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IPOs: How to Reverse the Winner’s Curse

Companies may have good reasons to go public, but the hoped-for shareholder return often doesn't come. Here are some thoughts for overcoming that obstacle.

著者：Hubert Shen

First published on 2月 12, 2020
min read


This article originally appeared on CFO.com. After the storied stock market successes of such technology icons as Amazon, Facebook, and Google, investors have endured a cold soaking of late with the share price reversals of LendingClub, Uber, Twitter, and Slack. Have initial public offerings lost their mojo? A company that executes an IPO can be said to have “won,” in the sense that its early investors can cash out, the company now has the prestige of being public, it has analyst coverage, and sometimes more news coverage. But it turns out that IPO magic is more hype than substance. New Bain & Company analysis shows that two-thirds of global companies that went public from 2010 through 2014 and stayed public over the subsequent five years underperformed their established, publicly listed peers, with a weighted annual average 0.4% total shareholder return (TSR) vs. 8.4% for their respective indexes by industry and geography. The underperformance spans regions, industries, and prior ownership, including private equity. Indeed, money has been flowing in the other direction. Over the past 20 years, private market capital globally has grown at more than double the rate of public capital, and there’s no slowdown in sight. What is behind this “winner’s curse”? Simply put, new investors might have bought a dog, and the company can now ill afford to focus only on acquiring customers — it must address cash flow and profits as well. Why IPO, then? Yet IPOs remain relevant for companies that need substantial capital in order to fulfill growth ambitions. An IPO helps a company gain recognition and credibility, which is relevant for building an ecosystem of partners in the company’s market. Also, companies can use new shares as an acquisition currency when trying to consolidate within their industry. Post-IPO performance, then, is critical for the companies and their investors. How can companies going public ensure that they join the elite one-third that outperform their public peers in TSR, a group that ranges from Spanish travel software company Amadeus to U.S. animal health company Zoetis? Outperformers treat their IPO as a beginning and a means to an end rather than any kind of end in itself. They take time to determine a winning post-IPO strategy, including where to play (which products, geographies, and customer segments to focus on) and how to win (the pricing, execution methods, and model for delivering value to customers). Consider the case of Pinnacle Foods, a U.S. maker of food staples. Private equity firm Blackstone bought Pinnacle in 2007 then took it public in 2013. The company’s stable cash flows attracted unusual demand from investors. The IPO plan included other components as well. Under Blackstone, Pinnacle set a productivity initiative that generated annual savings of 3% to 4% in procurement, manufacturing, and logistics. The company used “foundation brands” as cash cows to fund the growth of “leadership brands.” Over the next five years the stock price increased steadily as Pinnacle’s well-known brands excelled in the frozen foods and snacks categories. In 2018, when Conagra decided to buy the company as the perfect complement to its existing food portfolio, Pinnacle had realized a fivefold increase in value. Many of the newly public companies that outperform their established peers have gleaned how pre- and post-IPO investors have fundamentally different objectives and incentives. Private company investors look for liquidity, want as high a valuation as possible, and frequently push executives to tell as rosy a story as possible in order to maximize the proceeds at the IPO. Eager companies comply but often do not have the wherewithal to reach such lofty ambitions. Investors after the IPO have other priorities and look, in particular, for a practical scenario with some blend of growth and profits that the company can achieve. The trouble is that investment banks rarely offer helpful guidance on how to bring the equity story to life. Worse, in some cases there is no direct link between the story and the path to value creation. That phenomenon plagued companies at the heart of the 2000 dotcom bust and partly accounts for the recent WeWork and Uber share-price reversals. NXP Semiconductors took measures to ensure that investors understood its plan to create value. When NXP split from Philips in 2006, it was suffering from heavy losses, a lack of strategic direction, high costs, and organizational complexity. Now that it could stand alone, senior management began a restructuring program to streamline the organization in order to boost productivity and speed. The business also executed a major operational turnaround, resulting in a sharp reduction in the cost base. These moves set up an IPO in 2010, which helped pay down debt. The compelling story for investors included a strategy shift to focus on less-capital-intensive manufacturing, complex segments where it had an advantage in research and development, and high-growth markets, all while shedding some noncore businesses. Post-IPO, NXP continued restructuring. Timing helped, as 2010 was the first year of recovery for IPOs more broadly. Outsized earnings growth combined with burgeoning segments for future growth appealed to investors, and the share price grew sevenfold over the five-year period in our analysis. Valuing newly public companies is always tricky given the lack of a track record in most cases, as well as uncertainty about how management will adjust to the intense scrutiny of quarterly earnings calls and real-time feedback on their performance in the form of share prices. Executives who have prepared for life beyond the IPO will welcome that direct feedback and position themselves to earn investors’ trust. Hubert Shen is a partner with Bain & Company’s mergers and acquisitions and private equity practices. Henrik Poppe leads the firm’s corporate finance practice in Europe, the Middle East and Africa. Mike Kuehnel is a partner with Bain’s financial services and corporate strategy practices. They are based, respectively, in Los Angeles, Oslo, and Frankfurt.

