What does this say about business owners?
THERE is nothing in the literature, experts say, that examines the traits of entrepreneurs or business owners who take their companies public as opposed to those who do not.
According to Dr Tim Loughran, a professor of finance at the University of Notre Dame who specialises in IPO matters, if such a study were done, it would probably show that going public is merely a proxy for success. "In other words," said Loughran, "successful people build companies that the financial markets will value highly and they will go public in order to realise this value, whereas unsuccessful people are not likely to follow the same path or have the same result."
This is not to say that there are not successful people who build successful companies and choose never to go public. Last year, for example, Forbes Magazine identified 257 closely held, private companies in the United States with annual revenues of at least US$1 billion. Their wider list of America's 500 largest private companies shows annual revenues ranging from US$604 million to in excess of US$50 billion. All together, these private companies employ over three million people and contribute more than US$700 billion annually to the US economy.
The list includes such well-known names as PricewaterhouseCoopers, Publix Supermarkets, Ernst and Young, Hallmark Cards, DHL and Polaroid.
WHY GO PUBLIC?
So, what is it that motivates a business owner to go public? "Above all, you must have a commitment to growing the business beyond the limitations of your own resources and be willing to put yourself up to public scrutiny," asserts Ryland Campbell, who will take his Capital and Credit Merchant Bank public next month and become listed on the Jamaica Stock Exchange.
"You have to be dedicated to building a company that will grow from strength to strength and from generation to generation," Campbell added. "And, the best way to do this is to build a team of key people who share the vision and have the skills, competence and motivation to ensure the company's success.
Capital and Credit, which opened for business in 1994 with start-up capital of J$30 million, has now become Jamaica's largest Merchant Bank with capital of over J$1 billion. The group includes two associated companies, Capital & Credit Securities Ltd., a member of the Jamaica Stock Exchange and Capital and Credit Remittance Ltd.
Jamaica Money Market Brokers' Donna Duncan-Scott, whose company went public in Jamaica in December 2002 and subsequently became listed on the Trinidad and Tobago Stock Exchange on February 7, 2003, focused on control. "Many business owners are concerned about losing control if they were to go public," she said, "but going public does not mean losing control." "If you are an operating owner, control is a function of how effectively you run the business and service your customers so that it grows and adds value for shareholders."
Mrs. Duncan-Scott said that JMMB's intention to go public was considered very early in the firm's 10-year history as a means of releasing the value that would have accrued and of expanding to better serve a wider market. The firm's public issue in Jamaica, which raised J$ 1.02 billion for approximately 17 per cent of its issued share capital, was oversubscribed and realised value on the order of 300 times the original investment. The real challenge, according to Duncan-Scott is going from servicing a handful of investors to now over 12,000-5,000 of whom were customers. "The answer is the maintenance of transparency and of world-class company standards," she said.
With more than J$51 billion under management on behalf of more than 70,000 customers, Jamaica Money Market Brokers is Jamaica's leading financial management and advisory firm. The company also operates JMMB Securities Ltd., a member of the Jamaica and Trinidad and Tobago stock exchanges as well as Caribbean Money Market Brokers Ltd., in Trinidad and Tobago.
VALUATION OF PRIVATE AND PUBLIC COMPANIES
Private companies are usually valued lower than public companies. This is so even when these companies are in the same industry. Several reasons for this were cited in a recent Entrepreneur Magazine article on the subject:
Market liquidity private firms lack market liquidity, making the shares difficult to sell and, therefore, low in value, generally speaking. The shares of a public company may be bought and sold daily, which enhances their value.
Profit measurement by seeking to maximise earnings for shareholders, public companies tend to maintain greater profitability than private firms.
Capital structure public companies within industry groupings tend to maintain fairly similar capital structures (debt/equity mixes), making price/earnings ratios reasonably comparable. This is not the case with privately held companies.
Risk profile public companies usually provide for continuity of operations, making them less subject than private firms to downturns in the economy, changes in management or changes in the business environment.
Business operations public companies generally develop operations spanning a broader range of markets, products and services than do private companies, making public companies more likely to be able to cope with competition.
FEEDBACK
Participants in the Jamaica Stock Exchange's seminar on going public in February provided feedback, the most salient of which we now share:
Going public appears to be the way to go if you are truly seeking growth and continuity. But you have got to make sure that you have your house in order before even thinking about it.
You really need to get a handle on the costs of going public before you get serious about it. I personally would have liked to have had a more in-depth breakdown of the reasonable costs of going public in the seminar.
I wanted to learn more about the comparative advantages or disadvantages of the alternatives of going public. What is the comparison between going public and a merger and acquisition, for example?
We were doing a private placement and the seminar taught us exactly how to go about it. In other words, it helped us to do our homework. Now that that we have gone through that, we are definitely considering going public before the year is out.
Our company is definitely going to go public. We have been considering it for a long time. We consider it the best way to get out of the small, entrepreneurial mode into a large, corporate mode to be able to compete more effectively. What we would like is more information and insight into the pitfalls to avoid maybe a case approach with in-depth analysis. Representatives of companies desirous of going public are encouraged to contact a member broker of the Jamaica Stock Exchange.
(This column is part of the on-going public education programme of the Council of the Jamaica Stock Exchange)
