The First Day of the Rest of Your Life
When you take your company public, say CEOs on the Inc. 100, you change your job forever
You create and grow a company. Even if you have your eye on going public at some point in the future, you still run your company today as one kind of CEO. When you make decisions, you consider the interests of customers, employees, investors, perhaps even your community. Ultimately, though, you know it's your customers alone that you most need to please. Unless you serve them, your business dies. So you spend your days and your energy trying to understand -- and satisfy -- their desires before anyone else's. But when your company goes through an initial public offering and you become head of a publicly traded entity, that balance shifts. For one thing, you're suddenly forced to zero in on the interests of shareholders -- not to mention the interests of all the lawyers, analysts, and underwriters who pave your road to them. The focus on shareholders and their cupbearers is inevitable; it comes with the public territory. Customers and employees -- along with whatever other concerns dominated your pre-IPO workday -- can begin to get lost in the shuffle. Back then, your main external concern was your competition; now you become vulnerable to the ebb and flow of the stock market at large.
With those changes, you become a different kind of CEO. And the conversion starts during the IPO process itself.* * *
As new concerns vie for your attention, your time for running the business gets stolen.
From the minute a company begins thinking about going public to the day the offering hits the street, the executive becomes absorbed in the process to one degree or another. There are demands to bring in new personnel, pick an underwriter, oversee the prospectus development, set an offering price, pitch the company to the investment community, and get analysts to understand the operation. Judging from the comments of CEOs we interviewed, it's hard for most executives to anticipate the magnitude of the challenge.
William H. Brehm, who had stints in the corporate echelons of several major health-care companies before becoming CEO of CliniCom Inc. (#44) in 1988 and helping to take it public last year, says he underestimated the amount of his time and money the IPO would take, even though his chief financial officer took the main responsibility for overseeing the process. That sentiment is echoed by many. On average, the CEOs on this list spent 33 hours a week on their offerings, for an average of four and a half months. Even those who did know what they were getting into found their time eaten up: "I was totally consumed with the process," says Granite Broadcasting Corp.'s (#61) W. Don Cornwell, who had been vice-president of Goldman, Sachs & Co.'s investment-banking division for 12 years.
A chunk of that time and energy goes to basic self-education. If running a private company already requires a continual reeducation of the chief executive, moving into the world of public ownership demands a proportionally gargantuan leap forward. David Hale of Gensia Pharmaceuticals Inc. (#32) confers the deceptively simple advice that CEOs should "really understand the process, understand the issues, and know what the variables are that can affect success."
Generally, the CEOs of companies on this list tried to do that: all but a handful consulted accountants and lawyers, and the vast majority say they both read up on the subject and spoke with other executives who had taken companies public -- particularly useful, Cirrus Logic Inc. (#67) CEO Michael L. Hackworth says, because of the evenhanded perspective they offer. Almost three-quarters of the CEOs say they felt educated about being public by the time they filed.
After a CEO takes that first step of self-education, the pre-IPO preparation takes many forms. Synopsys Inc. (#9) began planning for its 1992 offering a year earlier by drawing up a to-do checklist. The main priorities, says CEO Harvey Jones, included filling gaps in the electronic-design-automation company's management team and enhancing its information systems. Getting those aspects of the company in order helped relieve pressure on the work force, which wouldn't be able to rely on the executive team to solve operational problems during the IPO process. Not only were Jones and the company's cofounder, current president Aart J. de Geus, occupied with bankers and lawyers during the months before the February offering, but both their wives also had babies in that time. "Part of getting the management team right was making sure the company could live without us," Jones says. "It was only during the road show that some of us were incommunicado. Still, it was the rest of the executive team that really carried us through that whole period."* * *
You have to please a new set of people.
On the upside, you get to make new friends. On the downside, those new friends are lawyers, underwriters, analysts, the investment community, and the Securities and Exchange Commission.
"It takes real introspection," says C. John Schoof II, founder and CEO of local-area-network maker Artisoft Inc. (#29) "Especially for an entrepreneur, it's very difficult. Because when you're building a company, you're always looking outward: you're looking for new ways of doing things, new products, new services. And the IPO process and what happens thereafter forces you to be introspective -- how good are your systems, how good are your people, how good is your schmoozing -- as opposed to focusing on what the next product is."
Companies with new products and technologies may be confident that customers will accept their products, but getting other constituencies to buy into the ideas can be another issue. At least 20 CEOs on this list say some analysts don't understand the nature of their companies. Among those are the heads of First Team Sports Inc. (#26), a maker of in-line skates that compete with Rollerblades, which went public in 1987, when the industry was still nascent; Video Lottery Technologies Inc. (#78), which sells computer systems to run lotteries; and Curative Technologies Inc. (#66), which makes biopharmaceutical products that help heal wounds.
