Sunday 18 April 2021
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Initial Public Offering Disadvantages (Part Two)

*This is the second part if this column, the first part was published last week but due to the length of the entire column it was separated in two.

Expense (s) of going public
The cost of going public is substantial, both initially and on an ongoing basis. For example, if IPO is cancelled at the last minute because of adverse market conditions or other reasons, the company will be liable for substantial costs. On an ongoing basis, regulatory reporting requirements, stockholders meetings, investor relations, and other expenses of being public are significant. The company may need to hire additional financial and accounting personnel to help with the preparation of the company’s financial disclosure. Conversely to the aforementioned smallto-medium sized companies can avoid or minimise the ongoing cost of being public by employing the following methods: (1) Judicious use of outside professionals (2) Sending bare bone annual and quarterly reports to shareholders (3) Using inexpensive techniques to reproduce and mail shareholders reports and (4) Avoiding of unnecessary shareholders meetings.
Pressure to Maintain Growth Pattern (s)
When a public company’s sales or earnings deviate from the upward trend, investors may become apprehensive and sell their stock, driving down its price. People will commence to evaluate the entity on a quarterly basis, rather than on an annual basis and this may intensify the pressure and shorten the company’s planning and operating horizons significantly. The latter may also tempt the shareholders to make short- term decisions that can have harmful and/ or long- term adverse impact on the company.
Disclosure of information- sometimes referred to as “opening you kimono”
IPO requires full disclosure of finances and technology. The public company’s operations and financial situation will be open for competitors and public scrutiny. The disclosure of information will not only be during the initial phase, but also on a continuing basis. Contrary, it is sometimes possible to avoid the disclosure of exact profitability of separate product lines, especially in the Fast Moving Consumer Goods (FMCG) industries.
Loss of Control, Vulnerability
When a sufficient large portion of an entrepreneur’s shares is sold to the public, the entrepreneur may lose control over the company, meaning, causing him as an insider to lose control. Simply said, he may become subject to a hostile tender offer. However, this can be alleviated through careful insertion of anti- takeover provision (s) in the charter or by creating two classes of stock with disproportionate voting rights. Concomitantly, when new investors develop a perception that the current management is poor, they often take control and fire the founder / entrepreneur.

Shareholders Lawsuits/ Legal Concerns
All IPO participants are jointly and separately liable for each other’s actions, meaning, if there are serious omissions in the IPO prospectus and if the public market valuation falls below the IPO offering price, directors, officers, and control persons can be sued by their shareholders. Advisable at this juncture, is that the public company can only prevent such lawsuits, or at least win them by disclosing adverse news to the trading markets and by avoiding overly optimistic or exaggerated comments on shareholders and press releases.
Estate Tax disadvantage
It is more difficult to obtain a low estate tax valuation for a public-traded stock than for the stock of a private company. The latter is true because the public market tends to value stocks on multiple of earnings basis, rather than on book value basis.

Extensive time commitment involved
Going public will take a minimum of six months and it involves a considerable amount of commitment from the part of the company’s senior officers.

Ongoing Management, fiduciary responsibilities and regulatory scrutiny
Providing answers to investors’ questions becomes an integral part of the management’s day-to-day activities and/ or functions. The public company becomes subject to operating limitations, which are imposed on it by regulators that it has become subjected to.

Decisions based upon Stock Prices and the Falling of Stock Prices
Management’s decisions may be affected by the market price of the shares and the feeling that they must get market recognition for the company’s stock. In addition, if the shares of the company fall, the company may lose market confidence and decreased valuation of the company may also affect credit lines, personal wealth of insiders and investors.
No immediate cash out allowed for the lead shareholders, entrepreneur or original business owner
Generally, IPO shareholders / entrepreneurs are restricted from cashing out their shares for many months after the IPO is issued.
Other IPO advantages might include specifics such as (1) The lead entrepreneur or majority shareholder deems it to be the most suitable retirement strategy (2) Obtainment of Special rating status by Government of the Republic of Namibia (GRN) and Regulatory requirements and (3) Creation of organisational ownership culture (i.e. through a combination of listing on the NSX and offering Employee Stock Ownership Plan) as demonstrated in recent years by the Old Mutual Namibia Group, Nedbank, Standard Bank Namibia and other companies.
Similarly, certain notable disadvantages are (1) Short-term growth pressure (2) Trading restrictions and restrictions on management (3) Loss of personal benefits (4) Regulatory review by relevant authority and (5) Increase unionist opposition to the IPO especially when the transaction is potentially deemed to adversely impact and promote unfavourable labour conditions in due course.
In conclusion, it’s imperative for the investors and/or lead entrepreneurs to realise that being public makes customers feel more comfortable, that you are managing a mature and stable company. The latter makes it fairly easy for an entrepreneur to make use of “funny money” stock certificates to acquire other companies without cash. Therefore IPO is best for well- seasoned start- ups with, among other things, ample fiscal resources and substantial brand recognition.

Pangwa P. Gabriel is the Chairman of Capital Resource Services (Pty) Limited (“CRS”) and he can be reached at: [email protected]

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