Sunday, April 4, 2010

Sustainable business and the IPO

Once public, a corporation is subject to share holder primacy. This can lead the corporation to do things which may not be in the company's, employees' or planet's best interests.

So if you wanted to be free of share holder primacy concerns and take the company private again what might that mean?

Barring the cases where the company fails and share prices drop resulting in a different set of stakeholders coming in and taking over (private equity takeover), let's assume this means buying back all of your shares on the open market.

Assuming that you used your IPO cash to grow the company (i.e. the cash is gone), you would have to do this through cash on hand and net cash flow. Is this reasonable to do?

An immediate problem that looms is that the higher the earnings, the higher the stock price. So the way you get more cash, makes the company more expensive. Let's pretend that you could freeze a company's stock price and income so that cash flow and stock price stay more or less fixed. Could you buy your company back even then?

Taking Google, a wildly successful company with huge net cash flow, as an example:
As of April 2010, they have a market cap of ~$181B with ~$24.5B in cash and net cash of ~$2.2B/yr (averaged over the last three years).
This means it would take >70 years to buy out their capitalization even if it could be frozen.
That doesn't sound very feasible.

So, while this is vastly oversimplified, it does suggest that going private for a successful company is no small matter. If sustainability is a key concern, going public seems to be potentially difficult act to "recover" from due to the high cost of shaking loose the shareholder primacy yoke.

I need to read Rework and see what 37Signals has to say about staying private.

Photo credit: wallyg (flickr)