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Thursday, 6 March 2014 00:00 - - {{hitsCtrl.values.hits}}
If successful private companies go public, it is beneficial to the shareholders of these companies. It is also beneficial to the country if these successful private companies transform themselves into public companies.
As these are two very good reasons, the intriguing question is, why do we not see more successful firms going public? Is it because the decision making process of whether to go public gets enmeshed in a tussle between logic and emotion and it takes time for logic to prevail?
Ringside view
I was able to witness at very close quarters this conflict being played out when I played chaperone to take a large family firm public. I also saw the same emotions on many occasions during my multinational career when trying to acquire local brands and when setting up and managing joint ventures. It is a story worth relating in the current context where strenuous efforts are being made to persuade companies to go public.
Successful entrepreneurs
Successful entrepreneurs have created many good businesses. There is no easy explanation as to why some individuals succeed in creating very successful businesses. There is no known link to education, sex or age, or height or weight.
Some have been to university whilst many others, have not. Some have started working in other firms and then branched out, whilst others have started out on their own from the outset. Not everyone who starts an own business is successful. Even amongst those who are successful, there are varying degrees of success.
Those who have created businesses of the size and scope that can be taken public are very, very special people. They are an elite; they are the cream of businessman. From hundreds of thousands of businesses in the country, they are the small golden minority who have hit the jackpot and are good enough to be able to ask the public to invest in their business.
The crux of the reluctance to go public
There are three related reasons that create a reluctance to go public. Firstly, the founding fathers believe that they are special (and indeed they are), and they wish to pass on what they have created to what has come from their loins. They do not want to give any part of it to strangers with money.
Secondly, they wish to control the management of the business, even after they have brought their children into their business. Thirdly, there is a general concern of losing their independence.
The rollercoaster of decisions
Because of these concerns, the path of deciding whether to go public is indeed a bit of a roller coaster journey. The highs are the benefits of going public and the dips are all their concerns. So there is great enthusiasm, followed by complete disenchantment. Often there is a long lull with thoughts of going public shelved.
After some time, on further reflection, the benefits drive the enthusiasm again to go public. This can go on for some time. It can be a draining, tortuous journey for the owners of large private companies.
The push and pull
As always nothing can beat the opportunity to increase one’s wealth. The dangling bait is the opportunity to release and realise value. The only assets a private company can sell quickly are its land and buildings. If these are essential for their current operations, these assets cannot be sold. It will be difficult but not impossible to sell a part of a private company.
The likely buyers are private equity firms. But PE companies generally operate to a set pattern. Their aim is to help to build a company, to then take it public, sell their equity and thereby make a killing. That is the sole motive of PE companies. (They do not buy in for love and affection for pioneering entrepreneurs!) To protect their investment they will put in place various agreements that will severely restrict the freedom of the family shareholders.
In one way this is no bad thing for the family shareholders as the PE firms will only be trying to develop the business. But during this phase there is no public value of the business. Pursuing a sale to a private equity business as the first step in the process of going public does not appeal to most private firms.
"Private firms must realise that all the benefits of going public far outweigh some niggling concerns they may have about becoming a public company. Good support and a good mentor will make this a painless process"
The carrot that drives the decision
Going public means putting some part of the equity of the business on the market through a public offering. The shares are offered to the public at a specified price. Then the shares are traded on the stock exchange and they have a very public value.
When you multiply the number of shares by the prevailing price per share, you get the market value of the company. The captains of the old family firm can then put their chests forward with pride and say my company is worth so many billions. That is something they could not do when it was a private company as private companies do not have public market value.
The family shareholders can sell a part of their holding and convert the shares into cash, and do what they desire with the money (buy the Ferrari and build their palace!). By contrast they could not do this whilst it was a private company.
The only way to get cash as a private company is to negotiate a sale of a part of the business. This is not an easy or comfortable process. When the company has gone public all that is required is to ring the broker and tell him the quantity of shares you are selling .Then hey presto in a few days the money is in your bank account. In essence this is essentially what is meant by the expression of going public to release and realise the value in the business.
The stress and strains post deciding to go public
The emotions and concerns can remain on a high voltage for some time even after the company has decided to go public. Many difficult issues have to be resolved. The role of family members on the board has to be agreed.
Even more challenging is the task of dividing the shares amongst the family. Sometimes lingering doubts may emerge about whether some may sell out to outsiders at some stage in the future.
Someone once told me that he had a recurring dream. He dreamt that when he went to the office there was a new receptionist, and he wondered why no one had mentioned this. Then when he went to his office there was a new name on the door! I mischievously suggested that when he next had this dream he should ask the new receptionist out for lunch. This did not produce a smile. He said that if his wife woke up and heard him trying to take the receptionist for lunch in his dream, it would be a bigger problem than losing control of the business.
The whole process of complying with all the rules of good governance could be a bit daunting. For example, as a public company it will need independent directors. There will be concerns about whether they will severely curtail the freedom of the family directors. There will be concerns about them asking probing questions! That will be something new in a family business when the only questions were asked by those family members allowed to ask them! The very thought that a remuneration committee will determine the salaries to be paid to the family members will create more than a ripple of apprehension.
All the rules of good governance of a good public company may initially be somewhere between frightening and irritating. Regulators should be keenly aware that loading the regulatory rules will dampen the enthusiasm for going public.
Helping hands
A private firm going public needs a good investment bank, and a senior experienced corporate figure as a mentor. Going public is a bit like childbirth. It can be frightening and difficult, but will be much easier if there is a good midwife helping in the process.
A bank cannot quite perform the mentor role. An experienced mentor could guide the family through the tricky decisions about the family role post going public. He could help in bringing on good non-executive directors; he could take the new public company through essential good governance and importantly create the understanding that good governance is not a pain but is something good for the business.
Private firms must realise that all the benefits of going public far outweigh some niggling concerns they may have about becoming a public company. Good support and a good mentor will make this a painless process.
(The writer has a Master of Arts Degree from Cambridge University, UK, and the AMP of Harvard Business School USA. He counts over 40 years of board experience having served as a Director of several companies in Sri Lanka and abroad. He was a Director on the main Board at Reckitt Benckiser PLC, UK, where he worked most of his career and at the time of his retirement was Global Director – Pharmaceuticals. He has served as the Chairman of the Board of Investment and Sri Lanka Telecom Limited and was a Senior Advisor to the Ministry of Finance. Currently, he serves as Chairman of Hemas Holdings PLC and First Capital PLC.)
