A Cold Look at Going Public
The burdens may outweigh the advantages: First in a series on IPOs
It was a lousy summer for entrepreneurs who had dreamed of taking their
companies public in one of the hottest bull markets of the century -- Aug.
17, 1998, was the last day a company with $15 million or less in revenue went
public. But the cool market for initial public offerings is no reason
to be in a funk. Instead, it's an excellent time to take a hard look at
the pros and cons of going public -- without such distractions as the spectacle
of competitors raising money right and left.
Companies go public for an array of reasons: They need more cash
to expand. They're concerned that bank mergers will cut off avenues for
small-business financing. They want stock for an acquisition, or they want
the prestige. From 1995 -- when the small-stock-dominated Nasdaq
Composite Index really took off -- to mid-August, 1998, 713 companies with
revenue under $15 million went public, according to CommScan, a research company in New York. But many entrepreneurs don't really know the burdens and potential pitfalls that go along with a stock listing -- bear markets being just one.
The reality is: Being public isn't a one-shot deal, it's
a way of life. And it may not be right for your company -- or yourself.
Here are some important points to consider before going down that road:
A first public stock offering, or IPO, is a major distraction for top
executives at a small business. The CEO must find an underwriter, gather
information for the offering prospectus, and lead the road show in which
the company presents itself to potential investors. It's no small challenge
to keep a fast-growing, lightly staffed business going while the boss is
flying around the country, with all his or her attention taken by lawyers,
bankers, and potential investors. "Companies that fail underestimate the
time that senior management has to spend on the process: It can be 90 days
of intense activity," Dennis Rourke, a managing director at San Francisco-based
NationsBanc Montgomery Securities, said at a recent MIT Forum about going
Your company is no longer your personal fiefdom. Accounts and strategy
aren't private matters between an entrepreneur and a few discreet investors.
The U.S. Securities & Exchange Commission requires regular earnings
reports, proxy statements, and shareholders' meetings. On top of that, public company
executives must constantly answer investors' questions, explain unexpected
developments, and listen to lots of unsolicited advice. It's no light responsibility.
And surprising shareholders with bad news can open you to a class action.
As a public company executive, you'll have something new to worry about
-- your stock price. It can be a distraction. It's also full of vital clues
about your company's relationship to the financial world. Aziz Valliani, CEO of MobiNetix, a Sunnyvale (Calif.) maker
of touch-screen terminals for customer transactions, saw his company's stock
vault from 1½ to 8½ within a few weeks last spring. He suspected
a leak about the impending earnings release and two nearly complete contracts.
That raised the specter of a time-consuming and embarrassing SEC investigation
into alleged insider trading. Valliani rushed out all the news. The stock
settled back to about 4½.
Being a public company is expensive. The IPO involves the biggest
one-time payment, largely for investment banking, accounting, and legal
services. Sonics & Materials, a manufacturer of ultrasonic
welding equipment in Newtown, Conn., reported $1.4 million of costs associated with its $5
million 1996 offering. But ongoing expenses for printing, mailing, and insurance are also sizable. For Sonics, which reported $12 million in revenue and a $396,469 loss (largely due to the relocation of its headquarters and a slowdown in its Asian business) in the year ended in June, the annual bill came to around $200,000.
If a new business contract is material to the company,
certain sensitive data must appear in SEC documents. Last spring, MobiNetix published its contract
to sell its devices to Federated Stores. Although the report excluded certain
details, MobiNetix had to reveal such information as the number of units sold, total dollar amount, software in development, and warranties. And these "are pieces of information you don't want to have to disclose to competitors," Valliani says. His rivals
are larger, so their contracts are rarely so important to the business
that they have to be reported. MobiNetix did recently manage to report
its first profitable quarter, but, says Valliani, the disclosure means the
company is under enormous pressure to get its products out fast before
competitors can take advantage of the information.
Of course, all of these obligations would be mere inconveniences if
the stock price reflected the true value of the business, and if the public
listing became an ongoing avenue for raising funds. Trouble is, in so many
cases it does not. Tomorrow, we'll look at what happens when a company
is public -- and its stock price just can't rally.
By Hilary Rosenberg in New York