This article originally appeared on CFO.com.

After the storied stock market successes of such technology icons as Amazon, Facebook, and Google, investors have endured a cold soaking of late with the share price reversals of LendingClub, Uber, Twitter, and Slack. Have initial public offerings lost their mojo?

A company that executes an IPO can be said to have “won,” in the sense that its early investors can cash out, the company now has the prestige of being public, it has analyst coverage, and sometimes more news coverage.

But it turns out that IPO magic is more hype than substance. New Bain & Company analysis shows that two-thirds of global companies that went public from 2010 through 2014 and stayed public over the subsequent five years underperformed their established, publicly listed peers, with a weighted annual average 0.4% total shareholder return (TSR) vs. 8.4% for their respective indexes by industry and geography.

The underperformance spans regions, industries, and prior ownership, including private equity.

Indeed, money has been flowing in the other direction. Over the past 20 years, private market capital globally has grown at more than double the rate of public capital, and there’s no slowdown in sight.

What is behind this “winner’s curse”? Simply put, new investors might have bought a dog, and the company can now ill afford to focus only on acquiring customers — it must address cash flow and profits as well.

Why IPO, then?

Yet IPOs remain relevant for companies that need substantial capital in order to fulfill growth ambitions. An IPO helps a company gain recognition and credibility, which is relevant for building an ecosystem of partners in the company’s market. Also, companies can use new shares as an acquisition currency when trying to consolidate within their industry. Post-IPO performance, then, is critical for the companies and their investors.

How can companies going public ensure that they join the elite one-third that outperform their public peers in TSR, a group that ranges from Spanish travel software company Amadeus to U.S. animal health company Zoetis?

Outperformers treat their IPO as a beginning and a means to an end rather than any kind of end in itself. They take time to determine a winning post-IPO strategy, including where to play (which products, geographies, and customer segments to focus on) and how to win (the pricing, execution methods, and model for delivering value to customers).

Consider the case of Pinnacle Foods, a U.S. maker of food staples. Private equity firm Blackstone bought Pinnacle in 2007 then took it public in 2013. The company’s stable cash flows attracted unusual demand from investors.

The IPO plan included other components as well. Under Blackstone, Pinnacle set a productivity initiative that generated annual savings of 3% to 4% in procurement, manufacturing, and logistics. The company used “foundation brands” as cash cows to fund the growth of “leadership brands.”

Over the next five years the stock price increased steadily as Pinnacle’s well-known brands excelled in the frozen foods and snacks categories. In 2018, when Conagra decided to buy the company as the perfect complement to its existing food portfolio, Pinnacle had realized a fivefold increase in value.

Many of the newly public companies that outperform their established peers have gleaned how pre- and post-IPO investors have fundamentally different objectives and incentives.

Private company investors look for liquidity, want as high a valuation as possible, and frequently push executives to tell as rosy a story as possible in order to maximize the proceeds at the IPO. Eager companies comply but often do not have the wherewithal to reach such lofty ambitions.

Investors after the IPO have other priorities and look, in particular, for a practical scenario with some blend of growth and profits that the company can achieve.

The trouble is that investment banks rarely offer helpful guidance on how to bring the equity story to life. Worse, in some cases there is no direct link between the story and the path to value creation. That phenomenon plagued companies at the heart of the 2000 dotcom bust and partly accounts for the recent WeWork and Uber share-price reversals.

NXP Semiconductors took measures to ensure that investors understood its plan to create value. When NXP split from Philips in 2006, it was suffering from heavy losses, a lack of strategic direction, high costs, and organizational complexity. Now that it could stand alone, senior management began a restructuring program to streamline the organization in order to boost productivity and speed.

The business also executed a major operational turnaround, resulting in a sharp reduction in the cost base. These moves set up an IPO in 2010, which helped pay down debt. The compelling story for investors included a strategy shift to focus on less-capital-intensive manufacturing, complex segments where it had an advantage in research and development, and high-growth markets, all while shedding some noncore businesses.

Post-IPO, NXP continued restructuring. Timing helped, as 2010 was the first year of recovery for IPOs more broadly. Outsized earnings growth combined with burgeoning segments for future growth appealed to investors, and the share price grew sevenfold over the five-year period in our analysis.

Valuing newly public companies is always tricky given the lack of a track record in most cases, as well as uncertainty about how management will adjust to the intense scrutiny of quarterly earnings calls and real-time feedback on their performance in the form of share prices.

Executives who have prepared for life beyond the IPO will welcome that direct feedback and position themselves to earn investors’ trust.

Hubert Shen is a partner with Bain & Company’s mergers and acquisitions and private equity practices. Henrik Poppe leads the firm’s corporate finance practice in Europe, the Middle East and Africa. Mike Kuehnel is a partner with Bain’s financial services and corporate strategy practices. They are based, respectively, in Los Angeles, Oslo, and Frankfurt.