The Eye-Catching Amounts Raised in Recent Public Offerings Came Only After Companies Anted Up Big for Legal, Accounting and Other Fees
Despite the market’s current snub to initial public offerings, going public has been a bang-up exit strategy for entrepreneurs and venture capital investors in the past few years. And it’s been a pretty good deal to the offensive line of the IPO process,the underwriters, accountants, lawyers and even airplane pilots who shuttle executives to meetings with potential investors.
That’s because going public is a daunting process, maybe even the biggest a young company can face. There are accounting issues, legal matters, and road shows to pitch institutional investors and filings with the Securities and Exchange Commission. Don’t forget about getting mutual fund managers on board.
“It is almost life-threatening,” said Brian Horn, whose company, Goapply.com Insurance Services Inc., a Costa Mesa-based online insurance services supplier, plans to go public later this year. Horn said he’s open to other options, like a buyout or a merger, which, in many cases, is easier than launching an IPO. In the run-up to an IPO, companies have to focus as much on the pending offering as their day-to-day operations, he said.
The process of going public also squeezes a company’s checkbook.
IPOs can cost a company anywhere from $100,000 to a few million dollars. Including the underwriter’s fee, going public can cost a company up to 15% of the total amount raised.
“The cost completely varies with the size of the offering,” said David Fife, an investment banker with Irvine-based Fife Waterfield & Co. Fife previously worked as a financial analyst in the equities division with Goldman Sachs & Co. The cost of an IPO also can vary based on the quality of legal help and services a company selects.
“I can’t see going public for less than $100,000,” Fife said.
The first charge a company is likely to encounter is for an external audit. Companies have to report yearsof earnings, revenue, assets, liabilities and all other numbers that public companies are required to disclose.
Accounting fees usually eat up about $100,000 to $300,000. The accountants often have to do “a lot of house cleaning,” Fife said.
A company’s lawyers also will rack up the bills. But a company also has to pay for its underwriter’s legal fees, though some underwriters take the money out of the amount raised.
The lawyers are responsible for putting together the prospectus, which Fife said is an expensive process since several drafts are required. The company, legal counsel, accountants and underwriters are involved in the process together.
“Legal bills are easily $100,000 to $200,000,” Fife said.
Moreover, a company has to clear up any existing lawsuits or other legal issues it has in order to prevent any problems or delays with the offering.
Still, the biggest fee for an offering comes from the underwriters, who register and issue the stock for a company. For their services, underwriters typically charge 7% of the total raised.
Though 7% may seem like a lot for an underwriter to charge,on an offering that raises $87.2 million, the average size of an IPO in 1999, the underwriter fee would be $6.1 million,the fee also covers an underwriter’s risk in issuing the stock. The underwriter can be held responsible to stockholders if the valuation of the company and the stock price is inaccurate.
When IPOs get into the billions, such as April’s $10.6 billion offering of shares in AT & T; Wireless Group, the underwriters charge a smaller percentage.
The underwriter’s fee pays for the firm’s lawyers, printer’s expenses and all travel costs.
The cost of the road show, or the company’s presentation to mutual funds and institutional investors, also varies.
Some companies send out their road show team via first-class commercial airlines, while others may charter a jet. Some companies will splurge and fly the Concorde if traveling to Europe. On larger offerings, companies often travel to foreign markets.
The larger the IPO, the more a company will spend, said Brian Songefest, an associate with Angelstreet.com,Newport Beach.
The group on a road show usually numbers four or five,including three from the company’s management team and one or two from the underwriter. For two to three weeks, the group travels, eats, sleeps and presents together, usually cramming the maximum number of cities and visits in the shortest duration of time.
Cheaper options are out there for companies wanting to go public. The Internet has brought about online companies like New York-based Wit Capital Group Inc. and its E*Offering unit, which can take a company public online, cutting some costs associated with road shows. While online offerings still are in their infancy, industry observers see them gaining ground.
“I think you’ll see people going to that structure,” Songefest said.
Another option is for a company to do a reverse merger into a public shell company. Fife said the company would then to do a secondary public offering to get capital and then hope to get analyst coverage of their newly public company. n
