Internet Securities, Inc was established in 1994 as an outgrowth of a student initiative at CarnegieMellonUniversity to locate hard to find financial data on emerging market companies and economies. The company recently relocated to Boston to be closer to the scene of financial information provider. Its target market is people doing business in the emerging markets. Financing is essential for the expansion of the company’s business activities and future growth.
The Best Goal to Pursue for ISI Is to Maximize its Stakeholders’ Value
Initial Public Offering
Generally, an initial public offering is the most suitable method of obtaining financing. In an IPO financing of Internet Securities, Inc will be provided in the form of Mezzanine capital by the banks that manage the offering. Initial public offering is a kind of public issue of securities, where an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities, or both, for the first time to the public. If ISI chooses the IPO path, the resulting capital infusion to the company from the increased number of stockholders and outstanding shares will provide the company with financial resources and a relatively liquid investment vehicle.
Internet Securities, Inc will have greater access to capital markets in the future and a more objective picture of the public’s perception of the value of the business. The reporting requirements that accompany the increased number of stockholders and costs involved implies that the founders must carefully calculate the advantages and disadvantages of going public before starting the process.
An initial public offering will provide Internet Securities, Inc with economic and financial advantages. An IPO will ensure that all positive effects from reinforcing the financial structure are made possible by obtaining new funds. ISI will have direct access to new financial sources at a low price, which will be attained without the participation of proficient intermediaries. Through an IPO the company will move from actions aimed at financial problem solving to a medium long-term financial strategy.
The IPO will ensure expansion of available investment sources based on the increase of contractual power and lucidity that IPOs offer to listed firms. Internet Securities, Inc will experience good rating emanating from reduction of funding costs. Funds collected from an IPO can be diversified, which means less dependence on the bank system and the possibility of reducing the cost of funding supplied by the banks.
An initial public offering provides the venture with a great source of interest-free capital for growth and expansion, reducing debt as well as product and market development. A public listed company has better status and position in the market. The IPO will make it easier for ISI to form coalitions and bargain deals with suppliers, customers, commercial banks and creditors. For the founding members it is also a way of harvesting the rewards for their efforts by selling off a portion of their ordinary shares. For existing employees it is a way of rewarding them through share options.
Through an initial public offering, Internet Securities, Inc will obtain value and transferability of the organizations assets. ISI should decide to go public so that the value of the company can be disassociated among the second and third generations. For the founders going public is the most profitable way to achieve the liquidity necessary to make an exit with the best possible return on their previous stage funding.In this context, other investors are also able to liquidate their investment more easily when the company’s shares are taken on value and transferability. Due to this liquidity, the value of listed shares of ISI will be higher than shares before the company is publicly traded.
Going public will enable Internet Securities, Inc to enhance its ability to obtain future funds. As a listed company, ISI will find it easier to raise additional capital particularly debt. The management will be able to borrow money easily and on more favorable terms when there is value attached to the company and it is easier to be transferred. Research shows that both debt financing and future equity capital is easier to obtain because ISI will have established a track record of increasing share value.
In addition, Internet Securities, Inc being public will enable the company to generate a good reputation and increase visibility in the economic and financial community. These positive effects can be utilized as leverage in marketing and corporate strategies because they can attract more qualified administrative resources. Public companies are more attractive than private ones because they have highly skilled managers with a better prospective for expansion. Reputation capital which is obtained by strengthening of the company’s image is very useful in the marketing strategy because it increases the ISI’s visibility if there is an internationalization campaign planned.
On the other hand, a trade sale will mean that the founders of Internet Securities, Inc will sale a part or a totality of the venture to another company. Direct competitors, supplier or a customer or any other company that has a strategic interest in the venture may become the acquirer of ISI. The reason why the founders of Internet Securities, Inc should not choose trade sale as a means of rising funds is the uncertainty of developing a successful exit strategy. A sell to a strategic buyer may in contrast be profitable in monetary terms, probably even more than an IPO. Trade sales have lower transaction costs, lower information asymmetries as it will be easier to convey information to a limited number of parties than to the public at large.
The acquiring buyer will purchase all (or a larger part) of the common stock of the Internet Securities, Inc for a specified price. The buyer will then replace the selling private equity fund as the owner of ISI. Private equity firms may prefer a trade sale over other exit routes because it offers more control over the exit process, and they can maximize the value of the investment through the sale negotiations.
The management of Internet Securities, Inc should note that an initial public offering will not always lead to direct sale of their share because stock market authorities or investment banks may require existing shareholders not to sell their shares for a limited time. In the case of trade sale the buyers of ISI may be willing to pay for potential synergies that may be created after the acquisition. The founders will, therefore, be in a weak position to negotiate for the synergies to be paid for.
