Saturday 29 August 2015

Protect the shareholders or yourself?

This reflections will be based more on gut feeling than actual proof and as always anything I say should be taken with a large grain of salt.

I will go over two thoughts that I currently have:

Why do you make an IPO?
Which managers will protect the shareholders and which will protect employees?

Only for clarification, I run a company that I also founded.

I see two reason for why a founder would like to make an IPO: 

1. The first one is to actually put a clear value on the company, meaning to be able to realise this money as cash one day not too far away from now.
2. The second reason is to bring in capital to be able to grow quicker. This will, of course, always be the claim for why you want the money because no one would like to jump into a company where the founders say that they only want to realise their tied up cash. Hence also the reason for why founders can be prevented from selling their shares during the next x couple of years after the IPO occurred.

Sometimes you as a founder are interesting in both but often only one of them and to be honest with you all then it will be the first one. We want money for the time we put into the darn company. The more founders/investors that you already have inside the bigger the chance that the first reason will be the only one, no matter what else is claimed. I do however see one exception and that is if the company is very advanced (amount of employees, revenue, earnings) and actually have so many investors inside before the IPO with a professional hired CEO assigned by the investors then the matter will be different.

What I am saying here and this is an important note for myself and maybe I should even add it to my mistake list: "Be very careful of IPOs and young company in general where the founders are the managers and majority/large shareholders." My thoughts go directly to my own holdings Gerry Weber, Kernel, Tessenderlo and my previous investment and big failure Asian Bamboo.

I have already tasted a little on the second question, which is also the title, who will protect shareholders and who will protect employees?

Looking from my own perspective. When the wind start blowing in the other direction would I then protect some anonymous shareholders over my own monthly salary and the monthly salary of the people that I personally employed? As a founder and big shareholder you can not be fired and by keeping the business running you know that you will at some point get a break again. We know this because we have had that kind of situation for many years even before the IPO took place.
For us living from hand to mouth is common but for a shareholder it becomes a cold shower that they do not want to have any part of. I also know as a founder that any day in the future I will increase the shareholders interest again when the business takes off and in the meantime I will just have to gain back my IPO dilution via hefty bonuses that are paid out as shares.
Easy to do since the poor shareholders are stuck with their unrealised losses and will not come to the shareholder meeting to vote against my large bonus payment and they will probably not even look at the annual reports unless something positive happens such as an increased share price.
The biggest fear for me as a founder/manager would be if a larger player would start to buy shares and to take over what I created and any mean to make sure this would not happen until I via bonuses are back again in control would be the road that I would take.

On the other side if you arrive to a company as a professional CEO that were hired by the shareholders then the story is very much different. You feel no emotional attachment to the employees and if 10% needs to be fired then so be it. If I do not do that then the people that hired me will also fire me and I also have bills to pay each month and maybe mouths to feed. My interest lies with the interest of the people that hired me so I protect myself. This can also go to the extreme and a good professional CEO must know when the employees needs to take the hit and when it is time for the shareholders to do so. 

Conclusion: An IPO with founders as managers will rarely look after the interest of the shareholders. There are simply too many emotional attachment to the company. If the founders are about to loose control then one should be very wary of their response since in that lies their salvation but not yours. To imagine that a CEO and founder that live and breath a company will tell you how he will rip you off is as they say in German to be living in a "ponyhof". I once again come back to thinking about the managers of companies and what their interest actually is and I see that I need to put in some more thoughts into that.


Eighth Wonder Investing said...

First of all thanks for a good blog!

Interesting article, could just say that one of my big failures where just this, managers as owners and recent IPO.

I always thinks it hard with IPOs since management is often biased since they own stock. Except its not the queen who sells something :)

Best regards,

Anonymous said...

Thank you for reading!

Yes, IPOs are difficult. With founders that seriously want the money to grow further then the upside is very high but to know what their inner intentions are.... Well... that is difficult.

- Fredrik von Oberhausen