When Maurice Gallagher, Jr., CEO of Allegiant Travel Company, rang the closing bell at NASDAQ in January, he became the envy of a large number of business entrepreneurs. Gallagher and key employees were celebrating their successful launch as a public company. Since the NYSE’s birth in 1792, many business owners have dreamed of seeing their company’s symbol listed on a stock exchange ticker tape. After working hard to build a business, having investors express confidence in your enterprise can be an owner’s ultimate reward both financially and emotionally.
Although seeing your company’s name in lights can be a thrilling and heady experience, the process of going public is far from easy. “Going public is a huge decision, one of the biggest you’ll ever make,” Gallagher emphasized. “It’s a great investment in human and monetary resources.” Far from a new kid on the block, Gallagher had been around the initial public offering (IPO) track several times before Allegiant – first with WestAir, a commuter airline he owned from 1983 to 1992, and in Mpower Communications Corporation, where he served as acting CEO.
Founded in 1997, Las Vegas-based Allegiant offers low-cost fares and travel packages with nonstop flights on Allegiant Air from world-class destinations including Las Vegas, Orlando, Tampa Bay and Palm Springs to more than 50 small U.S. cities. One of the few U.S. airlines that continues to post a profit, last year it made $8.7 million on $243 million in operating revenues, according to its unaudited financial results. Scheduled passenger totals increased from 970,000 in 2005 to 1.94 million in 2006. With a bright future for continued growth, the company found itself in an attractive position to consider going public last year.
The Importance of Due Diligence
Before climbing on the public bandwagon, however, a company needs to meticulously research the process and study how the advantages and disadvantages will impact it. “The key to knowing whether you should be a public company is due diligence,” explained Stephen Brock, president, CEO and director of Public Company Management Corporation (PCMC) of Las Vegas. “You have to have fire in your belly to go national or international. You can’t be just one coffee shop; you have to want to be 1,000 coffee shops.” Brock’s company specializes in consulting with businesses on all the intricacies of going public.
The most common advantages of a public offering will:
• Raise money – Provide capital rather quickly in order to grow the company, expand and update assets, or to retire debt.
• Create liquidity – Produce a market in which the stock may be freely bought and sold.
• Offer an exit strategy – Provide the vehicle and opportunity for founders and other investors to take profits, protect assets and increase their financial freedom.
• Increase the worth of the company – Raise the value of the stock by changing from privately-held to publicly-traded.
• Add to personal wealth – Increase the worth of shares and assets owned by investors and founders.
• Enhance prestige – Create and enhance an image of stability, longevity and profitability.
• Strengthen employee compensation – Give employees a chance to invest in the company through stock option plans.
• Provide opportunities for mergers and acquisitions – Facilitate the purchase of other companies by using stock as cash and a measure of the company’s value.
The most common disadvantages of a public offering will:
• Incur expenses – The cost of going public can be as much as 25 percent of the total monies raised in the offering, not including the cost of business disruption.
• Increase liability – The company can be held liable for whatever information is filed in public documents, and can be sued by stockholders for breaches of fiduciary duty.
• Destroy confidentiality – Regulations demand disclosure of much information that some companies would rather remain private, such as balance sheets, trade secrets and management data.
• Diminish control – Depending on what percentage of the company stock is publicly-traded, outside stockholders could gain considerable leverage over management.
• Divide profits – Outside stockholders will share in company ains.
• Create reporting burdens – Public companies are required to file periodic reports to the Securities and Exchange Commission (SEC) which can be costly, as well as provide an information source for competitors.
Sales and Growth Are First Requirements
Perusing the laundry list of ups and downs, however, is useless if the company isn’t making any money, according to Brock. “The worst candidates for going public are companies that don’t have sales,” he said. “If you don’t have them [sales] before, you won’t afterwards.” PCMC will only consult with clients that have a minimum of $2 million in annual sales. “You need to be able to sustain yourself and also have a potential for growth,” Brock added.
In deciding to go public, Allegiant was a strong candidate because of its profitability and its continued growth. Last May, the company filed papers needed for the IPO with the SEC. The public offering closed in December after selling 5.75 million shares for net proceeds of $94.8 million. The public stock represents about 25 percent of the company stock with the remainder still owned by management and early investors. The IPO was extremely well received when it opened at $18 a share and then rose to $25.10. The immediate infusion of cash will be used to retire debt, expand the fleet of aircraft and fund continued growth. In general, the IPO provided financial stability and increased strength to the company, according to Gallagher.
Although Allegiant came out of its IPO experience smelling like a rose, the road traveled was painfully thorny. “The entire process was very frustrating because it took longer than expected and many things were outside our control,” said Andrew Levy, Allegiant’s managing director of planning. The passage of the Sarbanes-Oxley Act of 2002 made a complicated process even more so, according to Gallagher and Levy. In the wake of the Enron and other corporate scandals, the act increases the oversight on accounting firms that perform public company audits, and also imposes new obligations on public companies and their officers and boards. “It was hard trying to respond to the SEC,” Levy said.
