Has going public lost its appeal?

Charlie Mayes, managing director of DAV Management, discusses how the public is starting to lose interest in company IPOs.

Fifteen years ago IPOs were all the rage. Today however, the public company is in trouble, facing a loss of confidence and trust with numerous shareholder revolts plaguing many public businesses.  Just a few weeks ago, global advertising giant WPP suffered a major revolt with almost 60% of investors voting against the £6.8mn proposed pay package for CEO Martin Sorrell.

The number of companies listed on the major US stock exchanges has been in serious decline. From a peak of just over 7,000 in 1997, listings fell to just over 4,000 in 2011.  With increasing regulatory burdens the advantages of going public are fast diminishing and this trend looks set to continue.  Today, companies can raise large sums of money from private equity sources without having to go down the IPO route.  This therefore begs the question: has going public lost its appeal?

One only has to look to the recent flotation of Facebook, another example of an IPO that has started to sour. One of the most anticipated public offerings in history, the Facebook IPO has been mired in controversy.  Shares that launched at $38 on Friday 18 May fell 11% on Monday 21 May, and a further 9% on Tuesday 22 May to $31. This is a remarkable turn of events as just two weeks prior the social network’s share sale was over-subscribed and the eight-year-old firm was valued at $104bn.

If IPOs are indeed becoming less attractive, how do business leaders determine the future strategic direction of the company? What are the alternatives and what becomes the end goal? A company’s strategic trajectory was probably more straightforward when businesses were headed for an IPO. 

Now there are a multitude of choices and an increasingly volatile economic environment to contend with. This leaves business leaders with something of an end-game void and in danger of losing sight of the strategic direction in which the business should travel.  Once this sets in, a gradual loss of control typically follows, as leaders grapple with substitute strategies to the traditional IPO and overlook day to day business performance.  

Needless to say, shareholders will take a pretty dim view of this.  No matter how much uncertainty clouds their judgement, it is absolutely essential that business leaders take a constant temperature reading on the business and their environment and that they have the right checks and balances in place to sense potentially damaging influences at the earliest opportunity.  It follows that organisations must improve their agility and create business models that enables them to change or adapt their strategy quickly in response to market drivers.   

Easier said than done?  Well it’s certainly apparent that many business leaders have lost their nerve in the face of today’s acute challenges. I would urge leaders to deal with any apprehension they may be harbouring, make positive choices and move on.  

I’ve seen inertia set in where management teams procrastinate about decisions to their detriment. In my experience making a judgement call, even if it is not quite the right one, is better than doing nothing.  One of the more corrosive effects that I’ve witnessed over the years is where a lack of decision making leaves a business drifting, ’sleep-walking’ off course for months or even years.  

Don’t misunderstand me, I’m not suggesting that organisations should make reckless decisions in a blind panic. Knee-jerk decisions that are not based on clear reasoning inevitably result in what we call a "spinning business" scenario – where the business starts to veer off course and inexorably spin out of control.

For those who are not familiar with the term "spinning business" let me explain.  A business that has started to spin is one which, when faced with a changing environment, such as the current recessionary market or the uncertainty caused through the decline of the IPO shareholder event, takes ill-informed decisions without fully understanding the market context. 

In phase one of a spinning business scenario, the initial indication of trouble occurs where a hitherto successful strategy is hit by external factors that are outside the influence of the business and which start to disrupt the market dynamics. The strategy that the company had been following, which was once beautifully aligned and serving the organisation well, becomes out of synch with the marketplace. 

In phase two, executives decide that they need to tweak things a little and are sure that they’re getting on top of the problem. However, tweaking doesn’t correct the situation, revenues are at risk and the management team starts to think about reducing operating costs, suspending recruitment and making redundancies.   

Phase three sees the problem entrenching and the management team starts to try a few wilder ideas but with a predictably adverse effect.  Eventually changes start being made for the sake of it, as managers strive to demonstrate they are taking action but without giving previous changes any time to work.  Desperation has set in.

At this most extreme point the business moves into phase four where it realises the strategy is absolutely wrong and major changes will have to be made. At this point, however, it is unclear if the situation is recoverable. It may be too late and the business may be forced to drop out of the marketplace altogether. More insight and managerial courage in the early stages of the spin can prevent the whole scenario developing.

As the economy continues to bite and as organisations look for new ways to fuel growth and strategic direction, especially as IPOs lose their appeal, the chances are that many businesses will find themselves a bit directionless. I find that many companies just don’t think clearly enough about their long-term strategy and the default claim up until recently was: “We’re planning to IPO.”  Now many of those organisations don’t have a clearly defined end goal and are in danger of losing direction - spinning out of control as they look to shoehorn in alternative strategies.

At this stage it pays to step back and take a considered, structured approach that enables you to understand the reasons behind any change in your marketplace and take strategic steps to address it at the earliest possible point. It’s a bit of a hackneyed quote these days, but insanity really is doing the same thing over and again and expecting different results.

Charlie Mayes is managing director of DAV Management.

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