nationalpost.com
Financial=20
PostEntrepreneur
FP Entrepreneur
of the Entrepreneur
Pros and=20 cons of an IPO
Aaron Lynett/National Post
David Fabian, audit partner with RSM Richter = in Toronto,=20 says while more companies are discussing going public these days, = entrepreneurs=20 don't have an appreication for the costs associated with an=20 IPO.
Graduation Day is how successful former startups often reflect on the = day of=20 their initial public offering. And that analogy might be more = appropriate than=20 they realize.
Similar to students' experiences when they enter the workforce with = newly=20 conferred degrees in hand, new public companies can quickly find = themselves=20 thrust into a world of unexpected surprises.
"There is a lot more discussion around public offerings these days," = said=20 David Fabian, a partner with Toronto-based accounting and consulting = firm RSM=20 Richter. "But I don't think there is an appreciation for the primary = costs=20 associated with being public."
Mr. Fabian, who helped guide such companies as Evertz Technologies = Ltd. and=20 the Pizza Pizza Royalty Income Fund through the IPO process, notes that = the=20 initial conversion costs alone can range into the millions of = dollars.
Then there are the various follow-on costs, which are seldom = considered in=20 advance. Fees charged by legal advisors, auditors and stock exchanges = could add=20 several hundred thousand dollars to a company's public tab, Mr. Fabian = said.
With hot tech startups such as two-year-old online deals company = Groupon Inc.=20 or five-year-old Internet telephony provider Skype SA seemingly rushing = to=20 market, it can be difficult for rapidly growing young companies to see = the=20 forest for the trees.
Just three years old, Oakville, Ont.-based toymaker Great Circle = Works Inc.,=20 managed to increase annual revenue more than 2,200% between its 2007 and = 2009=20 fiscal years, earning it the coveted No. 1 spot in Profit Magazine's = October=20 2010 ranking of Canada's 50 fastest growing businesses. Yet despite such = spirited growth, it has no immediate plans to offer shares of the = company on a=20 public market.
"I do plan on growing the company substantially in the next few = years," said=20 Mark Cahsens, founder of Great Circle Works.
"However, with [going public] I would be concerned that the pressures = from=20 shareholders and from the marketplace would not necessarily be = consistent with=20 the right path for the company.
"Some of my attention would be pulled away from running the = business," he=20 said.
An IPO is a major disruption to a business, Mr. Fabian agrees. Yet = there are=20 several advantages associated with going public that extend well beyond = the=20 requisite funding boost.
"Going public is definitely a sign you've made it to the next level, = no=20 question about it," said Brad Cherniak, a co-founding partner at = financial=20 advisory firm Sapient Capital Partners in Toronto. "It then gives the = company a=20 currency to use to pay its employees, to pay targets of acquisitions or = to=20 create incentive programs for staff based on the stock price."
Indeed, one of the reasons Mr. Cahsens might consider taking Great = Circle=20 Works public in the future has nothing to do with the money. "I'm still = a very=20 small company, but as I grow I'm going to want to hire people who are = really=20 good at what they do in this space and being public has a draw that is = more=20 appealing to a lot of the important or experienced executives in the=20 marketplace," he said.
Being public can energize a company, Mr. Cherniak said, "but it can = also have=20 weird effects."
Smart Technologies Inc., a Calgarybased maker of digital displays for = classrooms, experienced a surprising turn of events shortly after its = IPO last=20 July. A $100-million class-action lawsuit was filed against Smart = Technologies=20 last month by a group of investors who contend they purchased the stock = under=20 false pretenses. The group claims the company failed to disclose a = significant=20 decline in sales growth at a firm it had earlier acquired. Smart = Technologies=20 denies the allegations says it will "vigorously" defend itself when the = Ontario=20 Superior Court of Justice case comes to trial.
Smart Technologies isn't alone in facing such unusual problems = post-IPO.=20 "Once we became public, there were a lot of things I saw that I didn't = expect,"=20 said the chief executive of a Toronto-area communications service = provider who=20 requested anonymity because the company has since re-privatized.
"All these people very quickly came out of the woodwork who service = public=20 companies, people who will go out and promote your stock and they'll = want to get=20 paid in stock as well. They'll ask for a one-year contract, then = ultimately they=20 end up doing nothing and just riding off your success and when the stock = does go=20 up on its own because of your activities or sales they get to benefit = from=20 that," the chief executive said.
"So we just found [the public maret] to be a very shady world."
While such negative experiences are usually the exception and not the = rule,=20 those companies who have them can quickly find themselves in the = unfortunate=20 position of becom-ing a public orphan.
"That is where you end up with all of the cost and none of the = benefit of=20 being public because you can't use your shares as currency for = acquisitions,=20 your employees don't want the shares because they're going down 20% a = year and=20 you can't issue more stock because no one cares about your story or your = stock=20 price graph," Mr. Cherniak said. "Interest will dry up fundamentally and = it=20 might not be a bad company, it is just that the stock is not a good = stock."
Avoiding the orphan title is easy enough. So long as patience is top = of mind=20 for companies planning on taking the plunge and they have that nice, = steady=20 hockey stick-like earnings growth curve that public markets tend to = prefer,=20 everything should work out all right.
