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Porter flies from downtown Billy Bishop Toronto City Airport. (CNW Group/Porter Airlines Inc.)
Porter flies from downtown Billy Bishop Toronto City Airport. (CNW Group/Porter Airlines Inc.)

Value Series: Part One

IPO or no? Going public has its downsides Add to ...

Taking a company public can be lucrative for investors looking to cash out. The prestige and visibility that come with operating in the public sphere don't hurt, either.

"Going public is both exciting and the ultimate Canadian dream," said Roman Dubczak, the head of equity capital markets at the Canadian Imperial Bank of Commerce.

The upsides to a successful initial public offering, or IPO, are alluring. If it is well received, the company can access cash flow that will enable it to achieve its goals - it can grow, make acquisitions or pay off debts. Then, through a secondary offering, shareholders can cash in.

In April, Montreal-based dollar store chain Dollarama Inc. issued a second offering after raising $300-million through an IPO in 2009. This time, however, the proceeds of an additional $287-million went to the company's selling shareholders, composed of chief executive officer and founder Larry Rossy, chief financial officer Stéphane Gonthier and private equity firm Bain Capital.

But management and shareholders must consider the downsides of going public before committing to an IPO, particularly with the market as unpredictable as it is. With auditors and lawyers fees, plus underwriters taking a 5 per cent to 6 per cent commission off the sale once it's closed, a $50-million to $150-million IPO could cost $1.5-million to $3-million, said Peter Miller, the head of equity capital markets at BMO.

"There are costs for translation into French (if you're listing in Quebec), road shows, hotels, lunches and listing fees on the TSX," he added. And there's a chance that after all that time and money, the market just isn't receptive. And then? "You can wait, and try again. Or you just say no, and those are sunk costs."

Porter Airlines withdrew its IPO in June after it had already announced that the offering price of the shares would be reduced to $5.50 from its initial range of $6.50 to $7. Porter's CEO, Robert Deluce, is hoping to get approval from the U.S. State Department to establish customs preclearance facilities at Billy Bishop Toronto City Airport for trans-border flights. It's a key element of the company's plans for American expansion, but U.S. authorities declined the application in August, putting the IPO's marketability into question.

Besides the market's co-operation, a few key factors can determine an IPO's success, Mr. Dubczak says. The management team must be aware of how gruelling the process itself is, and how different operating as a public company is from the private world.

With visibility comes a loss of privacy. Management's salaries are published, and rigorous reporting procedures make finances public. Management also loses its autonomy; the people who started the company aren't the bosses any more - they have shareholders to answer to. While the company is planning an IPO, managers will be juggling their regular day jobs while helping to write the prospectus, selling their story in the road show, completing the housekeeping tasks that regulatory bodies require, learning about compliance and hiring a board of directors that has experience operating in the public realm.

"You need to look in the mirror as a management team and say, 'Do we really want to be a public company with all the rigours and discipline that it requires, and the cost that it entails?'" said Lawrence Wilder, securities lawyer with Cassels, Brock and Blackwell. "And it sounds kind of funny that you're arguing against [you firm's interests]in a sense, but it's better to get people who really, truly understand the downside of being public right up front."

The management team is essential to every aspect of the IPO process, including the marketing of it. Some executives are better at it than others.

"In the case of Dollarama, we had Neil Rossy," Mr. Dubczak said of the company's road show. "He is the merchandising guy who can kind of spin the story well and talk about all the nuts and bolts of it. He was on it."

Leadership is also important to potential investors who are looking at the long run. Entrepreneurs should be wise to the fact that if they're looking at the IPO as an exit, it could take some time before they can cash out.

"If going public is an option, you're going to have to stay for some time," Allan Bronstein of Torkin Manes LLP said. The length of that time depends on the availability of a suitable replacement that the board of directors and shareholders approve of, and on when a second offering could be well-received by the market.

And it's the markets, for both initial and second offerings, that are so difficult to count on now. Equity market experts are reluctant to be too optimistic about the future of IPOs.

Kirby Gavelin, the managing director and head of equity capital markets at RBC is conservative in his predictions.

"The IPO market from an investor's perspective is the riskiest part of the market," he said. "These are companies that don't have a record as a public enterprise, haven't had the research coverage, haven't yet established the anchor investors that have developed core positions, are holding them and are supporting the market in terms of an ongoing trading."

CIBC's Mr. Dubczak is more optimistic.

"I'm, by nature, bullish," he said. "I think you'll see IPOs in a stable market. The longer things are stable, it creates an inherent degree of predictability in things. " In a low interest rate environment, Mr. Dubczak thinks that baby boomers hoping to retire in the coming years will be looking at investments with higher yields. Those investments could come in the form of IPOs, particularly those companies with excess cash flow and who can pay dividends. "The longer interest rates stay low, the further [baby boomers]have to push out."

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