THINKING OF GOING PUBLIC? HERE’S WHAT YOU NEED TO KNOW
Rafael S. Lajeunesse, CEO and founder of ReachX, offers words of wisdom on taking your company public.
For many companies, the allure of going public is difficult to ignore. Making an initial public offering (IPO) appears to be an enticing offer for a number of reasons, with its promise of substantial capital, increased visibility and market prestige. It’s an intoxicating vision of your business at its prime but the intricacies of the IPO process call into question whether it's worth going public and which companies it really is an option for.
What are the key things to consider about your company before going public?
Some business leaders may argue that going public is a “one size fits all solution” but is this really the answer for all companies? There are so many considerations to make before going public - these encompass financial and compliance regulations and getting the timing right for going public. One of the most important things to consider before even thinking about going public is your company’s financial readiness. If you’re planning on going public in the UK, you need to consider how the IPO landscape has become even more complex since Brexit passed.
The London stock market is facing a two-decade low for listings. Brexit affected investor sentiment due to the uncertainty around Britain’s exit from the EU leading many British start-ups to flock to the New York Stock Exchange where valuations are higher and pockets are deeper. The intensifying cost-of-living crisis and rising inflation haven’t helped the landscape for UK IPOs. With Deliveroo Plc, Wise Plc and THG Plc all down more than 60% since going public in 2022, investor confidence hasn’t been stable.
Companies going public in the UK also must check their compliance with the UK-adopted IFRS Accounting Standards rather than the previous EU ones. Unlike some other global exchanges, the UK does not permit dual-class share structures in IPOs. This is another reason companies have been choosing to list elsewhere, such as UK chip designer company ARM, which was listed on the NYSE this year.
UK laws require various different regulations including a prospectus which provides detailed information about the company’s finances, business operations and risks to potential investors. You must also comply with the LSE’s Listing Rules. These rules set out requirements related to corporate governance, disclosure and ongoing reporting obligations for listed companies. Other regulations include transparency rules, market abuse, insider trading regulations and admission documents for the FCA.
There are expensive new costs involved for a company going public, and if you're a company that feels like you need to list on the NYSE instead, your pockets need to go even deeper to fund a listing further afield. Fulfilling the ongoing financial compliance regulations can be a major financial burden, meaning going public is becoming a realistic option only for companies with significantly strong cash flow.
Public companies are also at the mercy of global financial trends and stability. As geopolitical trends continue to remain unstable, investors are less likely to commit. While many companies fantasise about going public during a bull market - a prolonged period of rising asset prices - it may be some time before the global market reaches this stage, as markets are still recovering from the pandemic.
Global interest rates have a direct bearing on the availability of capital, borrowing costs for business, and most notably the risk appetite for IPOs. In the decade leading up to the low point for rates in the summer of 2020, the benchmark US 10 year yield struggled to hold above 2 percent. Shorter-term rates across much of the G20 were at or close to zero, meaning short-term borrowing was almost free. This led to available capital seeking higher and riskier returns in order to deliver income to investors and savers. An obvious beneficiary was the IPO markets of Europe, the USA and the UK.
As the world emerged from the pandemic in the winter of 2020, demand for commodities and manufacturing started to return to levels not seen for many months. This combined with the war in Ukraine, tensions with China, and a host of instability worldwide has pushed prices of food, fuel and all commodities to levels not seen for a decade. The resulting inflationary surge has taken the yield on the US 10 years back to around 5 percent. Suddenly capital has an alternative place to invest. Fixed-income funds and dividend yields on benchmark stocks are once again an investor’s best friend. Whilst stock markets remain relatively stable in the long run, the days of 10 to 20 percent annual gains are a distant memory for the moment. This has of course had a serious knock-on on effect into the IPO market. Investors are much more risk-averse when it comes to placing bets on new ventures or even established household names trying to raise capital.
Is the prestige worth it?
One of the main reasons that founders are so determined to go public is the prestige and publicity that comes with a stock exchange listing. Yet, they can sometimes fail to consider how much information actually needs to be publicised, often leading to public, industry and media scrutiny. It can be particularly difficult to keep information secure from private competitors.
The cost of disclosure financing is another financial burden, with the costs of appointing an investor relations department, producing comprehensive prospectuses and ongoing reports and audit reviews quickly piling up. Marketing and public relations activities to manage the increased visibility of the company and investor confidence, can also add to costs.
When things do go wrong for public companies, it can seriously affect the public’s perception and thus investor confidence. Take the recent resignation of BP CEO Bernard Looney as an example. Looney admitted to not being “fully transparent” when an anonymous source informed the BP board of directors about “relationships” the CEO had with staff members prior to them joining the company. The day after the shock resignation, BP's share price dropped as much as 1.8%. BP will have to disclose if any remuneration payments are made to the former CEO, a decision which could have a further effect on its stock price. This shows the complexities of compliance and the risks associated with it.
Which companies should go public?
With so many risks and drawbacks to going public, alongside a historically narrow rally on the NYSE, it calls into question which companies should consider going public. Only 39% of the stocks in the broad market index are trading above their 200-day moving average, a historic low. Considering these factors, I’d argue going public is only a viable option for large companies with significant staff departments and robust cash flows. Going public allows large enterprises to raise substantial capital for further expansion and investment.
One of the main bonuses for large companies going public is allowing an allocation of equity to employees as part of employee benefit and retention program. For example, John Lewis is known for its partnership scheme in which employees are part-owners of the company and share annual profits. Supermarket chain Tesco has also implemented a Save As You Earn (SAYE) scheme, which gives staff the opportunity to save directly from their pay packet for three or five years. Once they have finished saving, they can choose to buy Tesco shares at a discounted Option Price or get their savings back.
This is an excellent way for larger firms to enhance employee engagement and loyalty. For smaller companies, the financial burdens and regulatory complexities of an IPO call into question whether they are able to reap the same benefits and if the process will just cause more financial difficulty, rather than raising capital.
Well-known companies have reversed the decision to go public over the challenges of IPOs. One of the most notable examples is the multinational technology company Dell Inc. In 2013, founder Michael Dell, in partnership with private equity firm Silver Lake Partners, led a leveraged buyout to take the company private. This allowed Dell to undergo a major reconstruction and refocusing without the scrutiny of public ownership. In 2018, Dell Technologies, the parent company of Dell Inc. conducted a complex reverse merger with VMware, a publicly traded subsidiary. This allowed Dell Technologies to become publicly traded once again, while also retaining the benefits of status as a private company.
What are good alternatives to going public?
An alternative option is to merge into a public company to avoid the initial difficulties of valuations and raising capital. H.J. Heinz company, known for its ketchup and food products, was taken private in 2013 through a joint acquisition by Berkshire Hathaway and 3G Capital. In 2015, the company later merged with Kraft Foods Group Inc. to form The Kraft Heinz Company, which is publicly traded.
Overall, it’s difficult to ignore the current challenge of IPOs across the global markets. Britain's financial watchdog just recently signaled that its plans to merge the London Stock Exchange's two categories of company listings and dilute some shareholder rights, were poised to go ahead in a bid to make the City more globally competitive.
Nevertheless, companies will still find it difficult to ignore the allure of going public. Shoe brand Birkenstock debuted on Wall Street last week with little success. The company had the worst NYSE debut in two years, closing down 12.6% on its first day, the worst first-day showing in a US IPO of $1 billion or more in over two years. This recent debut has called into question, more than ever before, if going public is really worth while and serves as a cautionary tale for other companies. Staying private has worked for well-known companies such as flat-pack furniture seller IKEA and confectionary brand Mars Inc., so is it time for more up-and-coming companies to follow in their footsteps?