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Dollars & Sense:
IPOs: Once Hot, Now Not

  Column published in DM Review Magazine
June 2003 Issue
 
  By Susan Osterfelt

Is it a good thing or a bad thing to be a publicly held company? Back in the heyday of the late 1990s, an initial public offering (IPO) was "the" thing to do. An IPO raised sometimes enormous amounts of capital and established companies with the potential for what was thought to be tremendous success on Wall Street. In 1999, a total of 541 companies went public. However, the bursting of the tech bubble in March 2000 changed all that. Companies once thought to be the darlings of Wall Street failed, and entrepreneurs became gun-shy at the prospect of going public. Now the economic slowdown has reduced the number of IPOs to what they were in the 1970s. Want to take a guess at how many companies went public in the first quarter of 2003? Five. Yes, that's right, five. In the same quarter, 17 companies withdrew their plans to go public in 2003. That doesn't say a lot for the "lure" of having your stock traded on a major exchange, does it?

However, there are still valid reasons to become a publicly held company. Having your stock traded on a public exchange can provide a return for investors and an incentive for employees because stock in the company becomes a freely tradable security. Being a public company also provides a certain amount of advertising in terms of public visibility, which is generally not afforded private companies.

From a financial standpoint, there are additional benefits to going public. The capital markets provide an additional source of liquidity, diversifying where you can raise capital. A public market capitalization gives banks something to evaluate to lend you money. That market capitalization also provides a currency for acquisitions - both when your company is looking to acquire other companies and when your company is looking to be acquired. Market capitalization information is constantly reevaluated based on what the market is willing to pay and is readily accessible on the Internet.

However, recent events have highlighted reasons why some companies may not choose to go public. Consider the fact that publicly held companies are subject to oversight by the Securities and Exchange Commission (SEC). If you screw up in your financial reporting, you may be the target of an SEC investigation, which - if it turns out not in your favor - could not only result in accounting reclassifications, but also significantly damage your company's reputation. Additionally, it even gets personal. The Sarbanes-Oxley Act requires executive officers of publicly held companies to personally attest to the correctness of financial statements and provides for personal retribution if the financial statements are found to be incorrect.

There are costs inherent in being publicly held. Your company needs to be ready to assume these costs if it intends to go public. There are, of course, investment banking and legal costs involved in preparing your company to offer its stock on a public market. In addition to these costs, there are added functions that your company now needs to perform, such as investor relations and compliance, as well as ongoing systems enhancements necessary to provide information that is required of a public company.

Being publicly held means that your company will have to disseminate information you would never have disseminated previously, including some information that may be considered competitive intelligence. A public company subjects itself to full disclosure, which can be a good thing or a bad thing, depending on your point of view. However, the law says that investors have a right to know what is going on with a company. Public companies are expected to provide guidance on their anticipated performance in upcoming quarters, and they are expected to be forthright and aboveboard in complying with accounting rules and regulations. Their financial statements are subject to scrutiny by anyone who wishes to know how they make money. Every quarter, they are expected to explain what their revenues and earnings are, and management's explanations are made even more accessible via the Internet.

Going public involves consideration of both the pros and cons. Obviously, not many privately held companies decided to make the jump in the first quarter of 2003. The stock markets in general have been disappointing, to say the least. However, despite the decline of the Dow Jones and the NASDAQ, there are companies that are performing well and whose stock price continues to rise. There are companies that are willing to put up with SEC oversight, that are well managed, that want and receive improved access to capital markets and that are willing to provide information to the general public on how they are doing, even if it involves sharing the challenges they face and their strategic goals. It's a matter of need, and it's a matter of confidence.

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Check out DMReview.com's resource portals for additional related content, white papers, books and other resources.

Susan Osterfelt is senior vice president at Bank of America, in Charlotte, North Carolina. She can be reached at susan.osterfelt@bankofamerica.com.



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