Last weekend, I finished reading Rod McQueen’s ”BlackBerry: The Inside Story of Research in Motion” and thoroughly enjoyed it. It got me thinking about one area devoted relatively little space in the book – the entrepreneur’s decision to go public.
Now, in 300 pages recounting the 25 year history of perhaps Canada’s most successful technology company, you may figure 20 pages is sufficient to devote to the issue of going public. For the record, Research In Motion (RIM) completed a private placement of $34 million to institutional investors in June 1996 (12 years after Mike Lazaridis had started the company) and then completed a full blown IPO in October 1997.
RIM’s revenue at that time was approximately $18 million and the value placed on the firm prior to the offering ( the “pre-money value”) was $350 million. That’s almost 20 times revenue for those of you with a mathematical bent. The rest, of course is history. From a $1.21 split adjusted IPO price the shares rose to a current price of $76 – a healthy return over 12 years.
The book did not indicate whether RIM spent a lot of time considering whether to go public or not. RIM needed the money to fund its growth, they accessed some capital through a strategic investor and government programs, however the banks weren’t there to support the ongoing growth (sounds familiar even today) and RIM went public to access capital.
It has been my experience that that there is (or should be) considerable weighing of the pros and cons before taking the significant step of going public. The advantages of going public are well documented and can be convincingly put forth by legions of investment bankers - greater access to capital, liquidity for investors, a higher valuation for your company which could be used as acquisition currency (private companies tend to trade at a “liquidity discount” versus their public peers), greater credibility with customers, employees and suppliers (including suppliers of capital), etc.
There are, however, a number of disadvantages (lets call them “issues”) to consider before making the leap to the public markets.
These typically include initial and ongoing legal, accounting costs, increased governance responsibilities and introduction of a new, sometimes shortsighted shareholder into the decision making process. The TSX website suggests $600,000 in initial costs, plus underwriters’ fees of 4% to 6% (I’m not sure where you find IPO underwriters at 4% these days). That’s going public. The cost of being public is likely as much as $1 to $2 million per year.
But there’s one other issue that doesn’t get a lot of press. In some situations, when the afterglow of the IPO has faded and the Lucite tombstones are gathering dust, the stock may languish in a “no mans land” - too small, lackluster growth, limited profitability, stretched capital structure or failure to meet expectations - some or all of these have occurred and there is no interest from investors or analysts.
Your laundry is out in open for competitors, suppliers and customers and it’s of no real benefit to you. Case in point: there are more than 100 companies listed on the TSX in this situation with a market capitalization less than $100 million and trading less than 20,000 shares per day. It’s hard to imagine they enjoy a lower cost of capital.
I don’t want to dissuade business owners from going public. I was taught early on in my career that the markets are fickle and when the IPO market’s moon is in alignment with the issuing company’s stars, you access the market, since you don’t know when it will be open again.The problem with some IPOs has been that only part of the equation was working (the IPO market was open) and the company was not really ready for an IPO.
We tell entrepreneurs to ask themselves (at least) three questions before they entertain visions of ringing the opening bell at the TSX:
1. Why do you want to go public? (i.e. does it support your long-term business plan or is it an opportunistic response to market timing?)
2. Where do you expect your stock will be trading in the medium to longer term?
3. How committed are you to managing the demands and expectations of your new business partner, the public?
It’s been our experience that companies that take the time to think about these questions are always glad they did.
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