Do You Really Want to be an IPO Millionaire?
Media and cocktail party chatter increasingly glorifies IPOs as the Holy Grail for business owners. There is a contrary view: the risks may just outweigh the returns.
To see why let's have Mr. Assets (the business owner) play “Who Wants To Be an IPO Millionaire (MillIPOnaire?)”
For $500: (THIS game is for serious money): What costs more than an IPO?
Babe Ruth's Rookie Card? The Hope Diamond? The Empire State Building?
A Small Nation…You've got $500!
For $1,000: After their IPOs, business owners will concentrate on...
Marketing People Profits
Daily stock price fluctuations...You're right!
For $2,000: If a public company misses a quarterly Street earnings estimate or has a “surprise”...
Big deal, we are all long-term investors, who cares?
The stock drops, shrewd investors buy it on weakness and it rebounds
Wall Street downgrades the stock
The stock drops over 30% in one day (even if it is Procter & Gamble)…Right!
For $5,000: The seller will now deal with a fascinating group of new friends?
Customers Suppliers Employees
Wall Street Analysts…You got it! By the way, there are no safe harbors in THIS game.
For $10,000: Which stocks do Street analysts hate to cover?
Takeover candidates General Motors Dotcom startups
Your IPO trading 10,000 shares a month…That's good for $10,000!
For $15,000: What's the most important thing for a post-IPO manager to work on?
Developing people New products, innovations and technology Strategy
SEC compliance…Right!
For $25,000: Their time horizon will be?
Retirement Decades Next Year
Next Quarter's Earnings…You got it!
For $50,000: They...
Are prepared for this radical change in “workstyle”
Will just love dealing with the financial community
Understand how critical it is that they promote their companies to investors
Have no idea how draining and time-consuming all of this will be…
For $100,000: A company must be how large in sales to keep Wall Street interested?
>$25,000,000
>$50,000,000
>$75,000,000
>$100,000,000… You just won $100,000!
For $250,000: Underwriters look at the following when considering IPO candidates Sales, Earnings or Cash Flow
Mr. Assets ....Want to use a lifeline? 50-50? OK:
Sales Earnings or Cash Flow
Mr, Assets ...Another lifeline? Call a friend? Fine. “
Hello, Mr. Buffett, this is Punxsutawney Phillus, the new host on “Who Wants To Be an IPO Millionaire?.” Your friend needs your help. Which of the following do underwriters look at when considering IPO candidates: Earnings or sales or cash flow?”
Buffett: “Well, it used to be earnings, but as I have written in the letters to Berkshire Hathaway shareholders, not every year is a great one based for the market's valuation of our company...based on my methods ...., and I always pick stocks based on trivial Old Economy details like earnings and cash flow. So I'd have to say Sales.”
Sales…You just won $250,000! (Cash Flow will develop later...right...)
For $500,000: Which provides the most liquidity?
A sale to an ESOP
An IPO
A sale to a public acquirer for stock
A sale to a public or private acquirer for cash
Let's see, an ESOP sale has to be at fair market value, which rules out inflated public company multiples, so that can't be right. IPOs are expensive, with legal, auditing, underwriting, roadshow, and promotional fees, not to mention ongoing regulatory compliance costs. IPOs do not provide immediate, full liquidity. In fact, sellers are locked in more than ever! Sure, they can sell a few shares in a secondary offering, but not so many as to raise investors' suspicions. They are heavily constrained by insider trading and Rule 144 restrictions. So nix the IPO. A stock deal defers taxes, but the seller is locked in by the very same restrictions so they have limited liquidity. I
'll say:
A sale to a public acquirer for cash…Is that your final answer?… Yes!… You've won $500,000!
Don't get nervous, but here comes the big one:
For $1,000,000: Are you going to develop an IPO for your company?
In a New York Minute
Greed Is Good
Show Me The Money
NOT
This little "thinking approach" is designed to do just that...cause you, the business owner, to recognize the fact and circumstance in any sale are critical. An IPO may sound good at the cocktail party, but when you go to the bank you want cash or a debt instrument that is secure. Never, never go ahead with any transaction until you fully understand what the terms and new operating environment means to you...and your primary assets!!!