Should a Company Go Public
Essay Preview: Should a Company Go Public
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In deciding whether to go public, firstly, a corporation must determine if it is realistically in a position to support a successful public offering. And Amazon.com is not the exception.The following are some of the factors that should be considered in the decision-making process and are elements that could prove critical to the success of the offering.
Potential
As founded in 1994, Amazon actually has a short financial history. However, by the end of the first quarter of 1996, Amazon.com had grown rapidly to $875,000 in sales. Doubling its sales each of the four next quarters, Amazon successfully increased the first quarter Revenue in 1997 to the level of $16 million. By March 1997, Amazon.com had a customer database of approximately 340,000 names from over 100 countries. Average daily visits had increased from approximately 2,200 in December 1995 to approximately 80,000 in March 1997, and repeat customers accounted for over 40% of orders. The explanation for this rapid success is that book buyers via Amazons service can get access to a broader selection of titles, lower prices, value-added content, customer interaction, and personalized services, all from the convenience of their home.
Although during the first 30 months of operations, Amazon.com had accumulated a deficit of $9.0 million, this loss is simply considered to be a trade-off between short-term profitability and long-term approach. Amazon saw an opportunity to access the public markets while helping to build their brand and made a strategic choice to focus on the long-term opportunity, which would involve significant investment in marketing and promotion, site development, and technology and operating infrastructure development, rather than short-term profitability. They believed that the right thing for customers and for the long-term development of the business, and therefore, for shareholders, was to extend their brand position and achieve sufficient sales volume to realize economies of scale.
Another factor has to be mentioned is their competitive advantage of following web-based business model over land-based booksellers such as B&N and Borders. This online model targets a global market, has reduced overhead costs and a shorter operating cycle as compared to brick and mortar businesses .Also, Amazons business model has a superior inventory management system, low occupancy cost and high sales per employee. Amazon,therefore, can reach large, global groups of consumers with minimal cost, which make the business model very scalable.
A corporation must have a market value after the issue that is large enough to attract institutional investors. While public offerings may sometimes be structured for issues as small as a few million dollars, institutional investors and major underwriters usually take interest only in issues of $25,000,000 and up.
Assets
A corporation must have either a solid net worth supported by tangible assets or, if technology based, solid proprietary intellectual property with strong business prospects. The quality of a corporations patent portfolio and other intellectual property protection is critical.
Business plan
A corporation must think about its longer-term business goals and whether going public is the best way to finance its growth. Prospective underwriters and investors, as well as securities regulators, will require that a corporation have a clear plan for the use of the proceeds from the issue. On occasion, a two-step process whereby a smaller private placement precedes the initial public offering may be more appropriate and financially advantageous, as it may reduce dilution to the founding shareholders.
Market
The going-public process is typically heavily influenced by precedent. Having a good grasp of a corporations industry and market, as well as its competitive strengths and weaknesses, is critical to building a credible “case” with underwriters and potential investors.
Management and board of directors
A corporations management must possess sufficient depth and experience to carry out a successful public offering. Prospective underwriters and investors are particularly interested in the strength of the management team. A corporation must therefore ensure that management is willing and able to assume the responsibilities involved in going public. In addition, changes to the board of directors and the establishment of appropriate committees of the board are very often required. Boards of directors play a significant role in both the management of public companies and in their public image. A corporation will often need to add to its board individuals with experience, expertise or the necessary independence.
Share structure issues
A corporation must consider whether its share structure, including recent pre-IPO share issuances, meet the public-interest criteria applied by regulators and addressed in CSA Staff Notice 41-305 – Share Structure Issues – Initial Public Offerings.
Underwriters
The choice of underwriters is critical to the success of an initial public offering, for it is the underwriters who will take the issue to the public market. It is important therefore that the underwriters have a solid reputation in both the financial community and in the particular industry of the issuer. A corporation should generally look for underwriters who have a wide