The management may be opposed to trade sales because this regularly entails the loss of their independence and control of the company. Another important factor to consider is that in case the management fails to realize a trade sale within a defined period, the private equity should have the contractual right to seek buyers and to disclose information about the company when soliciting offers from third parties. Internet Securities, Inc will be considerably more marketable when 100% of the shares are for sale. This means that a private equity investor with a majority stake in the company will insist on a so-called drag along right, which will enable the private equity investor to force the remaining shareholders to sell their shares to the chosen buyer on the same terms and conditions as the investor.
When comparing a trade sale and an initial public offering, in an IPO the founders of ISI will retain their equity state, while in a trade sale the original owner will have to sell out and the new owner will replace the incumbent management. In the context, motives of the founders of Internet Securities, Inc are not solely financial. This implies that the founder’s private benefits with an IPO can supersede the mere monetary benefits from a private sale of shares. The non-financial factors can compensate for the founder’s risk of losses incurred through an IPO. When the cost of IPO under pricing becomes relatively large, however, owners may try to maximize their proceeds by limiting the number of their shares sold at the IPO itself. Trade sales are likely to be unattractive for ISI because the company intends to invest for strategic reasons. This is because trade sales are not used to pursue strategic goals.
Through trade sales, Internet Securities, Inc founders are likely to suffer from public exposure and potential loss of control. The management of ISI will have to deal with new shareholders whose major aim is to buy the entire company. Everything the company does or possesses becomes shared information and can be scrutinized by buyers interested in the company. The founders will therefore suffer potential loss of control. When enough shares of Internet Securities, Inc are sold to the public, the firm can lose control of decision making, which can even result in the company being acquired or taken over by another.
Why IPO Is the Best Path for Internet Securities, Inc
Initial public offering (IPO) is more preferable for ISI because once the company is listed it has to make several critical changes in the internal organization to work in the external financial and economic world. The need for precision pushes the company to make its activities and processes more visible. The founders of ISI have to realize that the increase of decision constraints and the potential interference of third external parties decrease the control power of the entrepreneur. The IPO process will impose costs related to the fulfillments which target companies have to execute. After listing, Internet Securities, Inc will face several costs needed to adjust their organizational structure. The costs include advisory services supplied by the sponsor and the quotation syndicate, costs related to the certification and audit of ISI’s balance sheet and marketing costs related to the promotional activities of the IPO.
Initial public offering is ideal for Internet Securities, Inc. This is because having a publicly traded stock will allow the owners to attract, retain and provide incentives for talented managers by offering them stock options and other stock-based compensation. Going public will allow the founders to reallocate personal wealth away from their business and diversify their portfolios. The act of going public will generally result in increased media attention which will promote the company’s products and services.
An IPO should be considered as the most favorable route for extending the funding for Internet Securities, Inc. This is because in a buoyant public capital market, an IPO will generate a higher price than a trade sale or selling to a strategic buyer. An IPO is ultimate for Internet Securities, Inc management as it will allow them to remain in place and control, even if there appears a range of institutional and private shareholders. This is often preferable to the personal risks of a trade sale to a single shareholder who will impose his or her own management. An infusion of common equity will not only permit ISI to pursue profitable investment opportunities but will also improve its general financial condition and provide additional borrowing capacity. In addition, if the stocks of Internet Securities, Inc perform well, the company will be able to raise additional equity capital in the future.
The Likely Impact of Each Decision to Its Existing Investors, Employees and Founder
Initial Public Offering
When ISI goes public, there arise certain benefits for employees and managers including improved personal image, international visibility and recognized expertise. The positive aspects are balanced by an increased monitoring of their daily performance because their work is continuously subjected to the judgment of the financial market expressed in terms of share price. It is important to note that the listing of Internet Securities, Inc will allow diversification of managers’ and employees’ salary so that it can be divided into flat and variable remuneration linked to long-term incentives. The IPO for the employees is an opportunity to be involved in a stock options plan. Thus, key employees of Internet Securities, Inc can be given incentives through stock options. Employees prefer to own stock, or options on stock that is publicly traded and therefore liquid.
Through the adoption of a stock option plan and employee ownership plan, the founders of ISI will provide employees with unique financial incentives. Employee ownership and stock option provide everyone with a personal stake in the company and hence a strong incentive to make the company as valuable and successful as possible. Through compensating employees with stock, Internet Securities, Inc will attract talented executives and employees that the company may not otherwise have been able to retain before the IPO.
The provision of quarterly information to investors through 10-Q filings often diverts the employees’ focus from managing a business that creates long-term value which achieves quarterly results expected by the market. This can create pressure to the employees to manage the company for the short term at the expense of creating long term value.
