. What are the commissioners thinking?
 
Mary Jo:  The intent of the JOBS Act is to make it easier for startups and small businesses to raise capital from a wide range of potential investors and provide additional investment opportunities for investors.
 
Investor: Opportunities you say?  Aren’t there enough investment opportunities out there already? Do we really need more?  I’m scared. I want my mommy.
 
Mary Jo: We want this market to thrive in a safe manner for investors.
 
Investor:  O.K. I understand that’s what you want.  But President Obama wanted the Affordable Care Act website to work.  Besides, wasn’t the SEC supposed to be watching folks like that Madoff fellow?  He should have been easy to monitor, compared with the thousands of small entrepreneurs who will want to sell securities to unsuspecting investors?
 
Mary Jo:  There is a great deal of excitement in the marketplace about the crowdfunding exemption.
 
Investor:  Did I say I am scared?
 
Roger Pondel, rpondel@pondel.com
 
 

Board Member, Meet Shareholder

Nederlands: Vergaderruimte Boardroom Kromhout ...

(Photo credit: Wikipedia)

The Conference Board recently published a blog post on the rapid increase in shareholder requests for special meetings with board members.  Several factors are influencing this trend, including “say-on-pay” and more and more investors calling for the appointment of an independent board chairman.  Indeed, shareholder activism seems to parallel this new wave of requests for special meetings.  The question is, should board member-shareholder engagement be shunned or embraced?  Let’s first review some results from a recent survey conducted by the National Investor Relations Institute.

     

  • The majority of survey respondents (60%) state that their companies do not permit board members to engage directly with shareholders (defined as in-person or via telephone).
  • Within companies that do allow direct communication, 65% state that any board member may speak directly, while 35% state that only certain board members may speak directly to shareholders.
  • Within companies that do allow direct communication, 57% indicate that a member of management is not required to be present during these discussions.
  • In general, as market cap increases, so does the likelihood that only certain board members may speak with shareholders and that management’s presence is required.
  • Companies are only slightly more likely (43%) to facilitate indirect communication between boards and shareholders (defined as e-mail responses to questions via a third-party, such as the IR department or corporate secretary’s office), than direct communication (40%).

 
There are pros and cons to board member-shareholder engagement, and much of that depends on the shareholder base and propensity for activism. But as the Conference Board points out, engagement is here to stay and it behooves companies to develop a plan of engagement long before a rogue activist is banging down the door.

Following are a handful of tips to consider when board members engage with investors:

 

  • Instead of letting them come to you, proactively engage top investors with a specific agenda, whether it is to discuss the company’s executive compensation plan or other corporate governance concerns.
  • Make sure the board member is accompanied by an investor relations representative or another knowledgeable board member.
  • Try to summarize positive developments for the company at the beginning of the conversation.  It is easy to get derailed or focus on one specific topic from the outset of a conversation and never return to a broader discussion about positive developments.
  • Set time parameters.  Generally, 30 minutes to an hour should more than suffice.
  • Ask questions.  Yes, the investor is generally asking the board member questions. But engaging with an investor could provide invaluable insight that could greatly improve shareholder relations.

— Evan Pondel, epondel@pondel.com

Enhanced by Zemanta

The Empire Strikes Back

As the IPO market heats up with the usual technology, healthcare and consumer company players, an unusual pending deal will impact the New York skyline as well–the Empire State Building.
 
Last week, it was reported that at least 80 percent of the investors of Malkin HoldingsLLC, Peter Malkin’s company that owns the Empire State Building, approved a plan to take the historical New York City skyline tower public.
 
Malkin’s plan involves lumping in the Empire State Building into a newly created real estate investment trust (REIT), the Empire State Realty Trust Inc. The REIT is estimated to be valued at approximately $4.15 billion, more than a billion over the $2.33 billion that the building alone is valued at after debt. Through this plan, investors will be able to cash out, and Malkin will be able to stay in control.

Empire State Building

Empire State Building Photo Credit: wikipedia.com)

 
With its complicated ownership history, the 82-year-old, 102-story Empire State Building certainly will be the centerpiece of the new REIT, which in total will have more than 18 properties.  Should the IPO go through, Malkin’s share is calculated to be worth as much as $714 million. Investors would also see flexibility and have more access to their capital, making this IPO quite attractive.
 
