Valuation And Pricing Concerns

Several factors contribute to the process by which the IPO offering price is set. Pricing is a negotiated decision of the company and its underwriters and is the byproduct of market conditions and investor feedback. That decision often reflects competing interests. The higher the price, for example, the more capital the IPO could raise; but the lower the price, the more attractive the IPO may be to investors. The decision will also reflect the valuation analyses performed by underwriters and/or potential investors and indications of interest from underwriter clients who have been solicited about the IPO. As the SEC notes, the offering price may bear little relationship to the ultimate trading price of the securities (high or low).

The Costs Of The Process

The pursuit of an IPO can be consequential to the company, both as to the direct and the indirect costs of the process. The direct offering-related costs include the underwriting fee; legal, accounting and advisory fees; printing and registration costs; and stock exchange fees. The indirect costs include the distraction from operations created by requiring management to support the registration and related efforts; the investment in the legal, financial, accounting and information systems and governance policies necessary to support public company status; the costs of the systems necessary to comply with increased regulation and legal compliance; and potentially disruptive changes in the board and senior leadership associated with the transition to public company status.

The Traditional Advantages

“Going public” through an IPO or similar model offers a number of attractive advantages beyond the obvious ones associated with raising money for growth and development. These include the ability to use public company stock to facilitate acquisitions, to support employee recruitment and retention efforts, to provide a mechanism for shareholders (including officers and directors) to convert their own stock positions into cash and to enhance the reputation of the company.

The Traditional Disadvantages

“Going public” through an IPO or similar model also offers a number of pause-provoking disadvantages. These include the significant cost and distraction associated with the process, compliance with the regulatory burdens imposed on public companies, increased financial scrutiny (including market focus on short-term results), more intense performance pressures on management to meet published guidance and analyst expectations, increased requirements relating to structure and composition of governance and a new oversight dynamic with public stockholders.

The Ultimate Gut Check

Early in the planning process, company leadership should engage in a frank discussion as to whether the IPO is truly the right fit for their organization, their constituents and their culture. This is the “Do we really want to do this?” analysis and requires a clear-eyed review of what it means to become a public company and what it takes to get there. Leadership should examine the potential impact not only on the company and its shareholders, but also on the ability of its executive team to weather the scrutiny, the regulatory burden, the financial reporting requirements and the analytical pressures that are a critical part of life as a public company.

To learn more about how your organization can make the most of the IPO process, please click to read:

5 Equity Compensation Considerations For Your Company’s IPO Journey