Page 37 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 1. Executive Compensation Framework 23

Acquisition

Merger

Joint Venture

Alliance

Start-up IPO Spin-off

Divestiture
Founder Venture Investment
Capital Capitalist Banker Bankruptcy

Figure 1-7. Structural change of an organization

with another company, or it may want to divest all or a portion of its business. These phases
are listed in Figure 1-7. All have executive pay implications.

Initial Public Offering
Reasons for an IPO include raising capital for expansion, deleveraging an earlier leveraged
buyout and removing a portion of the business not aligned with the company’s vision and
mission. Timing is critical. Waiting to have a longer track record may come at the expense
of missing a prime market opportunity. It was believed that 1999 was a great time to do an
IPO, but when the bubble burst a year later, the number of business failures far exceeded
even pessimistic expectations. To some, IPO meant “investor pain overload.”
It the company decides to undertake an initial public offering, it must be prepared to know
what is required of a publicly traded company. It is important to not only know the require-
ments before proceeding but also to do a dry run on preparing the reports and releases to
ensure a smooth transition from being privately held to publicly held. New functions such as
investor relations need to be formed and staffed, and the extent that equity compensation will
be a portion of total pay, not simply for the executives but for all others in the organization,
needs to be carefully evaluated. It will be more difficult to ask for equity programs after going
public as it will dilute the ownership of the investors. The pay programs need to be aligned
with the company’s objectives and able to pass public scrutiny. Such objectives should be
consistent with a stated pay-for-performance philosophy. And the extent and an investment
banker must be selected. Experience with similar firms in the industry, including costs and
capital raised, should be carefully reviewed. This selection process is often called a bakeoff.
The selected underwriter analyzes the firm’s financial data, comparing them with rivals,
to set a preliminary value for the company. This leads to setting a preliminary stock price.
After the company agrees with the initial price range, meetings are set up with institutional
investors to get an indication of interest. Typically, this is a grueling several weeks of
cross-country (perhaps cross-continent) travel with several meetings a day with various fund
managers. This travel, usually called a road show, is set up only after long hours of polishing
the presentation and preparing responses to anticipated questions.