IPO, is it the last resort?
While there is an ongoing debate about the lack of IPO’s in Stockholm, new listings in other markets are announced continuously, something you can read about in an article in SvD Näringsliv on February 8 (in Swedish), ”10 giants headed for the New York Stock Exchange”.
With the arguments put forward in this debate, it is easy to believe that the stock market is just some kind of dumping ground for companies lacking the ability to raise money (i.e. the owners cashing in) in any other way.
It is clear that the requirements for listed companies have increased over time, but aren’t there any other advantages to a listing than the sign of quality? (Which may indeed by itself be sufficient?)
If it’s only about making an exit, it seems rational in the short term to sell to the highest bidder, but if you want to build long term value an IPO is a strong alternative. In addition to the most obvious reason for an IPO, raising new capital, increased crediblity and visibility can open the door to new business opportunities.
The information that companies are required to disclose to investors will of course not be confined only to this group, but it will also contribute to increased visibility and attention by many stakeholders such as customers (both existing and potential), suppliers and employees. The quality mark of an IPO can build confidence in the company, which in turn may lead to new business relationships that otherwise would not have been possible.
There are of course other advantages to taking a company public, among other things:
• Larger ownership base, employees etc.
• Easier to recruit when the company is perceived as a more attractive workplace
• A new currency to be used for acquisitions
• The management and employees, especially if they are shareholders, will work even more intensively to achieve good results. Being a shareholder also gives a greater sense of affinity than just being an employee.
Arne Karlsson, CEO at Ratos, summarized it well in an article in Veckans Affärer, (in Swedish) ”What complicates the IPO climate is that buyers and sellers do not have the same perception of the future. Buyers can accept an introduction price in relation to the companies’ current earnings level. Where they do not agree with the sellers is on the outlook. The sellers expect a valuation as if the profits will rise in the coming years, while those who are supposed to subscribe to IPOs believe that the earnings uncertainty is too high to pay the offered price”.
In other words, the decisive factor is the horizon of the owners’ commitment: if they want to cash in immediately they are likely to sell to the highest bidder, but if they have a longer perspective they can float the company and sell a smaller part initially, stay on and create greater value in the long run.