IPOs and Secondary Offerings
The professionals at Mantyla McReynolds and BDO, a full service assurance, audit, and tax firm, understand that many companies plan on one of the following events within the next 1-4 years:
i. Companies that plan to go public.
ii. Companies that are public and plan to complete a secondary offering or private placement.
iii. Companies that have or need a bank loan and are required to have audited or reviewed financial statements.
iv. Companies that plan on a merger, acquisition, or other exit strategy.
While our firm assists companies with each of these plans, this article is specifically focused on the first two points above. In a recent conversation, a CFO of a multi-billion dollar market cap company mentioned to me his opinion that the ease of obtaining significant amounts of needed capital in the public arena is second to none. Though this is not true for every company’s financial situations and needs, we have seen the results of this statement again and again. Not every company’s business model and operations necessitates a need to become a public company with access to the capital markets. Many private companies have been able to secure sufficient funding through banking institutions, private equity groups, and other capital sources, all while maintaining close control of the company’s equity. However, for some companies, becoming a public company has allowed for long-term growth projections to be realized in a significantly accelerated timeframe. The main reason for this accelerated growth is partially attributable to a public company’s access to capital markets at precisely the moment when significant capital requirements needed to be funded.
Staying Private or Going Public
A CEO of one of our public clients once said that they could have kept the company private and over a 10-year cycle become a company with a business valuation exceeding $500 million. However, with an understanding of the public markets, they chose to become a public company with access to significantly more capital resources and were able to more efficiently implement their business plan and growth projections in becoming a company with a growing valuation exceeding $1.5 billion. This level of growth and resulting valuation occurred in less than 4 years. The CEO also remarked that though they personally incurred dilution in their equity ownership position in becoming a public company, being able to grow the company at an accelerated rate increased the overall valuation of their original private equity holdings by 4 to 5 times more than if they had remained a private company.
Secondary Offerings
Not every company that goes public experiences this level of success, but the fruits of being a public company are available for the picking. For some companies, being a public entity has simply provided them with more options in effectively implementing their business plan. When one of our clients became a public company several years ago they brought to market a revolutionary business concept that was still in its infancy and generally unproven. Without significant amounts of capital infusions the overall operations and business implementation had little hope of making it off the ground. Within the last three years we were able to assist this company in raising over $550 million through secondary and follow-on public equity offerings, with one individual offering totaling over $200 million, as well as a $300 million public debt offering. Each of these offerings were performed in less than two weeks from the initial announcement to the close and funding date. The short time period from announcement to funding allowed our client to maximize the value of the offerings and the resulting overall value to the company.
From an accounting firm perspective, the time required in a 7 to 10 business day window to perform necessary comfort letter and bring down letter procedures, respond to underwriter and attorney requests, and review the offering filing is an extensive commitment and usually doesn’t fit into a pre-determined schedule. However, even when one of our client offerings was announced and completed in the middle of busy season, the ability for a company to access the public capital markets during an advantageous window is one of the primary benefits of being a public company. A public company needs a team of professionals, from the attorneys to the accountants, that understands how critical it is to be available and able to perform these transactions in the required timeframe that is most advantageous to the client.
More Than One Way To Go Public
As noted, for some companies there are significant benefits in becoming a public company that were not available to them when they were a private company. The decision in becoming a public company should not be taken lightly, and there are many potential benefits and detriments that should be considered beyond simply the ease of access to funding through the capital markets. Additionally, whether a company performs a traditional or non-traditional “going public” transaction should be given significant thought and analysis, particularly as it relates to a company’s immediate funding requirements. For example, a company not desiring the cost and time of a traditional IPO transaction, might consider a reverse merger or other non-traditional transaction to first become a public entity with access to the capital markets, albeit at a limited level. However, in performing a non-traditional transaction the new public company might still need to wait a year or more before being able access significant capital at the amounts and levels required by the company.
As with many market realities, though there are benefits to first becoming a public company through a non-traditional process, there are also the drawbacks that a company must consider and apply to their own business needs and growth projections. A traditional IPO process in many regards is the highest standard, if not the only standard, from the perspective of some investors, while completing a reverse merger with a public entity has had its fair share of both positive success stories and negative press. In November 2011, the SEC also released a series of new rules as it relates to reverse merger transactions and the eventual qualification of those entities in being listed on a major U.S. stock exchange. Specifically, a reverse merger public company must complete a one-year “seasoning period” on an over-the-counter or similar exchange and maintain a requisite minimum share price before applying for listing on a major U.S. stock exchange. The ability to access the amount of public capital identified above is generally not a reality or possibility when the Company is listed on non-major exchange. Though there are listing rules that must be met by all public companies, whether the company became public through a traditional IPO or a reverse merger transaction, these additional rules for reverse merger companies should be carefully considered by management and consultants early in the going public process.
It should also be noted that IPOs are generally more drawn out and are directly impacted by short term market events. Once an IPO is announced, companies are frequently impacted by both positive and negative market events, and constantly need to assess whether to delay the IPO process or move forward. As one example, the first half of 2011 saw IPO activity at a level that was comparable in many regards to pre-recession highs. Then in the second half of 2011 the U.S. long-term credit rating was downgraded and the impact on potential IPOs was immediate. IPO activity during the second half of 2011 decreased significantly compared to 2010 and years prior to the recession, and many private companies opted to delay the process indefinitely despite the significant costs and time already incurred.
This one significant event was entirely outside of the control of those companies seeking to perform an IPO, yet it directly impacted how successful an individual IPO transaction might be and many companies opted to defer. An IPO that has been in process for months, with the related costs and time incurred, is suddenly and unexpectedly delayed due to unfavorable market conditions. Depending on how far down the IPO road a company has already traveled, there is the potential that a material portion of the costs incurred on the process will not be recouped or even reduce the future costs incurred once the IPO process is restarted. For well established and successful private companies these delays and costs are easier to bear as simply being part of the overall IPO process. Whereas for startup companies and those poised to experience accelerated growth, the costs required to restart the IPO process at some indefinite point in the future are simply not a cash flow reality.
These same market events also impact follow-on or secondary offerings of existing public entities, however, the cost incurred and time lost in a derailed secondary offering pales in comparison to the extensive cost and time lost in a failed or delayed traditional IPO transaction. As demonstrated above, the timing on a secondary offering from the initial “over the wall” announcement to the closing of the transaction is potentially significantly shorter than the traditional IPO process. For some companies, it might make more business sense to first become a public company through a reverse merger or Form 10 process, develop through the seasoning period, and then perform necessary capital raises when the market conditions are in the company’s favor. Once becoming an established public entity, management has increased flexibility in taking advantage of sensitive market windows in completing secondary and follow capital raises.
In summary, the most advantageous market windows are sometimes very short. In light of this, a company should ensure that they have a solid team of professionals and advisors early on that have extensive experience assisting companies in reaching their capital requirements, including: attorneys, accountants, and bankers. Mantyla McReynolds and BDO have assisted numerous companies in going public, whether through initial SEC registration statements or reverse mergers with subsequent equity and debt offerings. Throughout each of these transactions, we have never lost sight of the business reality that when client expectations and timelines are met, greater success has generally been the result.
Through our strong relationship with BDO, the 5
th largest international accounting firm in the world, we are further able to leverage national and international resources with the agility and speed of an experienced local team. Through BDO, we have available for our clients excellent informational resources at the “IPO Readiness Center” at
www.bdo.com/ipo. Additionally, BDO has prepared a “Guide for Going Public” that is a thorough guide for private company executives that are considering an initial offering (
www.bdo.com/download/1577).
