The excitement of listing a company’s shares on the exchange for the first time seems to suppress the part of the brain responsible for arithmetic in reporters, business owners, CEOs and “investors” alike.

Saturday’s Australian Financial Review carried stories on two recent initial public offerings (IPOs) for software company Atlassian and real estate company McGrath. According to the AFR, Atlassian “aced its first day of trading” with shares surging 32% on debut, while the McGrath float “failed to fire” with prices dropping 11%.

Both businesses have been spectacular success stories. Starting something from scratch and growing it to a billion dollar company is an incredible achievement.

But if logic is your thing, when it comes to raising money, Australia’s premiere financial newspaper and the top executives at these companies have it backwards.

The purpose of an IPO is to raise money for the business. Any sane business owner would want to do that for the lowest possible cost.

In exchange for cash, business owners give investors shares in their company. It should be self-evident that for the business owner, the fewer shares they need to hand over for that money the better. That means getting the highest possible price for the shares.

In the same way that you hire a real estate agent to get the best price for your house, companies hire investment bankers to get the highest possible price for their shares.

So ask yourself this: if your real estate agent sold your house yesterday, and one day later the new owner was able to sell it for 32% more, would you say your agent had “triumphed”? And how would you feel if I now told you that the banker’s commission for arranging the sale of shares was 14% vs the standard 2.5% in real estate?

Based on the closing price after the first day of trade, the owners of Atlassian gave away $147 million more of their company than necessary, and likely paid their bankers circa $50 million for the privilege.

McGrath meanwhile should have been telling reporters “What do you mean failed to fire? I just raised $129 million in cash, but only had to give away $114 million in stock. I added $15 million to my net worth today without raising a finger! I’d consider that a spectacular success!”

 

References

  1. AFR Weekend 12-13 December 2015

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