Published August 1, 1998

Why do an IPO? Objectives of IPO and Alternatives

Taking Your Company Public

For the small to medium range company without the experience or expertise, the concept of taking the enterprise to the public market is often considered the ultimate corporate success. This goal is often re-reinforced by certain capital investors which view an initial public offering ("IPO") 5-7 years "down the road" in the investment cycle as a means to achieve their economic goals on return as well as a convenient exit strategy-

For the owners of a private firm, it is suggested that the expected benefits from an IPO strategy should be carefully and objectively weighed, since the dream and reality can often be two entirely different things. Firms may go public for any number of reasons, but the common elements tend to be cash and/or additional leverage opportunities. There are accordingly two separate issues - (1) do the expected benefits of an IPO outweigh any disadvantages; and (2) is success from an IPO that clear and is there exit strategy for any downside possibilities?

There are various alternatives to an IPO if cash and stable financing are the only issues. The real issue is how much new responsibility is the company prepared to assume for its expectations. For example, the entire preparation and process for an IPO (i.e., time and costs for professional assistance, internal company support, and underwriting) is substantial, as well as the on-going compliance with regulatory and new stockholder requirements. Investor relations will take on a whole new and far broader meaning, both in terms of time and money.

Once the IPO step has been taken, the company's options may in fact be become more limited. Unless the company is thereafter successful, "going back to the well" may not be either feasible or available. Reversing the public ownership process may be either difficult or impossible.

For example, many firms in the bio-industry were selling in the $50 a share range not long ago, and currently are down under $10. The public markets tend to have a rather short term focus and success of an IPO and its value longevity may be based on factors even unrelated to the particular company's results or future products.

The above areas are noted solely to emphasize the need for the private firm to objectively investigate all available options, weighing the costs versus benefits across the entire spectrum, with the input of experienced and trained professionals. Certainly, if the owner is seeking an exit strategy as well, an IPO may be a very successful option. if the owner seeks to manage and/or be a part of the "bigger picture", then the issue may be entirely different.

One alternative to the IPO approach is "strategic partnering". Although it can be fashioned in number of forms to suit the venture and the players, at its essence, it is the partnering with one or more investor companies, which in addition to cash, typically brings valuable industry expertise, resources, and/or bargaining power to the enterprise. The investment decision, unlike the public market, is usually not driven by "internal rate of return" expectations on the cash invested. Rather, the investment view tends to be long-term in nature and predicated on product market share considerations/expectations.

Strategic partnering opportunities may be more difficult to obtain, but then the potential benefits of remaining private with "deep pockets" and/or significant resources support may indeed make it worth the effort. Large companies are usually not known for innovation, quick and creative answers/solutions to product/service market needs. Large companies do typically have significant cash and very effective sales and distribution resources. To that end, one should seek partnering relationships with companies that understand your specific company business and can benefit from the arrangement on a long term basis.

Strategic partnering can be a very flexible arrangement, custom fitted for the parties and their needs. Once the arrangement has been established, the relationships need to be well structured, clearly delineating the rights and responsibilities of each party. As in any transaction, all parties must be comfortable with and trust the relationship to ensure the benefits to each as originally envisioned.

Successful partnering can as well provide more flexibility in obtaining additional outside financing, both public and private, as well as better rates, terms, and conditions. Even the public market option may still be available.

It must be noted that almost 95% of all companies $10 million to $100 million in revenues never go public. As well, there are many large companies which are not, and would not consider the public market for financing, a notable local example being M&M Mars in McLean, Virginia (multi-billion dollar enterprise).

If your firm is approaching or at the critical stage for determining and acquiring significant capital for firm expansion or increased market share, this overview may be of immediate benefit. The key, as in any good business decision, is professional input on the available options, objective evaluation, and aggressive implementation. Strategic partnering is one of those options with a proven and very effective means to achieve a wide range of management and investment goals.

Henry Barratt, Partner Boles & Co. McLean, VA (703-35&2117)