Direct Public Offerings
Why Choose a DPO Instead of an Underwritten IPO
We once wrote to the chief executive officer of a prominent company with an immensely successful retail product. They were reportedly considering an underwritten IPO. (They eventually went the underwritten route, although they did insist upon some significant changes to accommodate individual investors.) This is an edited version of our letter to the CEO:
Have you and your board considered a direct public offering? You don’t have to turn over control of your public offering. In a DPO:
• You control the timing. Individuals who already believe in you will purchase all of the shares you wish to offer, whenever you choose to offer them. You don’t have to fit through a “window of opportunity” defined by money managers and investment bankers.
• You control the amount offered. Why sell $100 million or more in an initial offering, when your need for cash and for share liquidity could be met with a much smaller offering? Direct offerings can be made to match operating needs, avoiding the pressure to invest excess cash. Dilution to your founding investors can be reduced by a series of offerings, each priced to reflect increasing value.
• You control the pricing. All of the shares you offer to your millions of customers and admirers will be purchased, almost regardless of the price. Your board can set the price in a direct public offering, based upon a pricing analysis that is free from the drama of the first-day “pop” and the need to present favored professionals with trading profits.
• You control with whom you share ownership. Direct public offerings are purchased by individuals who already have a relationship with the business. The average investment is about $1,000. Shareownership would reinforce the community you have created.
• You control who joins your management. You do not have to “put in place financial managers and processes that resonate with Wall Street,” in the words of the current Business Week article about you. With direct public offerings, your board can continue to use its own experience and wisdom.
• You control the offering process. Your direct offering can be designed, staffed and implemented under your direction. Communications with investors will be electronic, without the road shows, one-on-ones and unexpected diversion of management time and resources.
• You are relieved from the pressure for quarterly performance and comparison with analysts-defined peer groups. Individuals in your community will invest because they have watched an excellent team prove itself in an extremely competitive environment. They have no short-term expectations.
• You will have a much more stable aftermarket price. Volatility is very much affected by having large blocs of shares held by professional money managers who act alike. After a direct offering, you will have thousands of individuals, holding small amounts each, with long-term objectives and making their own independent decisions.
• You will have far less concern over shareholder litigation. Sudden share price drops create the profit in shareholder class actions. Market prices after direct offerings have moved gradually, even upon very negative news. Because you have managed your own offering, you will not be attacked for claimed abuses in the distribution of shares.
• You will be free from interference with management decisions. Individuals who have invested small amounts do not expect any participation beyond the annual shareowners’ meeting. You will not be threatened with analyst downgrades or major sales if you ignore recommended mergers, acquisitions, alliances or policy shifts into the latest trend.
• You will spend far less time servicing shareowners. Direct purchases will include an election to receive all communications from you by posting on your website and email. Your Edgar filings and news releases will be sufficient. You will not have to hold telephone conferences or attend analyst/money manager meetings.