Roy Salisbury - Monday, June 10, 2013
Self-Underwriting (SU') IPOs
It was thought that SU’s would become the wave of the future back in the 1990’s in in fact SU’s peaked in 1999 and has become an obscure and unlikely process today. Back in 2005 a detailed paper was written with a comparison of alternatives for going public from reverse takeovers, self-underwriting IPOs and traditional IPOs. The scope of the document was as follows;
“We examine the characteristics of firms using reverse takeovers and self-underwritten IPOs as an alternative to the traditional underwritten IPO. We find that at the time they go public, firms that use alternative mechanisms tend to be less profitable than contemporaneously issued IPO firms of comparable size in the same 3 digit SIC code, but they do not exhibit significantly higher distress. However, by two years post going public, they have significantly increased debt and experience declines in profitability and balance sheet liquidity. Furthermore, we find that RT and SU firms are characterized by lower levels of trading liquidity and significantly higher volatility, as measured by the standard deviation of returns. While the combined sample of RT and SU firms have comparable institutional ownership post going public to their control IPO firms, RT firms are characterized by significant lower institutional ownership than their matches, and while IPO firms experience significant increases in institutional support, those using RTs and SUs experience declines. We also find evidence that firms utilizing alternative going public mechanisms outperform their matched traditional IPO counterparts in the short term, and exhibit comparable performance in the three years following going public as indicated by equal weighted buy and hold returns.”
There was, a number of points in the report that the perception of an SU would have had a weaker due diligence regiment and lack of solid backup data/documentation. This may have been somewhat true back in the 1990’s but less so today and history has shown that even the strongest of Investment Bankers make many of the same mistakes and a good recent example is Facebook you would have thought they had learned from the Dot Com era.
A further weakness of a SU was thought that a SU would be unable to attracted institutional investors without a creditable underwriter. In today’s market I would think that retail investors would be attracted to well prepared and documented SU’s today and as more data is collected some institutions will follow or at least track transactions as they grow and thus become more appetizing for the institutions.
My assumption to why SU’s lost their luster was that money was readily available using other means that where less costly and intrusive to the issuer. What the reasons are is open to interpretation and opinion.
The issue today is with the aid of technology and the lack of access to capital will SU’s have a chance of a solid comeback for specific classification of companies. I clearly believe that SU’s or a better term Direct Public Offerings are already on the way back for certain business classes.