6 Reasons
Companies Aren't Going Public
Why would you, if you have a growing company and
rational business plan. But for a lot of would-be IPOs, going public would
reveal the awful truth that their Unicorn dreams are half-baked schemes.
CEO,
1871@tullman
Hope isn't really much of a strategy-- unless you are an
investment banker. I hear a lot of cheap conversation and a fair amount of
wishful thinking about this year's expected abundant crop of initial public
offerings, but-- at least to date--there's not much to show for all the talk.
I'm sure we'll see a few brand-name, bloated valuation deals come thru the
pipeline --although Q1 is already in the books with little or nothing other
than Snap to arguably brag about. Then again it's a little tough to brag on an
IPO that was recently trading 3 or 4 bucks below its opening price. You can
expect to see some aggressively manipulated and short-term upward bumps in the
opening sessions for some of these "winners," but overall, it's gonna
be another very slow and painful season for IPOs regardless of how much hype
the Street and the financial media try to manufacture. Why?
There are three pretty clear reasons. (1) For real companies,
there's no reason to IPO. A good, solid and growing company doesn't need or
want the help, the heartaches, or the hurrahs of being public. They'd rather
continue to focus on building their business; (2) For unreal companies-- the
bogus unicorns-- there's no upside. These outfits have been largely hoisted on
their own financial petards and now they can't figure out a way to get their
deals out the door and sell their story to the public suckers without the
embarrassment of a downward valuation when the underwriters actually start
writing the deal book; and (3) They're already a dead dog, living on borrowed
time. These are companies that are trying to prop up a tired tale that should
never see the light of day. But that won't prevent greed-crazed brokers and
bankers from reacting to that old Wall Street maxim: "when the ducks are
quacking, you better find something to feed them" (or your competition
surely will). So they're pretty much willing to try to sell anything they can
get on file with a semblance of a straight face. Anything to make a buck.
You'd think that most of us had learned our lessons, at least in
the case of the dog deals, but there's really no evidence to support that. My
Dad used to say that, if you were offered an oil and gas deal in New Jersey or
a share of a thoroughbred in Toledo, you should flee as fast as you can. If these
things couldn't get done in Texas, Tennessee or Oklahoma, they weren't worth
doing and it wasn't a question of "if" you'd lose your money, it was
just a matter of "when." To me, that's what the market looks like
today. When I hear some of the folks talking about the IPO "window" being
open for business, and I look at the junk that people are promoting, the only
window I'm reminded of is in the Beatles song She Came in Through the Bathroom
Window and the lyric: "Didn't anybody tell her? Didn't anybody see?" Apparently
not.
As far as the Unicorns go, there's an internal set of obstacles
and some market issues as well. Internally, they have been hyping and promoting
these crazy valuations and then using them for follow-on fundraising. And now
they have to justify these nutty numbers to some third parties. Even as
shameless and short-sighted as most brokers and underwriters are, they're
finding that the numbers just won't stand up and they're having to go back to
their investors and talk about "public" valuations that may be less
than the last couple of rounds of capital injections. Cloudera just set terms
for its IPO estimating an initial market cap at less than half its last private
valuation, $4.1 billion, in 2014, when Intel poured more than $750 million into
the company. No silver lining in this cloud. These aren't easy conversations,
but the saving grace may be that everyone in the pool at that point is part of
the same bullshit bandwagon and no one really wants to mention the Emperor's
lack of apparel. In some ways, this would be like having Ronald McDonald
criticize your taste in clothes.
The second, bigger problem is that the ongoing private valuation
inflations have so jacked up the numbers that there's really little or no bump
left for the public even if the sellers can get the offering out the door. This
is why Snap is already flat-lining. Where can you really go when you've already
sucked all the sex and juice out of the story? This has pretty much been the
case since the LinkedIn offering in 2011, but it has reached insane levels now,
where the comparisons between the private value return multiples that have been
created and the public value return multiples are downright disgusting. Take a
look at any of LinkedIn, Yelp, Facebook or Twitter and you can see the tiny
fractions of the overall value that ever accrue to the public investors.
There's probably no clearer demonstration of how and why we're constantly
hearing about increasing and massive levels of wealth concentration in this
country. We knew it was happening, but we probably didn't realize that we were
some of the most active enablers.
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But the most interesting discussions relate to the reasons that
the good companies with great prospects don't want to go public, don't need to
go public, and, most likely, shouldn't go public. There are at least half a
dozen clear concerns that the management teams of these businesses consistently
allude to in detailing their reluctance to do an IPO:
(1) We don't need the money. Cash isn't an issue and we don't
need public paper to do acquisitions.
(2) We don't want to incur the substantial costs-- both of getting
public and being public in terms of compliance, filings, etc.-- and we don't
need the management distractions.
(3) We don't need the additional media scrutiny and the
multi-agency regulation that being a public company brings.
(4) We're not excited about the mandatory disclosures that
simply serve to assist and inform our competitors and other copycats and fast
followers about our activities, results and plans.
(5) We think M & A is a better exit in many cases
("building to be bought") and a lot more manageable and controllable
than the vagaries of the public markets. It's always better to be bought than
sold.
(6) We don't want to be the next whipping boy for POTUS.
Bottom line: an IPO is no longer the brass ring for anyone with
a brain and a real business-- it's more likely to be a bunch of sad sacks and
oversold salesman walking around with tin cups.
The opinions expressed here by Inc.com columnists are their own,
not those of Inc.com.