The Demise of the IPO Allure
Has the American Dream faded into the past?
The initial public offering "IPO" became one of the hottest phrases in the bull market of the late nineties. It became the dream of every start-up to take their company public and reap enormous gains from their ownership interests. The IPO became a "risk-free" way to raise capital and create wealth for shareholders, including employees. As a result, pre-IPO start-ups heavily relied upon stock options to compete for top-level talent against traditional brick and mortars. The lack of cash flow posed few problems to companies attracting A players with a promise to pay big with an IPO.
Times have changed! The unprecedented times of down markets, corporate scandals, and legislation has ushered in a new age of shareholder scrutiny-specifically for publicly-traded companies. Our research into the number of recent IPOs paints an astonishing picture of the trends. The number of IPOs has tailed off dramatically since 1999 when there were 492 throughout the year. For 2002, IPOs dropped to 81 total-including only 31 for the second-half of the year (post Sarbanes-Oxley). The combination of a slow stock market and increased shareholder scrutiny has served as a de-motivation for seeking public corporate status.
Adding insult to injury is FASB's all but finalized decision to account for stock options as an expense. While FASB is reacting to negative shareholder perception by attempting to curb excessive executive compensation, one of the unanticipated fallouts will most likely be eliminating a start-up company's most useful tool of attraction and retention - pre-IPO stock options.
While start-ups are already struggling to compete for the almighty dollar to stay alive, the noose is starting to further tighten due to fewer companies delivering on a promised IPO and an inability to attract A players out of the traditional brick and mortars. The lure of "going public" has faded, and large numbers of IPOs have become a thing of the past.