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The key to going public.


Editor's Note: Corporate Strategies is a new column which will explore legal topics and strategies for building a profitable business.

A successful businessman sold his business which he had built through years of hard work. He received $100 million at the closing. At a family celebration, he reflected on how he had come to the area with only a pack on his back. One of his grandchildren snuggled up against him and asked, "Grandpa, what was in your pack?" "Only a change of clothing," he replied, "and $10 million in government bonds."

Not every business is blessed with $10 million in government bonds for its initial capitalization. But once successful, the value of good business can often be realized and enhanced through the offering of its securities to the public in a "going public" transaction. The stock market's present level has stimulated increased interest in raising capital through this public market. At present, more than 160 companies have commenced the process of going public by filing their registration statements with the Securities and Exchange Commission (SEC) in Washington, D.C., or in regional SEC offices.

The Team Players

The process of going public involves many players who participate in a carefully orchestrated symphony of documentation, regulation, analysis, timing, hard work, negotiation, and patience. The players in this symphony include:

* The Company, or "issuer," whose business is attractive enough to be of interest to investors in the public. * The company legal counsel, who acts as the director of the going-public symphony. The company's legal counsel prepares the prospectus and registration statement which fully discloses all material information on the company, responds to any SEC comments or requests for changes in the prospectus and registration statement, responds to any SEC comments or requests for changes in the prospectus and negotiates any differences, deals with and organizes all the other players in the public offering, negotiates the very important and complex underwriting agreement which governs the company's relationship with the underwriter, and generally is responsible for compliance with relevant, rules, and regulations. * The underwriter, who purchases the company's stock at a discount and resells it to the public at a price attractive to investors and acceptable to the company. A critical part of the underwriter's role is also to support the company's stock to ensure that an orderly trading market develops after the company's shares are in the public's hands. An example of how crucial the underwriter is can be seen in the case of Smith's Food and Drug Centers, which went public in 1989. The company's book value per share was approximately $6.50 at the time of its initial public offering. Through effective presentation of the company's outstanding performance by its underwriter, Goldman, Sachs & Co., however, Smith's stock was priced in the public offering at $19 per share. This amounted to 14 times its earnings, even though the industry was only experiencing a price/earnings ratio of 10 to 12. Smith's has recently traded as high as $43 per share, representing a price of more than 25 times its earnings. * Underwriter's legal counsel, who works closely with the company's legal counsel in examining the company's affairs (a process known as "due diligence") in preparing the registration statement and prospectus, in negotiating the underwriting agreement, and in generally ensuring that all steps are properly taken to comply with securities law. * Accountants, who audit the company's financial statements included in the prospectus used to sell stock to the investors and who are otherwise responsible for all of the company's financial data appearing in the prospectus. * Financial printers, who print the preliminary or "red herring" prospectus, often distributed to interested investors prior to clearance of the public offering by the SEC, and who also print the final, or "effective," version of the prospectus for use with purchasers of the stock. * The Securities and Exchange Commission, where the stock is registered for sale and where staff lawyers and accountants review the company's registration statement and prospectus to ensure that they comply with complex federal rules which mandate "full disclosure" of all material facts about the company. * State securities regulators, who oversee the application of state securities laws, know as "blue sky" laws, which govern the sale of the company's stock in each state.

Going Public Is a Team Effort

The process of going public is truly a team effort which generally requires four to six months of significant effort on all fronts, audited financial statements for a two- or three-year period depending on the amount of money to be raised, and the proper structuring of the company selling securities.

Even though the process of going public is complex and challenging, the rewards to the business owners can also be substantial for one primary reason: the liquidity afforded holders of registered or free-trading stock generally results in a valuation of a public company at a much higher level than is possible in any other setting. Thus, the businessman who sold his company for $100 million could have obtained $200 million had he tapped the public marketplace.

The process of going public is a major development in the life of any business. It is a step which should be taken only after a thorough analysis of the advantages, disadvantages, consequences, and alternative means of financing. Future columns will focus in more detail on these issues and hopefully assist business owners in determining whether their companies should be public companies.

Robert K. Rogers is a partner in the business law firm of Rogers, Mackey & Price and chairman of the Wayne Brown Institute.
COPYRIGHT 1991 Olympus Publishing Co.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:an exploration of business law
Author:Rogers, Robert K.
Publication:Utah Business
Date:Jul 1, 1991
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