It is very rare that any deal of this magnitude will please all parties. While the advantages of taking the Empire State Building public appear at first glance to outweigh the disadvantages, at least for top investors and the Malkins, it remains to be seen if this deal proves to be more profitable than costly.  How the Malkins approach IR will also be interesting to watch.  Such a high-profile building is likely to attract a significant retail following, and telling the REIT’s story to investors might be the biggest challenge yet for the Malkins, especially when all of Manhattan is already watching your biggest asset.

 

Joanne Sibug, jsibug@pondel.com
 
 
Related articles:
 

 
 

Influence Ebbs for Proxy Advisers

JP Morgan

Influence is waning from firms whose mission, in part, is to recommend how investors should vote in corporate elections, The Wall Street Journal reported last week.  In one striking example, the roles of chairman and chief executive officer remained as one at J.P. Morgan Chase after a widely publicized contest, even though the two largest proxy advisers were in favor of splitting it.
 
Institutional Shareholder Services Inc. and Glass Lewis & Co. have long been key influencers when it comes to recommending votes, but with nearly 30 percent more proxy contests in May than last year, issuers have become a lot savvier about engaging investors before entering proxy season.
 
And rightly so.
 
The WSJ citing ISS said investors were able to secure board seats 73 percent of the time this season, compared with 56 percent last year. Nevertheless, issuers that are showing their muscle are starting to win, as was the case with J.P. Morgan.
 
It’s always easy to come up with a “should-a, could-a” list following proxy season.  But one prevailing concept should stick with issuers year round:  a well-devised investor communications and engagement plan helps ensure that management’s side of the story gets heard.  And if such a plan is implemented long enough in advance, investors will take the time to listen and come to their own conclusions long before the ballots are cast.

 

— Evan Pondel, epondel@pondel.com
 
 
Related articles:
 

 
 

Who Do You Trust?

You say “po-tae-tow,” I say “po-ta-tow.” You say “tow-mae-tow;” I say “tow-ma-tow.”

An accent is one thing, but how can two respected financial organizations come to such disparate conclusions? A look at the overview comments by each tells a fascinating story:

{| style="width:100%; border:1px solid bl...

(Photo credit: Wikipedia)

Morgan Stanley, initiating coverage, says “Buy.” And Zacks, on the same day, with the same stock, says “Sell.”

Zacks:

  • “Disappointing results and rising regulatory concerns”
  • “Company has disappointed its investors in each of the last four quarters”
  • “We would advise investors to stay away from this stock for the time being”
  • “Longer-term recommendation of ‘Underperform'”

Morgan Stanley:

  • “Regulatory concerns are overblown”
  • “Compelling entry point”
  • “Underappreciated growth opportunity”
  • “Valuation does not reflect strong growth potential'”

Without mentioning the stock by name, since it is one of our clients, the recommendations just go to show how widely analysts can differ in their assessments of the same security, and how carefully investors should scrutinize recommendations when making investment decisions.

What happened to the stock on the day these opposing recommendations were issued? It went up.

 

Roger Pondel, rpondel@pondel.com 

Enhanced by Zemanta

Investor Communication Gets Creative

Lotta Value.jpg

Cheers or jeers for Loews?  The holding company that provides business insurance, operates hotels and produces energy, recently stepped outside the box and created a comic strip to connect with investors.  With such a diversified business, it may make sense that Loews is testing new communications methods and aiming to simplify its message.  Or does it?

According to a recent BloombergBusinessweek article, the idea came to CEO, Jim Tisch, during a discussion with Loews’ annual report designer, during which he was considering a more engaging way to present company information versus more typical (and some may say tedious) measures. The Adventures of Lotta Value, Investment Hunter!” is meant to help retail investors decide whether to invest in Loews. The comic takes readers on a journey to find the key to the company’s success, which is “tucked away in vaults at each subsidiary.”

Loews is not the first company to experiment with catchy means to speak to external audiences. In conjunction with its 2012 user conference, dubbed SuiteWorld, NetSuite President and CEO Zach Nelson, and Founder, Chief Technology Officer and Chairman of the Board, Evan Goldberg, utilized a humorous video to discuss the company’s business.

