No IPOs?

November 2017  |  FEATURE |  CAPITAL MARKETS

Financier Worldwide Magazine

November 2017 Issue

The ability to raise capital through initial public offerings (IPOs) offers a multitude of advantages to the owners and managers of privately held companies. Notably, the funds raised are cheaper than debt financing and do not require repayment.

Yet despite the obvious advantages, there are doubts surrounding the suitability and viability of IPOs in the current climate. Encumbered by growing and increasingly stringent regulatory oversight, the number of new listings has fallen in recent years, particularly in the US, which has impacted the number of public companies in the marketplace. According to EY, the decline in new listings is one of the key reasons the total number of public companies in the US shrank from more than 8000 in 1996 to around 4400 in 2016. While 2017 has been a better year for IPOs to date, the market for going public has only slightly improved and it seems increasingly likely that fewer companies will go public in 2017 than did in 2015.

The IPO pipeline has not been helped by the poor performance of two of the most hyped public offerings of the year – Blue Apron and Snap – which have regularly traded well under their initial offering price. Blue Apron saw its share price tumble in the weeks following its offering. In August it was down 40 percent on its IPO price of $10. Snap’s shareholders saw value fall 27 percent in the six months after the company’s March IPO.

For those companies considering their options, an acquisition may be a better alternative to an IPO. Earlier this year, applications management company AppDynamics was finalising its IPO when it opted to be acquired by tech giant Cisco for $3.7bn instead. AppDynamics is far from the only company choosing M&A, however. While IPOs on American exchanges last year were at their lowest level since the recession, mergers were at their highest, according to CNBC.

Given the economic pressure on smaller companies and start-ups trying to compete in a globalised, competitive market, better value may be found in being acquired than in pursuing an IPO.

Given the economic pressure on smaller companies and start-ups trying to compete in a globalised, competitive market, better value may be found in being acquired than in pursuing an IPO. Being subsumed into a larger organisation can provide opportunities to grow and become profitable, utilising a parent company’s infrastructure and resources. There is increased pressure on companies to get as big as possible, as quickly as possible – particularly in the technology sector. While going public and developing organically may be an attractive option, growth takes time and costs money. Acquisitions, on the other hand, allow smaller organisations to leverage compelling brands and concepts to generate value.

The IPO market has not completely collapsed, however. According to EY there are some bright spots. For example, 61 percent of all IPOs in H1 2017 took place in Asia-Pacific, as well as a 44 percent share of global IPO proceeds. The region has seen its best six months since 2002. “Asia-Pacific’s position as the leading center of IPO activity will remain unchallenged through the remainder of 2017,” says Ringo Cho, Asia-Pacific IPO leader at EY. “While Greater China continues to lead the way, other markets are seeing considerable activity. Australia ranked fourth among global stock exchanges by deal volume, while Korea made a significant contribution to total proceeds in H1 2017 with mega-IPOs from the technology and financial sectors.”

EY expects activity to increase in the UK and Europe, where political uncertainty has receded in recent months following major elections, in turn strengthening investor sentiment. The same applies to the US, though uncertainty around the Trump administration’s international trade policy may subdue activity.

There is political will to get the IPO market moving once again. Jay Clayton, chairman of the US Securities and Exchange Commission, has noted that: “The substantial decline in the number of US IPOs and publicly listed companies in recent years is of great concern to me. Some companies have shifted capital-raising activities to the private markets, where many Main Street Americans have limited access. High-quality companies may choose to go public at a later stage, after much of their early growth has already been achieved. Other companies may choose to stay private.”

All companies pursuing a public offering will be required to study the market and consider their particular IPO prospects. Cost will certainly be a factor. Since the introduction of the Sarbanes-Oxley Act in 2002, the cost of going public has increased significantly, and companies need to grow sufficiently to absorb the outlay. For companies such as Dropbox, Airbnb and Pinterest, all predicted to launch an IPO in the coming year, and any others considering their options, there are many questions to be answered and alternatives to consider.

© Financier Worldwide


Richard Summerfield

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