How to do a stock offering
Going public is a great way to raise tons of money, to say nothing for the ego boost of seeing your company’s initials flash across a stock display screen. But before throwing your lot to the bulls and the bears, you will want to ask yourself some questions.
Companies go public either to diversify their assets or to raise capital for expansion. If yours is the second goal, you should ask yourself how much money you actually need, and whether other sources might be preferable. For instance, you could raise capital by mortgaging a piece of real estate or simply borrowing money from a bank “It’s cheap, simple, and the interest is tax-deductible,” said one practical-minded investment banker.
The second question is whether your company is right for Wall Street. There is a Catch-22 to an initial public offering (IPO): You need money to expand, but investors are not going to buy your stock unless you are already expanding.
Buyers prefer stock that yields handsome per-share earnings, which usually means your company needs to be consistently posting quarterly earnings.
Sizzle may be steak
Without an impressive track record, a company doing an IPO needs “some sizzle,” according to Dain Bosworth Inc. vice president Mike Gillilan.
Sizzle is something that makes your company more exciting than other companies. That something could be an innovative marketing or management approach, a new product, or perhaps some visionary use of technology.
One industry with a lot “sizzle” is biotechnology. Companies here will often go public without a track record of earnings. What these companies do have typically is preliminary approval from the Food and Drug Administration for a new drug, one whose development is likely to be expensive but ultimately lucrative.
To make an IPO worth all the legal and accounting fees necessary to do it right, and even to meet SEC requirements, your company needs to raise at least $10 million, according to experts. If your company’s gross annual evenue is less than $10 million, and if your pretax profits are less than $10 million, chances are you are too small or not profitable enough for public stock, said Gillilan.
Is Wall Street right?
A third question: Is Wall Street right for your company?
“Once you go public you have a lot of responsibility that you didn’t have as a private firm,” said Gillilan.
In addition to making quarterly financial reports to the SEC, including publicly available information on employee compensation, you have to talk to a variety of people interested in your business: stock analysts, newspaper reporters and, of course, stockholders.
Encounters with these parties are not just a necessary nuisance. They are part of the public relations game you must continually play to foster a favorable view of your stock.
“The implications of being public are never fully understood,” said John Collopy, president of First Equity Corp. of Florida, Miami.
If you decide to go public, your best move is to find the right investment banking house to underwrite your offering. Here, the size of your offering is important.
“A major New York house is not going to do a good job on a $5 or $10 million offering,” said Paul Frederick, chairman of Frederick & Co. Inc, Milwaukee.
Better to select a smaller house that will continue to promote your stock during the crucial after-trade periods – the days, weeks, and months after the Street’s initial excitement over your offering has died down.
Your investment bank should have some expertise in the kind of business you’re in, and if your stock might have a regional focus, then the investment bank should be well established in the area where you hope to do the most business.
Research is key
The investment bank you choose should have a strong research department. The research department will be able to assess the relative strength of your company against that of your competitors. The research department also prepares reports about your company and distributes those reports to potential investors. Once again, this process should not stop after the initial trading.
Your investment bank can help you establish a realistic price for your stock, one that does not stand out as too high against those of your competitors. The bank will also put together a syndicate of 15 to 40 other underwriters around the country to provide national distribution of the securities.
Despite all your planning, an IPO still is an uncertain undertaking that an investment banker can cancel at the very last moment should some incident – the outbreak of war, an assassination, an economic crisis – cause a dangerous drop in stock prices. “There’s an old saying in the stock market: You go public not when you want to, but when you can,’” said Frederick.
Should the uncertainty, the costs and the various demands of Wall Street discourage you from a public stock offering, perhaps an alternative route is best. A private offering, in which stock is offered to a limited number of institutional investors, is a more modest alternative to the “big board.”
-- Alison Grillo
The Business Journal, Milwaukee, WI, 02/21/96