Is Being Public Worth It?

Executives and directors of private companies contemplating an IPO are sure to be reviewing the results of a recent Ernst & Young survey regarding the costs of going and being public.  In looking at 26 companies of various sizes across a range of industries that went public in the past two years, E&Y found that, on average, being public added $2.5 million to the annual cost structure.  This was mainly attributable to costs for 1) compensation for senior executives, particularly in finance; 2) fees to advisors including investment bankers, attorneys, auditors and investor relations consultants; and 3) new information technology, such as software to help meet public reporting requirements.

But in looking at costs, should they dissuade a company from going public?  The answer depends, of course, on the benefits a firm expects from being public, the most notable being a presumed lower cost of capital.  If a business is successful, public company costs pale in comparison to the ability to raise capital quickly (and perhaps creatively) at valuations that increase over time.  Additional benefits come from using stock and derivatives as currency for acquisitions and as compensation.

We note one key factor driving many companies to go public – pressure from early investors for a “liquidity event” – may be fading somewhat with the proliferation of markets for private shares, as currently provided by firms such as SecondMarket and SharesPost.

From LHA’s perspective, what management teams must not lose sight of as they weigh the costs and benefits of being public are the greater obligations to shareholders.  As one executive noted in CFO.com, “as a public company you are constantly considering what impact your decisions will have on your stock price; you have to consider the time it takes for management to articulate the story and keep investors apprised of those decisions.”

We believe a management team that understands the costs and responsibilities of being public is more apt to make decisions that are in the best interest of all shareholders, as well as effectively communicate the strategies, advantages, opportunities, progress and potential that comprise its investment thesis.

Unfortunately, not all executives may see it this way.  For example, the CEO of Zynga holds a class of shares with 70 times more voting power than the common stock issued in its December IPO.  Because of that inequality, one investment consultant commented, “…shareholders should assume Zynga (management) won’t listen to them.”

To answer the question “Is being public worth it?” an executive team must be able to appreciate and satisfy the other side of the equation: “Why is it worth owning shares of this company?”  And given the costs and obligations of being public, there’s another question they must answer, too: “Will I be fully utilizing the benefits of a public currency, or might I enjoy many of those benefits while remaining private?”