Almost every business owner dreams of hitting the jackpot by going public on a stock exchange. Yet when many find out what is involved in taking their company public, they recoil in horror, rapidly coming to the conclusion that this is not for them. But there are both pros and cons of going public for mid-sized businesses in Central Europe.

The case against going public could be summarised under a number of headings, starting with the costs and risks of going public. Taking a medium-sized company public on a Central European stock exchange can easily cost hundreds of thousands of euro, possibly even millions.

The company must fund these costs prior to the initial public offering (IPO). If market conditions change and the IPO fails, the company will still be saddled with considerable expenses. Despite the fact that the majority of costs are usually success-related, there are still likely to be considerable fixed costs, such as legal fees. The risk of such a public failure concerns some business owners, not just in terms of the money involved but also because of the possible negative publicity.

The costs of ongoing information provision and compliance should not be forgotten either, as a public company must be fully transparent. At the time of going public, an offering memorandum must provide full disclosure of all the information relevant to potential investors assessing the company. After going public, the company must generally file quarterly statements intended to update the shareholding public about all material developments concerning the company.

Collecting and disseminating this information has a cost, in terms of the staff time required to collect the information and create the reporting. Furthermore, giving your competitors detailed information on your operations may also have a less quantifiable but potentially very damaging cost. Also, there are various costs related to compliance: stock exchanges will generally require public companies to have a board of directors, who will in turn ask for liability insurance, and various committees of the board – an audit committee, a compensation committee and so forth – and the costs involved in these can be significant.

There is also the cost of shareholder communications and public relations to consider. Once a company goes public, it must maintain ongoing communications with shareholders and the general public. The company must develop a core of analysts who follow and report on the company.

This is generally only worthwhile for analysts once a company’s market capitalisation reaches a certain value, often in the hundreds of millions of euro. If such a following in the analyst community fails to develop, the general public does not receive the information and independent verification that it requires in order to develop the confidence necessary to invest in the company’s shares.

This can cause the share price to languish far below the price at which the company initially went public and also far below the real worth of the company. This, in turn, may then make it more difficult to raise additional financing or to engage in mergers and acquisitions, as any investors will tend to use the market capitalisation of the company as a proxy for the value of the company.  

A company that does not give full disclosure – where there is an error, omission or delay in information provision – may face potential liabilities. Class actions by shareholders are common in the United States. Fortunately, the Central European environment is not as litigious, but the possibility of liabilities still remains.

Going public often requires new skill sets and corporate culture – more emphasis on reporting may diminish entrepreneurialism. The corporate culture may need to change to one of greater transparency, or to a more "short-term" way of thinking – for example, meeting targets for the next quarter.

And there is always the possibility of hostile takeover – once the owner of a business sells more than 49 per cent of their shares, he or she may wake up one morning to face the risk of losing control of his or her company in the event of a hostile takeover bid.

The case for going public
The main reasons for going public, on the other hand, can be summarised as follows. Mainly, an IPO may allow shareholders to raise substantial fresh equity at favourable valuations.

This may be used to fund the exit of one or more existing shareholders, or to raise fresh equity for the company. If the timing is right and market conditions are good, the equity raised can be extremely cheap – for example, on the Warsaw Stock Exchange, at the peak of the market several years ago, IPOs were carried out at more than 25 times the earnings before income, tax, depreciation and ammortisation (EBITDA).

Where a company has an aggressive acquisition strategy, it may use its own shares to fund acquisitions, rather than cash. Similarly, it may offer shares rather than cash to management or other staff, in lieu of bonuses. This allows the company to conserve cash and may motivate management (or shareholders in the acquired company) to work hard in order to further improve share prices.

Ultimately, an IPO is not for every company. However, for a small minority of companies, it may be an appropriate step to take, consistent with the objectives and strategy of the company and its shareholders.

An IPO certainly does not provide a solution for an owner/CEO to exit in the short-term. Generally, a compelling growth story is a necessary pre-requisite for a successful IPO and it is a decision that requires careful consideration.

*Les Nemethy is the CEO of Euro-Phoenix Financial Advisors Ltd. (www.europhoenix.com), a Central European corporate finance company focused on mergers and acquisitions