External market pressures -- how the stock market is doing in general -- also became a new influence for companies going public. Martin Culver, cofounder and CEO of Fresh Choice Inc. (#55), a restaurant chain that had its offering last December, says that the so-called window of when investors are interested in buying stocks was closed when his company began considering an offering. "We didn't have to have the money right then to continue to grow -- we still had some expansion capital from our venture rounds -- so we thought, Let's give it a year, watch and see what the market does, and take the right opportunity."
For him as a company manager, that meant being ready to drop what he was doing to prepare the offering when the timing was best -- not from his perspective, but from a market perspective. "We asked our lawyers how far down the line we could prepare, if we could sort of get it out of the way and wait for the opportunity. But you really can't do that because most everything you put together expires in a fairly short time. In the prospectus you disclose everything about what could happen to your business, and with a fast-growing company, if you did it and waited eight months, you'd have to go back and redo it. So you pick a window and go for it very quickly."
Responding to the market also means disclosing to the market, and plans that were formerly internal become conspicuous statements to the external world. Cirrus Logic CEO Hackworth, echoing many CEOs, says the public disclosures made going public a tough decision, because they allowed competitors access to information "we consider proprietary." Others were concerned that their financial information would serve as a magnet, showing the world and potential competitors how much money can be made in their businesses.
What's more, satisfying the demands of the outsiders is engulfing. Once the IPO process was under way, Synopsys's Jones says, "the intensity with which we dealt with our lawyer and underwriters and other constituencies was much harder than what I had faced previously," when he helped take another company public.
Not only are the forces of those expanded constituencies terrifically strong during the IPO process; they continue to get played out to varying degrees post-IPO. The "public" watches and reacts to everything from acquisitions to product development, and constantly looms overhead, brutally unforgiving of volatility. Gensia Pharmaceuticals is facing a suit filed by shareholders who say the company failed to disclose information about the efficacy and testing of one of its drugs during 1992. Diagnostek Inc. (#52) was hit with a shareholder suit after an aborted merger, proving that stockholders can be more merciless than either customers or competitors. Diagnostek CEO Nunzio DeSantis offers this advice to CEOs considering an IPO: "Don't do it."
Although DeSantis is almost alone in giving that advice, other CEOs -- such as Artisoft's Schoof, whose company has been public since 1991 -- underscore the need to proceed with caution. "It gets back to the introspection thing: there's more time being spent on telling the company story, the financial story, telling where we've been as opposed to where we're going. The public wants to know, and they need to know, but it does get in the way of forging new territory." What's most frustrating for him, he says, is the continual external examination and reevaluation of the company that quarterly reporting brings on; he thinks filings should be required only every six months. "We're competing in global markets with companies that have annual or six-month requirements, and we're at a tremendous disadvantage. They can focus on the long term. I can recall saying during the road show that we wanted to keep a long-term focus, but the reality is that the board gets beat up by the investors, and a quarterly focus creeps in. It's no one's fault per se, other than the rules and regs that govern those issues." In retrospect, he says, he might have waited until the company was more mature before subjecting it -- and himself -- to the pressures of going public.
On the flip side, some CEOs surprise even themselves by taking those pressures in stride. Fresh Choice's Culver, at least in the handful of months since his company became public, has not seen his job as CEO change significantly. He takes calls from analysts, has spent more time doing public speaking, and hosts visits about once a month from representatives from the institutional investors. All in all, though, he says he's been surprised to find his responsibilities as CEO of a public company less time-consuming and distracting than he'd been warned and that his focus has not shifted from what really counts: the customer. "The people who have visited, and who call, are very interested in how our customers are being treated. I can only assume that's for real. Now, our financial results have been good to this point, and the assumption is that if we continue to execute well, the stock will continue to do well. But it seems that our investors truly are customer oriented," a pleasant relief.
Between Culver and Schoof is Synopsys's Jones, whose sentiment is probably the most common among Inc. 100 CEOs. "You have to always keep your priorities straight, and if push came to shove, I'd be in front of a customer before a banker or an analyst any day. On certain planes those bankers and analysts are knowledgeable; on other ones they're shallow. But they are a legitimate constituency and principal stakeholders in your success. You need to service them, just as you do major customers."
