Go Public Young CFO, Go Public By William CateGoing West in
1850s was American path to business success. It made railroads dominant economic power in America in 19th Century. Going overseas was business success strategy after World War II. It led to US being an economic superpower in 20th Century. In 21st Century, going public is only road for companies that want to grow into multinational corporations and achieve business success.
Risk Capital and Private Placements
For Private Companies, Risk Capital is almost impossible to find. American Venture Capitalists are currently funding only one business plan in every ten thousand that they review.
The odds of a public company arranging a Private Placement are about one in one hundred. The reasons that a public company CFO can raise risk capital in this way are that investors in a public company can sell their shares and thus have liquidity in their investment, liquidity that is lacking in a private company investment. Also, since a public company's share price tends to trade well above its book value, public company investor gets leverage in that shares should be worth more than equity that they represent in public company.
Spending Your Equity
From CFO's (Chief Financial Officers) viewpoint selling discounted shares is a better deal for public company than selling equity in a private company. Investors in a private company will expect at least 50% equity in company for their money. To raise same amount of money, CFO selling publicly traded shares usually gives up much less than ten percent of equity in his public company. Here's an example.
Let's assume that you are CFO of a public company and want to raise one million dollars. The company's share price is ten dollars per share. Your public company has already issued five million shares of stock. You, CFO, arrange a million-dollar Private Placement at a 50% discount to share price (at $5/share). Your public company will issue 200,000 shares of new stock for its million dollar Private Placement. Your company gives up only 4% of its equity for funding. If company were private, million dollar private placement would cost company at least 50% of its equity! This is simple addition and subtraction. These figures cannot lie. Take your company public!
Your Company Shares Are MONEY.
A wise CFO realizes that a public company's shares are money. I will repeat this important point. Your public shares are money. They can be used to buy other cash producing companies.
If shares trade at ten dollars, company is issuing ten-dollar bills and can issue millions of dollars of its currency. While shares won't buy food at Supermarket nor pay your electric bill, they can be used to buy cash-producing assets for your public company. All major corporations do this as a regular activity.
By converting shares into cash producing assets, you are converting a currency with limited exchange potential into a currency issued by some Government. After all, private company you buy is making money in some Government issued currency. Usually, public company has right to convert all currencies it receives into free trading currencies like Euro, US Dollar, etc. Using this strategy, you as CFO can convert a private or public company grossing a million dollars a year into a public company grossing a hundred million dollars a year within a few years. Let me show you how.
CISCO Leads Way
CISCO Systems, a multi-billion dollar international corporation, built itself into a high tech powerhouse by using its shares to acquire private companies. Its formula was 75% shares and 25% cash.
Let's assume that your public company grosses one million dollars a year. Your pretax one million dollars a year with a 25% pretax profit. You agree to pay one million dollars for private company. The payment will be CISCO 25% cash and 75% stock. While purpose of acquisition is to increase revenues and profits for combined companies, we’ll assume that private company integration with your public company doesn't enhance revenues or profits. Thus, next year's pre-tax profit of your combined companies be $500,000. The $250,000 pretax profit of acquired private company would offset your public company’s $250,000 cash outlay previous year.