"You need to consider your options and very carefully review the = costs=20 associated with being public before you make that leap," Mr. Fabian = said.=20 "Because once you go down that IPO road, it is very difficult to make a=20 U-turn."
HOW TO AVOID POST-IPO ORPHANAGE
Almost every private company that goes public in Canada risks = becoming an=20 orphan, warns Brad Cherinak of Sapient Capital Partners. To avoid = suffering all=20 the negatives of being public with none of the benefits, he recommends=20 newly-minted public companies heed the following warning signs.
Analysts don't care about you
An ideal response from the analyst community when a company first = goes public=20 is at least one full report providing comprehensive analysis of the = business.=20 But if all the attention a company can muster is one or two people = putting out=20 basic one or twopage reports -effectively reproductions of press = releases -that=20 company might be a public orphan.
Low trading volumes
It is not uncommon for IPO orphans' shares to go days, weeks or even = months=20 without being traded. The more the share price fluctuates whenever stock = does=20 change hands, particulary if it takes a big drop, the more likely it is = the=20 company is a public orphan.
Unrealistic share price
"I've seen a fair number of companies that will have $5-million in = cash on=20 their balance sheet, yet their market capitalization is less than that = cash=20 balance," Mr. Cherniak said. "So their shares value the company as not = only=20 worthless, but as having negative value." That is an extreme example. = But=20 generally if a company makes a major announcement that has no impact on = the=20 stock, or its shares are trading far below those of comparable firms, = that=20 company might be a public orphan.
The unknown shareholder
This one might seem like a nobrainer, but many companies simply don't = bother=20 getting to know their shareholders. "Still," said Mr. Cherniak, "If you = have no=20 idea who your shareholders are, you've never met your shareholders and = frankly=20 you've just never made the rounds with institutional investors, chances = are your=20 either going to become an orphan or you're an orphan already."
Entrepreneurs who recognize one or these telltale signs in their = business=20 needn't rush to reprivatize. There are many other reasons a company = might get=20 little to no attention from analysts or have a sluggish trading = frequency other=20 than being a public orphan.
However, the more warnings that amount to accurate descriptions of a=20 company's stock, the more likely it is.
Related Topics
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evious=20
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CAD (USD)$1.03=20 =E2=80=94 (
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13,674.25
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I:DJI12,044.40=20 =E2=80=94 (
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S&P=20 5001,304.28 =E2=80=94=20 (=E2=80=94)
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I:COMP2,715.61=20 =E2=80=94 (
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2,266.75
CANADIAN DOLLAR / US DOLLAR (CAD/USD) =
$1.03 =E2=80=94 (=E2=80=94)
| Open | $1.03 |
|---|---|
| High | =E2=80=94 |
| Low | =E2=80=94 |
| Close | =E2=80=94 |
| 52 Wk High | =E2=80=94 |
|---|---|
| 52 Wk Low | =E2=80=94 |
| Exchange | =E2=80=94 |
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S&P/TSX COMPOSITE INDEX (OFFICIAL) =
13,674.25 =E2=80=94 (=E2=80=94)
| Open | 13,674.25 |
|---|---|
| High | =E2=80=94 |
| Low | =E2=80=94 |
| Close | =E2=80=94 |
| 52 Wk High | =E2=80=94 |
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| 52 Wk Low | =E2=80=94 |
| Exchange | =E2=80=94 |
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DOW JONES INDUSTRIAL AVERAGE 12,044.40 =E2=80=94 (=E2=80=94)
| Open | 12,044.40 |
|---|---|
| High | =E2=80=94 |
| Low | =E2=80=94 |
| Close | =E2=80=94 |
| 52 Wk High | =E2=80=94 |
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| 52 Wk Low | =E2=80=94 |
| Exchange | =E2=80=94 |
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S&P 500 INDEX 1,304.28 =E2=80=94 (=E2=80=94)
| Open | 1,304.28 |
|---|---|
| High | =E2=80=94 |
| Low | =E2=80=94 |
| Close | =E2=80=94 |
| 52 Wk High | =E2=80=94 |
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| 52 Wk Low | =E2=80=94 |
| Exchange | =E2=80=94 |
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NASDAQ COMPOSITE INDEX 2,715.61 =E2=80=94 (=E2=80=94)
| Open | 2,715.61 |
|---|---|
| High | =E2=80=94 |
| Low | =E2=80=94 |
| Close | =E2=80=94 |
| 52 Wk High | =E2=80=94 |
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| 52 Wk Low | =E2=80=94 |
| Exchange | =E2=80=94 |
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S&P/TSX VENTURE COMPOSITE INDEX (OFFICIAL)=20
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2,266.75 =20
=E2=80=94 (=E2=80=94)
| Open | 2,266.75 |
|---|---|
| High | =E2=80=94 |
| Low | =E2=80=94 |
| Close | =E2=80=94 |
| 52 Wk High | =E2=80=94 |
|---|---|
| 52 Wk Low | =E2=80=94 |
| Exchange | =E2=80=94 |
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