- November 9, 2014
- Posted by: Treadstone Management Partners
- Category: Corporate Finance, Mergers & Acquisitions
Fledgling organizations deal with a large array of different decisions that directly impact the way in which they structure their organization. One such decision is derived from whether the executives will strive to release an IPO (Initial Public Offering) or aim to get acquired by a larger corporation. The choice between these two routes drives the way in which a company presently organizes their operations for the future.
By examining companies that have issued successful IPO’s, you can extrapolate common key success factors in organizational platforms. From analysis, a group of pre-IPO behaviors that directly affect a company’s success in going public have been identified. The most pressing factors are building the right executive team and creating a comprehensive strategic plan. These two pre-IPO factors go hand in hand and are important for both IPO and non-IPO seeking companies. However, for an IPO seeking company the executive team must develop a strategic plan as if they were currently a publicly traded company. This process allows for companies to hone their strategic plan internally before being scrutinized by investors and analysts. This practice must start years in advance of the IPO to allow for the preparing of financial statements, the building of inventor relations, and perfecting their board layout so that the post-IPO process goes smoothly. Due to the large time demand needed to prepare for an IPO, the attention of executives in an adolescent company must be on creating an organizational layout conducive to being a public company.
On the other hand, an organization with hopes to be acquired calls for a different structure to be put into place. Like previously stated, creating a strategic business plan is crucial in any company’s success, but in the case of a company striving to get acquired they must set their objectives in finding a niche in the market. The reason for acquisition varies widely from the need to reach a larger market to the demand for intellectual property. This wide variance in reasoning allows for fledgling organizations to organize their company today to fulfill a future niche for a large corporation. Such organizational setups include focusing on R&D and developing a product that fulfills a need not yet realized or focusing efforts into human resources and acquiring the best young talent. Both of the previous organizational focuses create a highly sought after attribute that large companies are willing to pay for to acquire.
Conducive Market Conditions
When a company finally reaches the organizational ability to go public, executives must decide when to execute their IPO. By analyzing past trends of IPO’s, it is possible to deduce what market conditions lead to the most successful IPO’s. One such market trend is the sheer amount of attention the industry in which the company is in is receiving. When an industry is receiving an enormous amount of publicity, the success of an IPO is increased drastically. Look at the dotcom boom for example; people were enormously infatuated with companies dealing with web-based systems. Many companies went public during this time cashing in on the dotcom fad and releasing extremely successful IPOs. However, these companies tended to not have any prior significant sales and earnings eventually playing a role in the burst of the bubble. This example shows the role media attention plays in the success of an IPO, but a successful IPO does not equate to stable future operations. Other than the amount of industry publicity other factors play into creating the ideal time for an IPO including the general state of stock market and the schedule of other IPOs. When the general market condition is high, your specific industry or company is receiving good exposure, and the schedule for other IPOs is minimal the market conditions for issuing your IPO has reached the opportune time.
The ideal market conditions for an acquisition, on the other hand, are hard to fully grasp due to the individualized state of acquisitions. The crucial market factors relating to acquisitions tend to stem from within specific industries rather than overarching market trends. Large conglomerates search specific industries to examine what current industry is undervalued and would lead to operating synergies. Unlike companies trying to release an IPO during a time when their industry is in the middle of the news, large companies try to predict market trends and acquire a company before large market attention. An example in the news recently is Facebook’s acquisition of Oculus Rift. Facebook hopes to develop Oculus Rift into a cutting edge technology subsidiary that will attain a first mover’s advantage in the virtual reality industry. Ideal market conditions for acquisition are complex due to the unique demand of the acquiring company; however, creating a company that is perceived to be at the forefront of a new frontier will allow for your company to be considered for acquisition no matter the state of the overall market.
Today’s Market Conditions
To be able to define what route a fledgling organization should pursue, in todays market conditions, is difficult due to the aforementioned individualized nature of different businesses. However, the current market trend of less IPO’s and more acquisitions shows the path of acquisition seems to be the most lucrative. The Sarbanes-Oxley Act of 2002 and the 2003 Global Settlement have paved the way for this market trend due to their extensive and strict requirements in releasing an IPO. Besides the governmental requirements, the sheer amount of resources needed to progress in every step of the IPO process can negate the money raised in an IPO. Lastly, going public means having to comply with a governing board as well as satisfy your investor’s demands. This requires the executive team to report to more individuals and for a small, rapidly growing company can cause an undermining of the expansion process due to bureaucratic red tape. With all these issues surrounding taking your company public, in today’s environment, young companies should more focus on organizing their operations in hopes of being a lucrative acquisition by a major corporation.