Trust the Professionals
Experts agree that the best way to navigate the turbulent public offering waters is with professional help. “Get a good securities attorney because it will make it a lot simpler and faster,” advised Ed Apenbrink, director of securities registration and licensing for the state of Nevada. “Doing it on your own is like doing your own taxes.”
Allegiant wisely chose accountants and attorneys well versed in the IPO process, and then used Merrill Lynch, Bear Stearns and Raymond James as underwriters. The cost for such things as lawyers, accountants, printing, filing fees and travel added up to around $1 million, but the prize was a listing on NASDAQ (once the acronym for National Association of Securities Dealers Automated Quotation System) with the symbol ALGT.
The IPO process, which can take anywhere from six months to a year, involves endless meetings with the professionals who guide the ship. Simply put, the objective is to write a complete history, description and valuation of the company that will be submitted to the SEC with all the required accompanying documents. This Registration Statement will be revised and, at some point, approved. The process also involves a road show where the stock is touted to brokers and potential investors. When the offering is finally made, hopefully the market reacts favorably and all of the stock is sold. “You live this thing everyday,” Gallagher said. “It’s a whole other level of activity.”
Alternatives to IPOs
While an IPO is considered the most prestigious method of going public, it’s expensive and beyond the reach of many small companies. Other routes to going public that can be cheaper and simpler include exempt offerings and reverse mergers. An exempt offering allows companies to sell up to $1 million in stock to the public annually without having to file a registration statement. The SEC and state agencies only need to be notified of the sale. This method is relatively quick and painless, but is limited in the amount of revenue that can be raised. A reverse merger allows a private company to become public when it acquires a dormant public company. Depending upon the company being acquired, the process can be cheaper and simpler than an IPO. However, the merger doesn’t raise capital and may cause the acquiring company to absorb weakness es and negatives in the dormant company.
Even though Brock’s company went public in 2004 through a successful reverse merger with an online office supply company, he isn’t bullish on the method now. “We don’t recommend reverse mergers because you don’t know who your shareholders are,” he explained. He also pointed out that new regulations adopted in 2005 increased the cost of the process.
Nevada Makes It Easier
With its business-friendly incorporation and registration procedures, Nevada appears to have the red carpet out for publicly-traded companies. “Our general goal is to allow everyone who wishes it – to be able to take their company public,” said Chris Lee, deputy secretary of state.
The two most commonly-used types of registration with the Nevada Securities Division are registration by coordination and registration by qualification. Used in conjunction with the SEC registration, coordination provides interstate sale of the stock and usually involves offerings of $5 million or more. Around 100 companies use this method each year in Nevada. Qualification provides intrastate sale of stock offerings that are smaller than those registered by coordination. Around 490 companies have used this method in the past 12 years, with 25 registering in 2006.
Before registering in Nevada, however, it’s necessary to form a corporation. With corporate tax advantages, economic incentives and a favorable legal system, it’s easy to understand why more than 300,000 businesses have incorporated in the state. Even without a public stock offering, it makes good sense to many businesses. “We want to help facilitate the growth of business in Nevada,” Lee explained.
• Following incorporation, these hoops must then be negotiated along the path to a public offering:
• Prepare and submit a prospectus, which gives a complete overview of the company, along with audited financial statements. Respond to questions and concerns expressed by the Nevada Securities Division.
• Conduct the sale of stock after required documents are filed.
• Complete the paperwork using a qualified stock transfer agent.
• Become a fully reporting company with the SEC by filing form 10-SB, if desired.
Where to Hang Your Listing Hat
Depending upon the size of the company and its ability to meet certain listing requirements, public companies have a variety of listing vehicles from which to choose. In increasing order of rigor and prestige they include:
• Pink sheets: An electronic system that displays the bid and ask prices for over- the-counter (OTC) securities; companies don’t need to meet minimum listing requirements with the SEC.
• Over-the-Counter Bulletin Board (OTCBB): A regulated quotation service for fully reporting companies not listed on the major U.S. stock exchanges.
• NASDAQ: A computerized system that provides bid and ask price quotes on both listed and over-the-counter stocks.
• American Stock Exchange (AMEX): The second-largest stock exchange in the country with slightly more lenient listing rules that the NYSE.
• NYSE: Known as the Big Board, the largest stock exchange in the world by dollar volume with a global capitalization of $17.4 trillion, the most stringent and prestigious home for public stocks.
Although it lists nearly 2,700 companies, the rigorous financial and listing requirements put the NYSE out of reach for most companies. It’s not the only game in town, however. Failure to qualify, even as a fully reporting company, should not necessarily discourage a company from trying to go public. Experts in the public offering field agree that it’s smart to start low on the listing ladder and work your way up as you learn the ropes. “If you learn first on the OTCBB how to do everything right, you’ll do better with a subsequent listing on a bigger board,” Brock explained. “It’s a training ground.”
In considering a public offering of any type, it’s important to understand that each company is unique. Education, due diligence and professional help will enable businesses to make the decisions best suited for their particular path to a public offering. It’s far from an easy journey, but to those who’ve been successful, it’s worth the sacrifice. “Even though Gallagher said the process was at times a dance with the devil, he’s not sorry to have gone through it. “We’re better off as a public company,” Brock said.