What’s next? “A organ opera reporting on its latest fiscal year, a Facebook poetry slam, an IBM string quartet, or an Herbalife ballet,” pondered Stanford Law School professor and a former member of the Securities and Exchange Commission, Joseph Grundfest, in the BloombergBusinessweek article.

As long as public companies continue to use formal and approved outlets for disclosure of material information, finding an effective way to fight through the clutter and noise, and make investors smile along the way, deserves a big cheer from me.

 

Laurie Berman, lberman@pondel.com

Social Securities

The Securities and Exchange Commission’s recent decision allowing public companies to announce information via social media outlets like Facebook and Twitter is a logical next step for a government agency that has been relatively non-committal about new information channels.

Most public companies think in terms of 10-Ks, 10-Qs, 8-Ks and the like when it comes to disclosure, in addition to issuing news releases on wire services, such as Business Wire, PRNewswire, GlobeNewswire and Marketwire. But times are-a-changin’, indeed. When an executive can speak directly to his or her audience on Facebook or Twitter, it seems superfluous to shell out thousands of dollars a year to issue news releases.

Tweeting a link to financial results is, in many ways, a lot easier (and certainly less expensive) than uploading an eight-page news release to a wire service. So what if tweeting financial results will not reach Yahoo! Finance, Google News and other websites that are fed by wire services. Consider how liberating it might feel to spoon feed your messages directly to audiences who care the most about your news.

Not so fast.

To think that social media are a perfectly benign and convenient way to disclose information is about as naïve as believing that Dennis Rodman and Kim Jong-un are BFF. Consider the fact that thousands upon thousands of fictitious identities are created on Facebook and Twitter on a weekly, if not daily basis. Now add to the mix that companies are issuing market-moving information on these very same networks, and soon the powder keg doubles, triples and quadruples in size.

Don’t get me wrong. I love social media and believe that a plurality of channels begets a more well-informed public. But the SEC doesn’t (likely) have the bandwidth to police the myriad shenanigans that social media have the ability to perpetuate.

And so my question is this: Is the SEC saying OK to social media to save face(book) on the fact that it did not initiate an enforcement action on Netflix CEO Reed Hastings? Or is it due time for the SEC to embrace social media for what they really are: new information channels that have the potential to breed a hornet’s nest of Reg FD infractions.

 

Evan Pondel, epondel@pondel.com

Lots of Opining as 2013 Proxy Season Heats Up

With this year’s proxy season well underway, bloggers throughout the nation continue to pontificate about the many hot topics facing public companies when it comes to shareholder voting. There’s a lot to learn, but to spare you some time:
 

  • Take a look at last week’s post byThe Metropolitan Corporate Counsel entitled, “This year’s Proxy Season, the Good News and the Bad News,” which sites say on pay and director independence as continuing issues.
     

  • Or you can look at the website,www.law.com, which focuses on environmental issues as dominant themes.
     

  • The Shareholder Rights Project, part of Harvard Law School’s Forum on Corporate Governance and Financial Regulation, recently announced that proposals it has submitted for 2013 meetings already have had significant impact, with declassifying boards and moving to annual director elections topping its list.
     

  • You also may want to look at www.boardmember.com; www.boardsuitecorp.com; www.proxymonitor.org; and www.corporatesecretary.com.
     

  • Many law firms and proxy solicitation firms are, of course, discussing current issues, as are most of the national law firms.
     

  • Then of course, there’s proxy advisory firm ISS, www.issgovernance.com, stating that political issues have surpassed environmental concerns this year, and that board diversity is elevating on the list of resolutions.
     

  • The other major proxy advisory firm, Glass Lewis, www.glasslewis.com, this year is adamant about board responsiveness to proposals that have received shareholder votes of 25 percent or more against a company’s recommendation.

 
That last one, board responsiveness, is among issues PondelWilkinson takes very seriously, and that ISS and Glass Lewis both continue to address. They will recommend a vote against directors if a board failed to act on a shareholder proposal that received the support of a majority of the shares outstanding the previous year, or if the board failed to act on a shareholder proposal that received a majority of shares cast in the last year and one of the two previous years.
 
My promise to spare you some time with this summary really isn’t sparing you much time at all. While there’s not much that is brand new this year, as always, there’s lots of noise out there, important issues brewing and many opinions of what’s hot. So it’s always a good idea to educate yourself if you are an issuer or a shareholder.

 

rpondel@pondel.com