Before doing that IPO …

Think twice – maybe you should even take a third, fourth or fifth look – before going public, Erik Birkerts advises private-company owners in a piece called “Hey, Where’s My Gulfstream?!” in the July 2010 issue of Mergers & Acquisitions.

Birkerts, a veteran of venture-backed companies that did IPOs in 1999 and 2007, now is a partner in Evergreen Growth Advisors, which consults on growth strategies. His reflections on the process offer some useful insights for investor relations professionals and senior management – before or after an IPO.

“The initial public offering of stock – the IPO – holds a mythical place in American business,” Birkert observes. “Employees consider the IPO to be synonymous with windfall riches. Company founders envision the IPO as the ultimate validation of their genius after years toiling on their ideas. Venture capitalists finally look forward to full nights of sleep with the anticipated returns from the IPO ‘exit’ juicing their portfolio. The siren call of the IPO for company lawyers, bankers and accountants is so loud and obvious that no further comment is needed.”

With the IPO market showing some signs of reviving in the first half of 2010, it may be prudent for management teams to – well, look twice before leaping. The M&A journal (which may have a bias as implied in the publication’s name) is available only to members of the Association for Corporate Growth, a private equity and deal-oriented group, so I’ll summarize the steps Birkert advises:

  • Carefully dissect arguments for why the company should go public
  • Have a specific plan for using the capital & communicate it early and often!
  • Challenge your thinking with independent, objective outside advisers
  • Operate from your worst-case financial scenario
  • Select your investment bankers wisely

Birkert notes that management may think of “many terrific reasons to go public,” but “there are as many or more reasons why going public should be feared.” IROs and IR counselors already know these reasons – distractions for management, Sarbanes Oxley burdens, expenses of legal, auditing, IR and other costs, etc., etc.

I particularly appreciate two pieces of Birkert’s advice aimed at not disappointing investors who buy in the initial offering:

  • Communicating your plans for use of the capital. “Although public filings may have generic language, it is best to be explicit during the road show so that the Street accounts for this spending [of the money raised].” If capital goes toward expenses, the early earnings as a public company may disappoint, he says. Worse yet, if management doesn’t have a clear plan, there will be pressure to do something, which sometimes leads to an ill-considered acquisition as a strategic but risky deployment of that capital.
  • Using a worst-case financial secenario. “The temptation is to make the financial forecasts sparkle so as to make the road show pitch compelling to potential investors. … However, if there is one time that Murphy’s Law can be counted on it is during the first year of being a public company. … Be conservative with financial forecasts. Set yourself up to succeed – not to fail.” Leaving a little money on the table during the IPO is better than setting yourself up for a bruising stock-market experience – and litigation.

Not trying to be negative here. I love public companies and the whole relationship with capital markets. But Birkert’s cautionary words echo the sentiments of many small cap IR people – and CEOs and CFOs – who are public but look longingly at privately held peer companies whose “exits” or “liquidity events” kept them private.

© 2010 Johnson Strategic Communications Inc.


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