An IPO will increase liquidity and allow founders to harvest their wealth. The stock of a private or closely held corporation is illiquid. Going public will enable the founders of the company to diversify. This is because as the company grows and becomes more valuable its founders often have most of their wealth tied up. By selling some of their stock in a public offering, they can diversify their holdings, thereby reducing the riskiness of their personal portfolios. The IPO will allow founders to reduce exposure to their company by selling shares. Sales by founders and key employees are usually set for more than 25% of the IPO offering; it is done in order to maintain a significant risk position. This will make IPO purchasers confident that founders as well as managers will be motivated in an economical way to increase the shareholder value. Internet Securities, Inc underwriters will permit the founders to include a portion of their own shares in the IPO.
It is, however, important to note that the number of shares the founders and majority shareholders will be allowed to sell in the IPO will be strictly limited by the underwriter. If ISI has good prospects, the founders who have information concerning growth potential of the company will intend to keep their shares and watch them continue to increase in value. Founders of the company will benefit from the development of an active and liquid market in the company’s securities, and it offers a ready market for selling their shares. By creating a public trading market for their shares, founders of Internet Securities, Inc can unlock the value of their stock. When this occurs, the founders can choose to sell some or all of their stock holdings in the market at a noteworthy turnover.
The major drawback of IPO is that the founders and the management of ISI lose control of the company. In this case, they should unite their efforts and seek substantial changes in the company. It is important to note that proxy fights can be waged and board members can appoint such directors who have a very different view on how to run the company than the founders.
Early stage investors benefit from an IPO through the development of a liquid aftermarket in a company’s stock. If investors are optimistic about the company, the price of the stock can considerably differ from the IPO price. In the aftermarket, investors purchase and sell a company’s stock among themselves, and the company does not receive the sales proceeds from any of these aftermarket sales. Even with the restrictions on sale contained in SEC rules and lockup agreement, investors often sell their shares in the market over time at substantial profits. The ability of investors to sell large numbers of shares at very profitable prices is a considerable benefit of conducting an IPO.
Many investors in technology-based companies such as Internet Securities, Inc have shifted from the buy and hold method of investing and record significant increases in the short-term prices of the stocks they buy. This is the matter of major concern because it can cause investors of ISI to engage in a great deal of short-term trading stocks expecting to generate fast profits.
Trade sales are usually designed to serve the objectives other than revenue maximization. Trade sakes are typically more conducive to the development of a strong governance structure for the company than is the case with share offering. Sales do not provide the same degree of transparency to the investor’s trade as public offerings and, therefore, they may potentially be prone to corruption especially when they are carried out through a non-competitive process.
In the case of trade sales, the investors feel that the company can be operated more effectively in the future or that the firm is worth more dead than alive. Trade sales involve either withdrawing the firm’s free cash flows over time or maintaining the status quo, thereby liquidating the ISI assets gradually or immediately. In this case the buyers will look for ISI’s stand-alone cash generating potential as the source of value. Through purchasing Internet Securities, Inc, investors will expand their investments. It is important to note that buybacks or redemptions by co-investors or management are a common exit route for passive investors and all other investors when other routes fail.
Trade sale will be quicker and easier than IPOs for founders, particularly considering the difficulties in finding buyers. The founders will get some money upfront which will depend on the sale price. The founders of ISI will stay with the company during the workout period. After the work-out of the sale is completed between the buyers and the founders, they lose management and strategic control of the company and they will probably leave if they do not sale 100% of their stake. The founders should note that ISI is far more profitable for marketing through trade sales when 100% percent of the shares are for sale. This implies that if the owners of Internet Securities, Inc choose to sell the company to a potential buyer, they will eventually lose control of the company.
The founders of the company will lose its confidentiality. The due diligence process might result in the disclosure of confidential information that, notwithstanding good confidentiality agreements, can be used by the competition against Internet Securities, Inc. Through trade sale, the owners of Internet Securities, Inc will have a clean exit. This means that the founders of the company will not only sell the title of the company’s assets, but also the burden of underlying liabilities.
Employees and management will be adversely affected by trade sale. This is because the founders and the management will lose their independence of running the company. Another risk of trade sales is that new owners of the company which appear through trade sale are likely to bring their own employees and management resulting in massive loss of jobs. There will be the potential for the managers to lose their positions and roles within the company post acquisition. A buyer might blend management teams together or dismiss current management depending on the terms of the deal.
In conclusion, an IPO is the most viable option for Internet Securities, Inc to attain financial growth. This is because an IPO is perceived to be the most remunerative for the private equity fund. IPOs have high financial growth prospects compared to trade sales. The IPO will be a reliable determinant indicating that the success of Internet Securities, Inc. The acquired reputation will enable the company to raise more capital to facilitate future growth such as acquisitions. Trade sale will not be the best option for the founders of Internet Securities, Inc since it regularly entails the loss of their independence and control of the company.