FOR THE RECORD
What will your newly hired CFO need to know before helping you go public? Here's a list
There is a voluminous amount of stuff a company needs to dig up to show its history and ongoing operations before making a public offering. "We prepared maybe three feet of documentation," says John Gannon, the chief financial officer of Powersoft Corp., which went public this past February.
Attorneys for Powersoft provided the company with a due-diligence documents list -- seven pages outlining what they and the underwriters wanted to see so they'd know that what was written in the prospectus was, in fact, accurate and complete.
"From my perspective, it was the world's most perfect orientation to a company," says Gannon, whom the Burlington, Mass., applications-software company hired last October to help take it public. "And that's particularly true for me as a new CFO. You identify every snake under every rock that ever existed in the past five years." As a result, there are no surprises.
Here are some of the items on the list, along with Gannon's reflections on what they can help uncover.
Articles of the organization, bylaws, minutes of meetings -- the paper trail that reveals how company decisions evolved.
Reports to securities holders: "Things like earnings per share: when you're young and losing money, you don't care how many average weighted shares outstanding there are or what their earnings are, because there is no constituency that demands it. Certainly, banks don't care. Companies tend to leave out details like that and then have to go back and re-create them later."
Audits, quarterly financials, business plans, projections: "To spend the money to build a company with extensive financial reporting from the beginning is a judgment call. If a company ends up not going public, some people would call it a waste. Others would view it as money well spent anyway, because you're running a professional organization. At some point you're probably going to seek debt from a bank or financing from a venture-capital group, and any of those vehicles will require at least some degree of housekeeping."
Records of debt.
Investor capitalization -- records of who owns shares, who owns options, who owns warrants: "That keeps you from a situation where you go public and all of a sudden somebody says, I own 100,000 shares, and nobody's got any record of it, or someone claims to have 20,000 options at three bucks when the company thought they were at six bucks."
Litigation, threatened or pending.
All governmental permits, license approvals, consents: "Anything you need in order to demonstrate you are properly qualified to do business in various states and countries."
Anything related to personnel -- work charts, employee-benefits plans, contracts, pension arrangements.
Property -- full documentation decribing what you own, where you own it, what your outstanding obligations are on it, and whether there are any issues such as environmental-waste concerns and what their legal ramifications are.
Major contracts with customers and suppliers: "Your shareholders don't want to find out that you've made a commitment to support a product line that's not profitable."
Lists of customers and suppliers.
Gannon's advice is like that of everybody who's been through an initial public offering: start preparing early. "When you want to go public," he says, "there's usually a pressing reason. There's a window of opportunity, or your business is accelerating, or the market is very accepting of new IPOs at the time, or your market sector is doing well, or you want to do it for competitive reasons or positioning, or you need the cash."
Making a public offering is not the kind of thing, he adds, that you want to delay just because you don't have your act together.
Percentage of CEOs who said that before going public, they . . .
hired a Big Six accounting firm: 35%
had their financials audited for the first time: 53%
brought in a new chief financial officer: 54%
made deliberate changes in order to improve the balance sheet: 55%
Words used to describe the road shows:
Drudgery, Educational, Enlightening, Exhausting, Exhilarating, Fun, Grueling, Inspiring, Intense, It happened, Long, Long forgotten, Necessary, Normal, Pressed chicken, Selling, Superficial, Tedious, Time-consuming, Tough
Advice to CEOs considering an IPO from those who have done it:
"Be aware of quarter-to-quarter pressures to perform."
"Do it if you must and if you can get results and deal with the scrutiny."
"Seek advice on other alternatives."
"Know that the process will take far more time than anticipated."
"Don't do it unless there is a compelling reason; the company will change from being proactive to being reactive."
"Don't be afraid to do it, but know that picking an underwriter is a key step."
"Get good legal advice, and be prepared to live in a fishbowl."
"Use board expertise when possible."
"Give up other duties."
Percentage of CEOs who said:
deciding to go public was a difficult decision: 23%
going public was a goal from the company's beginning: 43%
their IPO was smoother than others: 85%
analysts don't understand the company: 27%
they were surprised at the amount of time it took to prepare for the offering: 30%
Advice to CEOs considering an IPO from those who have done it:
"Network with other CFOs and CEOs who run comparable companies that have recently gone public."
"Run your company as if it were already publicly held."
"Don't let company matters come second."
"Develop a very good road-show presentation."
"Learn more about the process; take time to prepare."
"Raise what you need times two."
"Don't try to understand the street, and be in good physical shape."
"Do it -- when ready."
How long was the CEO involved in the IPO process?
Less than three months: 36%
Three to six months: 50%
More than six months: 14%
Average number of months: 4½
Average hours per week: 33