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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

Resisting Temptation to “Like This”

No hoods

No Hoodies (source)

As I mulled this post while prying my seven-year-old out of bed this morning, I also wrestled with all of the brouhaha surrounding the pending Facebook IPO.  Something just did not sit right.  Then it hit me.  I have seen this show before.
 
Facebook’s global adulation is understandable, and well earned.  One in eight people on the
planet use it.  That’s an unfathomable audience that is now interconnected. But as the reports during the IPO process reach their crescendo, two large questions loom:  1) Does Facebook’s advertising really work; and 2) Should the company be valued at $100 billion?
 
Don’t get me wrong, I want to see the company succeed, badly.  I am dying for some good news.  But the more our collective anticipation builds, the more I worry.  Is there a clear rationale for this target valuation or is it hubris?  Are we more enamored of simply breaking an IPO record, or are investors using sane judgment?  And should California really be thinking it can potentially narrow its budget deficit with increased taxes from the many new resident millionaires that will materialize from this transaction?  I get the feeling we are putting too much value on this event, and we might be in for some disappointment.
 
As my son and I had our breakfast, an opinion piece in today’s Wall Street Journal titled “Jenkins:
The Zuckerberg Challenge
” sustained my anxiety.  The author too postulated that apart from enviable 2011 ad sale revenues totaling $3.2 billion, a chasm exists between this and Facebook’s estimated target valuation.  He also provides heaps of praise for the seemingly endless possibilities that lay before the company, which I can’t deny.
 
But as a newly public company, Facebook’s iconic leader Mark Zuckerberg will need to be more transparent with the company’s operations and growth strategies than ever before.  Demonstrating that its ad engine provides real value to its customers and a putting a keen focus on generating profits will be paramount. He now has to answer to many more people that own his baby, and should the stock price fall below the IPO level, the barbarians surely will arrive at the gate.  Which makes me wonder why the company is aiming for such an immediate high valuation in the first place.  “Under promise and over deliver” has been a mantra that has served many CEOs well.
 
As I make my final inspection of my son’s school clothes it also occurs to me that Mr. Zuckerberg might want to leave his signature hoodie at home and don a suit now and then. Growing up is hard, but if you want a $100 billion valuation, you need to play the part.

 

– PondelWilkinson, investor@pondel.com
 
 

JOBS Act to Jumpstart IPOs

IPO

By most accounts, the JOBS Act will likely become law and the rules for new issues should help to streamline and ease the IPO process.
 
Yesterday, the Senate passed he Jumpstart Our Business Startups Act (JOBS Act) (73-26 votes) with broad bipartisan support.  Its version of the JOBS Act will require approval from the House of Representatives (remember that a few weeks ago the House voted 390-23 in favor of a similar version of the law), after which it will go directly to President Obama’s desk for signature.  The White House has previously endorsed the legislation.
 
According to a recent report from the legal minds at Latham & Watkins, the JOBS Act, which is a combination of several different bills, contains certain IPO-related provisions related to corporate governance and financial reporting standards that should:

     

  • make it easier to go public;
  • provide significant cost savings for the IPO process;<
  • allow issuers to gauge investor interest before filing a registration statement;
  • permit confidential initiation of the SEC registration process;
  • streamline the requirements for financial statements;
  • permit analyst research immediately after the IPO; and
  • provide transitional relief for some companies up to five years from more costly requirements such as hiring an independent auditor.

 
Those supporting the bill believe it will encourage small businesses to grow and hire more workers. Further streamlining the IPO process enables companies to gain access to needed growth capital to fuel their expansion needs.  Reducing red tape should give an added boost to entrepreneurs seeking to launch new business start-ups, but it also could spur others to illicitly benefit from less stringent rules at the Securities and Exchange Commission.
 
While this should be viewed as a positive step forward, it also reminds investors of all stripes to carefully seek out and read all company filings before laying down the green.

 

PondelWilkinson, investor@pondel.com