April 16, 2014

Does it Pay to Go Public?

IPORecently, a client pointed me in the direction of a very interesting Inc. article about the case for staying private. The author is the CEO of a privately held, family-controlled tech business, one that has name cache. He notes that being a public company is expensive and time consuming. He also believes that “the most critical benefit of staying private is the facilitation of a true focus on long-term goals.”
 
It’s not hard to argue that Wall Street is increasingly focused on short-term results, but does that mean that management teams need to adopt the same mindset? Maybe it’s a naïve belief, but some would say that if the stock market is working as it should, a company’s share price will reflect the company’s true value over the long-term.
 
The New York Stock Exchange predicts a busy year for IPOs in 2014, with about 150 to 200 new issues expected. Reuters points to first quarter IPO activity of $47.2 billion, a nearly doubling from this time last year and “the strongest annual start for global IPOs since 2010.”
 
Clearly, there are CEOs who still believe in taking their companies public, many in the technology sector. Perhaps they are in it for a large personal pay day, but perhaps they realize that it could be easier and less expensive to raise capital to realize their growth plans. Or perhaps, their Fortune 500 client base requires audited financials as a condition for doing business together.
 
The decision to go public is not an easy one, and it’s a decision that every company must weigh very carefully. If you’re contemplating an IPO to become like Hooli, the fictional tech company featured in the new HBO series “Silicon Valley,” it may not be the right move. But if you’re doing it to build something that can have a lasting impact, it might just be. Just make sure you surround yourself with good advisors to ensure a smooth process.
 
– Laurie Berman, lberman@pondel.com

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Director Tenure Tops List of Expected 2014 Boardroom Topics

We recently debuted our “heard around the water cooler”  series.  Following is the first installment:IR photo
 
Director tenure topped the list of topics that board members of publicly traded companies are expected to discuss in 2014, according to the Boardroom Water Cooler survey conducted in January by PondelWilkinson Inc., a corporate public relations and investor relations consultancy.
 
Institutional investors are beginning to advocate the concept of “board refreshment,” as a groundswell of concerns surface related to directors who have been in place for significant periods of time.
 
“The conversation clearly has shifted from age-related bias to tenure,” said Laurie Berman, managing director of PondelWilkinson. “Age notwithstanding, there is growing belief that the longer a director has served, the less independent he or she becomes from management, which is contradictory to fundamental governance mandates.
 
“Perhaps for some of the same reasons that term limits exist for political leaders, we soon may see an enactment of board member term limits as part of the increasing democratization of publicly owned companies,” Berman said.
 
The second most popular topic around the boardroom water cooler is the Securities and Exchange Commission’s mixed vote in September 2013 in favor of requiring companies to disclose the pay gap between employees and the CEO.
 
Originally mandated four years ago by the Dodd-Frank Act, if the rule passes, public companies would have to disclose the median of the annual total compensation of all of its employees, excluding the CEO, against the annual total compensation of its CEO, and the ratio of the two amounts.
 
“This proposal follows closely on the heels of the ‘say-on-pay’ advisory votes already in place,” said Evan Pondel, president of PondelWilkinson. “However, since the SEC was not unanimous in its vote, the proposal will likely be subject to strong challenges. Its underlying theme closely tracks the momentum that is building in Washington and elsewhere around income inequality,” Pondel added.
 
Survey results also point to heightened 2014 boardroom discussions about:

 

  • Cybersecurity and wrestling with increasing threats to intellectual property and information systems, such as the Target retail chain recently experienced;
  • Big data and taking full advantage of emerging technology to drive profitable growth;
  • Effective use of social media to enhance brand awareness, along with customer and shareholder loyalty;
  • Interest rates and how management should take advantage soon of what may be historically low rates before it is too late, regardless of current financing needs;
  • How best to comply with the newly required Form SD requiring disclosure beginning in May 2014 of the level of due diligence a company exercised to determine whether its products and products in its supply chain contain conflict minerals;
  • Maintaining valuation after a robust 2013;
  • How to deal with what may be a period of increased shareholder activism and a mindset that activists should be listened to, rather than avoided, and could actually bring good ideas; and
  • The importance of listening to small individual investors as well.

 
The anecdotal survey was compiled by the firm’s staff, who queried public company directors, CEOs and CFOs, sell-side analysts and institutional and individual investors.

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Beware ‘The Wolf of Wall Street’

Focusing on con artists and greedy hucksters selling dreams that rarely come true, “The Wolf of Wall Street” is an entertaining, well-acted, comedic, and sadly, reasonably accurate film.
 
Although intensely exaggerated, the highly successful Hollywood extravaganza epitomizes the classic bucket shop investment bank, selling mostly worthless penny stocks via high pressure telephone solicitations, principally to unsuspecting individual investors, and tantalizing entrepreneurs who want to take their very small companies public.
 
From Charles Ponzi to Bernie Madoff, there is a long history of questionable behavior on Wall Street. The wolf, or rather wolves, never really left. In fact, the sordid creatures may be creeping back into the hood with the stock market’s stellar performance. According to one law firm, DLA Piper, even though 2013 saw the lowest number of SEC enforcement actions (68) in the past decade, word has it that this year and beyond, the SEC plans to bring record numbers of sanctions using new tools and resources.
 
In a bulletin to its clients and prospects, the law firm noted that whistleblower bounties and tips are on the rise and that the Dodd-Frank whistleblower bounty program is gaining steam, with informants potentially receiving as much as 30 percent of any monetary recoveries. On October 1 last year, the SEC awarded its largest bounty to date, $14 million, which itself may drive the number of tips higher in 2014.
 
Mid last year, the SEC’s enforcement unit announced it had formed the Financial Reporting and Audit Task Force, comprised of lawyers and accountants throughout the United States tasked with identifying issuer violations. This august group has a tool in its arsenal, affectionately known as RoboCop, which allows it to determine whether an issuer’s financial statements stick out from the pack. Other tools are supposedly in the works that will analyze text portions of annual reports for potentially misleading disclosures.
 
According to the bulletin, with the amount of new resources and tools the SEC is devoting to detecting financial reporting violations, an expectation is growing that the agency will bring a greater number of enforcement actions in the future. In June of last year, SEC Chair Mary Jo White said that in certain cases, the SEC will not settle unless the defendants admitted wrongdoing, so more companies, officers and directors may be testing the SEC’s allegations and legal positions by litigating and going to trial.
 
The largest number of enforcement actions in any one year during the past decade was 219 in 2007. We’ll see what happens in 2014. But wolves everywhere, beware.
 
– Roger Pondel, rpondel@pondel.com

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