Page 222 - Finance for Non-Financial Managers

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Attracting Outside Investors
The Initial Public Offering—Heaven or Hell?
As we’ve already mentioned, the “pot of gold at the end of the
rainbow,” the goal of long-term strategies for the entrepreneur
who doesn’t want to run a company for the rest of his or her
working life is to sell it for a lot of money and retire to a beach
in Tahiti or a golf course in Florida. While there are several ways
to do that, selling the company to the investing public through a
public offering of stock will typically bring the largest return to
the sellers. The first time the company sells its shares in the
public market, it’s called the initial public offering (IPO). So, for
the classic entrepreneur, the IPO is the ultimate exit strategy.
Unfortunately for the
entrepreneur with beach-
Initial public offering
front dreams, the IPO isn’t
(IPO) The first sale of
quite as simple as selling equity in a company to the
all the shares and walking public, generally in the form of shares
away dragging a bag full of of common stock, through an invest-
money. The U.S. govern- ment banking firm.
ment, through the
Securities and Exchange Commission (SEC), long ago decided
that was a bad idea because too many owners were selling a
pig in a poke to unwary public investors who found out too late
their shares weren’t worth what they paid for them. Nowadays
all the owners, including the professional investors, will remain
owners after the IPO and their fortunes will rise and fall with the
public stock price, making everyone interested in the same
goal, consistent price appreciation.
The SEC aside, the prospect of selling shares over time,
along with the likelihood that the company’s continued success
will raise the stock price still further, makes the IPO the pre-
ferred exit strategy, if the company can get it. That’s a big “if,”
because not every company that has investor backing makes a
big enough splash to interest investment bankers. Remember
the eight in 10 companies that don’t make it? And the one in 10
that makes it big? Well, that means that roughly 90% of the