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VOL. 127 | NO. 74 | Monday, April 16, 2012

Many Questions Raised Before Going Public

By MICHAEL WADDELL

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As Facebook prepares for its multibillion-dollar initial public offering (IPO) next month, it sheds light on how companies – including local ones – decide whether to go public or not.

Research associate Angel Luciano checks concentration levels in plasma of a drug candidate as he works under a biohazard hood at GTx, Inc. 

(Photo by Lance Murphey)

Memphis-based pharmaceutical company GTx Inc. went public in 2004 and local paper producer Verso Paper Corp. held its IPO in 2008, but the overall number of publicly traded companies both locally and nationally has dropped over the past two decades.

Facebook plans to hold its IPO in May, and the initial public offering is expected to value the company at more than $100 billion. But it will change the culture of Facebook, which will be required to be open and transparent regarding its information to shareholders.

“I refer to it as the fishbowl concept. You are in the fishbowl once you are publicly traded,” said Marc Hanover, president and chief operating officer of GTx, a local biopharmaceutical company that was established in 1997 and then became publicly traded in February 2004.

He stressed that GTx and Facebook had very different circumstances heading into the decision to go public.

“We have to raise money as a necessity in order to pay our employees and expenses, but Facebook does not necessarily have to raise money because it has revenue from advertising to offset its expenses,” said Hanover, whose company is currently developing hormonal treatments for advanced prostate cancer as well as drugs that will help build muscle and bone in patients with small cell lung cancer.

“We felt like we had to go public in order to properly develop the drugs. There are only two ways for us to generate revenue: either from partnering with a pharmaceutical company to develop specific drugs or by raising money from the public sector.”

For GTx, the move to go public was very capital intensive on the front end, as all of the company’s money was tied up in clinical trials. Not until each drug was approved did the company see any profits.

Hanover describes it as a “high risk, high reward” venture.

“At the end of the day, the rewards far outweigh the risks, both from a humanistic standpoint as well as from a shareholder perspective,” he said.

From 2004 to 2009 GTx stock traded for an average of $12 to $24 per share. Now it’s worth approximately $3.34 per share.

The reward of going public for Facebook will likely be as much as $5 billion, capital it can then use to compete with Google and other companies by acquiring assets and developing new ways to generate more revenue.

Several tech companies have gone public in recent months including Groupon Inc., Pandora Media Inc. and Zynga Inc., which has close ties to Facebook.

Companies that go public will see their cost structure impacted by things like much more expensive audits and the need for additional staff to handle the extensive reporting and filings, which became more comprehensive and time-consuming thanks to the Sarbanes Oxley Act of 2002.

Since Sarbanes-Oxley was enacted, the number of publicly traded companies based in Memphis has shrunk from 20 in 2002 to 16 in 2006 to 13 this year. The overall number of publicly traded companies in the U.S. has dropped every year since 1997, according to data from Grant Thornton. Since 1991 the number of U.S. exchange-listed companies is down more than 22 percent (when adjusted for real inflation-adjusted GDP growth that percentage spikes to 53 percent).

On April 5, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which will make the process easier for companies to become publicly traded by bypassing audits and disclosures now required for investors.

John Strand, vice president of operations for Lenny’s Franchisor LLC, worked years ago handling corporate communications for the now-defunct publicly traded Fleming Cos. in Oklahoma City, a $23 billion company with more than 40,000 employees.

He remembers the amount of time needed to meet the various controls and regulations laid out by Sarbanes-Oxley.

“It took up a fourth of the company’s year planning wise,” Strand said. “Many companies since then have gone the other way and turned to private equity lenders to provide not only capital but also leadership, direction, oversight and accountability to their organizations.”

Dr. John Gnuschke, director of the Sparks Bureau of Business and Economic Research at the University of Memphis, said that in most cases of a private business going public, the decision is not driven by a single factor but is wrapped around the idea that the net benefits of going public outweigh the benefits of staying private.

“Both public companies and private businesses have profit as the common driving force behind decision making,” Gnuschke said. “Going public, if successful, will attract investors while also expanding the ownership group and strengthening the financial base of the company. It also allows previous owners to decide to change ownership positions or maintain investments in a larger and potentially more profitable business venture.

“Going public may open up opportunities for expansion and may change the dynamics of business management.”

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