464 Making Key Strategic Decisions
right off the top, although this is an expense that will not be incurred un-
less the offering is successful; certain other significant expenses, particu-
larly legal fees, accounting fees, printing fees, filing fees, and miscellaneous
out of pocket fees, must be paid even if the transaction is not successful.
Expenses in this size of proposed IPO could approximate $1 million.- Once the company is public, it will be subject to public scrutiny, must
make periodic filings with the SEC, and will incur an overhead in dealing
with the public which does not now exist. - There will be public pressure to achieve short-term growth on sales and
profitability so as to sustain and advance the stock price, and these pres-
sures will affect strategic decisions made by management which might
other wise be based on a long-range product-driven strategy. - Management and the directors can incur personal liability in connection
with a public offering, if it is ultimately determined that the prospectus is
materially false or misleading, causing a decline in the value of investor
shares (although certain protections from this risk can be obtained by the
company’s purchase of directors and officers [D&O] insurance).
The vote is taken. With some trepidation, the board decides to attempt
a public offering, or IPO, of its shares of common stock as quickly as possible.
A “team” of two directors and three members of management is established to
pursue that result.
THE PROCESS OF GOING PUBLIC
While it is possible for the company to sell its shares directly to the public
through a variety of mechanisms including direct offerings over the Internet,
the company wants to proceed in a more traditional fashion and retain one or
more investment bankers to serve as lead or “managing” underwriters for the
public offering of its common stock. Through the contacts of the investment
banker on the board, and the contacts of Vulture Partners, the team interviews
several investment banking firms.
The entire process of going public is supervised by the managing under-
writers who will head the syndicate of other investment banking firms which
will sell the shares of common stock to the public.
An under writer is either a distributor or sales agent for the shares, de-
pending upon the type of under writing which is undertaken. A “firm” commit-
ment under writing means that the under writers agree, as a group, that if the
public offering occurs, the under writers will themselves purchase all the
shares of stock and resell those shares to the public. Consequently, in the theo-
retical event that an insufficient public market develops for the shares, the un-
derwriters themselves will end up owning the shares of stock as investors. As a
practical matter, it is an exceedingly rare event that the under writers cannot
resell the shares after an IPO is effected.