In an April 1 “Closing Bell” interview on CNBC, Mark Cuban made an interesting observation that tech companies wait too long to go public. “Companies are waiting seven, nine, ten years or longer to go public,” he said, “and [by then] their hyper-growth is typically gone.” Mr. Cuban’s remarks were more than just an observation or call to action for issuers and underwriters generally, but also a personal philosophy he stated for companies that he controls and advises.
Mr. Cuban’s argument appears to be that issuers are mistiming their IPOs. The equity capital markets used to be able to capitalize on the hyper-growth of a company going public early and that’s not happening anymore, he said. Whether the blame in the delay is the issuer’s or underwriter’s – and that is a whole other matter – the result of postponing a company’s IPO past its hyper-growth phase is that “a lot of IPOs underperform,” ultimately leading to investor disappointment and shrinking demand.
“It’s something we have to work at. That when we hit $50 or $100 million in sales, and we think we can be a $500 or $750 million revenue and 10% net profit company, let’s go public early,” Mr. Cuban stated. By implication, Mr. Cuban is not generally deterred by smaller issuers that are unprofitable at the time of their IPO (in terms of earnings per share), which is a common underwriter concern.
Without going into great detail on the many macroeconomic and other reasons for a slower IPO market (especially for smaller IPOs), Mr. Cuban seemed to be saying that a big reason nonetheless is a lack of exciting hyper-growth companies electing to go public nowadays.
And the impact of this delay can be evidenced by the significant number of strategic acquisitions of smaller tech companies in need of growth capital for product development and distribution. Mr. Cuban highlighted the case of Facebook’s transactions with Instagram and Oculus, by suggesting that the smaller companies could have conducted successful IPOs as independent companies.
In part, Mr. Cuban’s observations on smaller IPOs are not entirely new. Professor Jay Ritter in “Reenergizing the IPO Market” (Jan. 3, 2013) and Professor John C. Coffee Jr. in “Gone With the Wind: Small IPOs, the JOBS Act and Reality” (Jan. 31, 2013) both point to the impact of strategic M&A (as compared to high regulatory costs, for example) for the decline in the number of smaller IPOs, with Professor Ritter noting that small firms will find it more profitable to merge with larger firms than to do an IPO given economies of scope and scale.
Mr. Cuban’s point about pushing tech companies to go public earlier in their lifecycles, even against conventional wisdom, is a welcome and fresh perspective, perhaps reminding us of the dramatic pace of smaller IPOs completed during the 1990s. Mr. Cuban is right in that smart investors will likely be happy to invest in multiple IPOs, one or more of which will flop, just to obtain a bargain price on stock early in a tech company like Google, Apple and Microsoft.
PartnerArmed with more than three decades of capital market experience, Spencer represents smaller publicly traded companies, and often underwriters and investment funds, in public and private securities offerings. He focuses ...