Considering the Cons of Taking Your Company Public

In 1996 a total of 675 organizations sold value in initial public offerings (IPO). That is more than two-and-half organizations every day; excluding weekends. The activity ebbed a …

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In 1996 a total of 675 organizations sold value in initial public offerings (IPO). That is more than two-and-half organizations every day; excluding weekends. The activity ebbed a bit in the most recent downturn. In 2008 and 2009 the consolidated number of IPOs scarcely achieved a 140 mark. Today, market activity shows that the IPO market is gaining momentum once again and last year we had over 160 IPOs.

Should your company join the force, and go public?

Your benefactors might inevitably want that because they need an approach to transform their speculation into money and you might discover the ‘open door’ to be tempting as well: "I run a public organization" sounds great. The benefits of going public can be enormous; after companies receive the immediate influx of capital, they put it to use to achieve more significant expansion goals, take strategic initiatives and often emerge as established entities.

However, public companies have many drawbacks as well. A public company is subject to a lot more regulations and is structured in a way, that you can lose control over it. Let’s see how;  

SOPHISTICATED REPORTING REQUIREMENTS

Get ready to do much paperwork and “properly document” daily business activity to meet complex reporting requirements by the Securities and Exchange Commission (SEC). Paccar, a specialized truck manufacturer, got in trouble with the SEC over its financial statements. The SEC alleged that Paccar misled investors because the internal financial reports viewed the ‘aftermarket parts segment’ as a separate business, but in the publicly available financial statements, the segment was shown as a ‘core business.’ After that, Paccar modified its internal accounting procedures and reported it as a different segment. Your company will need some structural and procedural changes to facilitate the ‘reporting’ process.  

SEC laws require public companies to report quarterly and yearly progress and to be audited by an independent auditing firm. You already have an auditor? You’ll probably need a second one, to check the first auditor’s work. This is because public companies, are now, more frequently audited, and small auditing mistakes can cost you with penalties.

NO MORE PRIVACY

As a CEO or top line manager, you get much attention from the press. Everyone wants to know how much value you’ve added to the company over the years and how much you benefited from it. Chances are, there will be a site page with information on your salary, your benefits, registered vehicles and any other asset you have. You might even have folks drive to your place, to snap photos of your house and post them on the web. You will be subject to the kind of security intrusion that government officials get. You will have to give your organization an “open structure”, where most information, about what happens in the company, is accessible to anyone and Say goodbye to privacy because public structures do not have privacy.

POTENTIAL TAKEOVER TARGET

During the IPO, if you sell just enough shares to outsiders, they can take over the company. Competitors may also find your company valuable and capable of producing synergies. Aggressive investors can also do a ‘hostile takeover’ if you do not want to sell your business.

When Clorox denied Icahn’s offer of $10bn, CEO Carl Icahn sent a ‘cold letter’ to the Clorox board, letting them know shareholders must settle on the takeover. Icahn denied to pull back and said that if he did not reach a settlement, he would buy majority shares in the open market and take over. Later, Icahn raised the bid to $11.7bn, and Clorox shareholders approved it.

BIZARE GOVERNANCE ISSUES

Leave the takeover rise aside, and you have some bizarre governance things, that are always changing. Recent regulations like the Sarbanes-Oxley by Congress and the RegFD, by the SEC, have made public companies subject to more scrutinies and have added more responsibility for the management. The management must disclose insider trading activity, reveal and address conflicts of interests that might influence financial results and even disclose certain data to the SEC and shareholders on a regular Basis.

So you have a strategy in place and know what you are doing. Your goals are clear to you. However, now ur company is public and has many shareholders. Millard S. Drexler, the former CEO of GAP, shares his experience and says that “Shareholders can be difficult to handle” and he does not like “answering them every step of the way.” Drexler was very experienced in retail, and so he successfully revived the failing company by taking strong strategic initiatives.

What Drexler says is true- shareholders sometimes come up with micro-level detailed questions that are difficult to answer. Sometimes, shareholders can totally disagree with you on certain strategic initiatives and other important managerial issues- they can be good friends when the stock is doubling and start to hate you for any unexpected downturns. They’ll be ready to blame your strategy, your approach to management- you name it. Then you’ll end up hiring an ‘investor relations manager’ just to address the nonsense. This adds on to cost.

FUTURE VISION

Stocks can be extremely volatile. A takeover bid can shoot up the stock price, and any bad news or earnings miss can eliminate gains for investors in a matter of minutes. The stock price becomes a crucial concern for the management and many times, it drives strategic decision making and goal setting. It is almost like, a company is not a company anymore, it is just a volatile financial derivative with a tag and CEOs become accountable for how the derivative is performing, rather than what they are doing to make a great company.

Another problem is that US companies have a tendency to focus their resources on short-term objectives to meet Quarterly earnings goals and many relative efficiency ratios. This is the reason that Dell Inc. went private in 2013. Dell’s founder and CEO, Michael Dell, says that as a private company, Dell will be able to focus on building core competencies with a ‘long term strategic direction.’ Yancey Strickler, CEO, and Co-founder of Kickstarter told the New York Times that, "We do not ever want to sell or go public." Strickler reasons that, going public will push the company to make decisions that he does not think are in the interest of the best company.

Entrepreneurship and the skills that go with it are not very common, and you showed those skills by making a great company! Going public does give you the influx of cash but how good is that cash if you can not spend it how you like? You will be focused on short-term gains at the cost of your long-term goals. The added regulations will make it difficult to manage and on top of that you’ll be risking your ownership of the company. The point here is that In a private corporation, you decide on what goals and strategic initiatives to implement and prioritize. Then you can execute them as you like. You can build on to your vision, and grow your business as you learn from experience.    

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