Introduction
Going public is a major milestone for any company, often seen as a validation of its business model and a gateway to significant capital infusion. However, the path to a successful Initial Public Offering (IPO) is fraught with challenges, and many companies are not adequately prepared for the rigors of the public market. The lack of readiness can lead to poor post-IPO performance, significant value erosion, and sometimes, the ultimate failure of the business. This article delves into the reasons why companies might not be IPO-ready, examining factors such as financial instability, weak business models, governance issues, overvaluation, regulatory challenges, and inadequate market preparation. Additionally, we will highlight notable examples in India and across the globe where companies have faced significant setbacks after going public, illustrating the critical lessons to be learned from these cases.
Reasons why companies may not be IPO ready includes: –
Lack of Financial Stability and Predictability:
One of the primary reasons companies fail after an IPO is the lack of financial stability and predictability. A company must demonstrate consistent revenue streams and profitability to gain investor confidence. Without a solid financial foundation, companies may struggle to meet market expectations. For instance, Reliance Power[i] went public in 2008 with great fanfare, but its stock price plummeted soon after the IPO due to project delays, high debt, and unmet expectations. The company’s inability to generate steady profits led to a significant erosion of investor wealth. Continuous assessment of criticalities to meet the revenue goals and aligning the resources accordingly chords a great deal.
Weak Business Model and Market Position:
A weak or unproven business model can also spell disaster for an IPO. Investors seek companies with a clear path to profitability and a competitive edge in their market. Companies that lack a strong business model or are in highly competitive, low-margin industries often fail to thrive post-IPO. Infibeam Avenues Ltd[ii]., an e-commerce and digital payments company, went public in March 2016. Initially, the company attracted attention because it was one of the first e-commerce firms to be listed in India. However, there were significant concerns about its business model and market position. Infibeam operated in a highly competitive and low-margin industry, dominated by other ecommerce giants, which raised questions about its ability to compete effectively. Managing business constraints itself as project may lead to avoid or atleast moderate these tendencies.
Governance and Management Issues:
Effective governance and a strong management team are crucial for a successful IPO. Companies with poor corporate governance, internal conflicts, or inexperienced management often face challenges in the public market. The management itself forms one of the key-stakeholder of IPO especially towards the stability and assurance a Company and investors require during the process. Kingfisher Airlines[iii] attempted to go public but faced severe governance issues, management inefficiencies, and financial mismanagement. The company’s inability to manage its finances and operations led to its eventual downfall, leaving investors with substantial losses.
Overvaluation and Market Conditions:
Overvaluation is another critical factor leading to IPO failure. Companies that are overhyped and overvalued may struggle to meet the high expectations set by their initial pricing. Additionally, unfavorable market conditions can exacerbate these issues. Paytm[iv], which went public in 2021, faced a significant drop in its stock price post-IPO due to concerns about its profitability and high valuation. The company struggled to justify its lofty valuation amidst intense competition and regulatory scrutiny.
Regulatory and Legal Challenges:
Regulatory and legal challenges can also hinder a company’s success post-IPO. Companies operating in heavily regulated industries or those facing ongoing legal issues may find it challenging to navigate the public market. Yes Bank[v] faced multiple regulatory and legal challenges that impacted its stock performance post-IPO. Although it remains a player in the banking sector, these issues highlighted the importance of regulatory compliance and risk management.
Inadequate Market Preparation:
A successful IPO requires thorough market preparation, including investor education, robust financial reporting, and effective communication strategies. Companies that rush into an IPO without adequately preparing the market may face significant hurdles. Vishal Retail[vi] went public in 2007 but struggled with operational inefficiencies, high debt, and inadequate market preparation. These challenges led to a sharp decline in its stock price, eventually resulting in the company being sold off.
Through the International Lens:
Not just in India, but across the world, there have been numerous cases where companies have struggled to sustain success post-IPO. Despite the initial excitement and capital infusion that comes with going public, many corporations face significant challenges in maintaining investor confidence and delivering on their growth promises. Weak or unproven business models, intense competition, and market misalignment often lead to financial instability. Moreover, regulatory, and legal challenges can exacerbate these issues, as companies operating in heavily regulated industries may encounter ongoing compliance costs and legal disputes. Corporate governance lapses, such as lack of transparency and poor management practices, further undermine investor trust. High-profile failures in various global markets highlight the critical importance of sustainable business strategies, robust risk management, and adherence to regulatory standards to ensure long-term success in the public domain.
WeWork[vii] attempted an IPO in 2019, but its filing revealed substantial losses and an unsustainable business model. Investor confidence plummeted, leading to the withdrawal of its IPO and a significant valuation drop.
Blue Apron[viii], a meal kit delivery service, went public in 2017 but faced stiff competition and high customer acquisition costs. Its stock price fell dramatically, and the company has struggled to recover.
Uber[ix] faced numerous controversies and management issues leading up to its IPO in 2019. Although the company successfully went public, it struggled with regulatory issues, internal conflicts, and public scrutiny, which negatively impacted its stock performance.
Snap Inc.[x], the parent company of Snapchat, went public in 2017 with significant hype. However, the company struggled to achieve profitability and faced intense competition from larger players like Facebook, leading to a sharp decline in its stock price post-IPO.
Facebook[xi]‘s IPO in 2012 was initially troubled due to technical issues on the NASDAQ and subsequent legal challenges. Although Facebook eventually recovered, the initial months post-IPO were rocky and highlighted the importance of regulatory preparedness.
Groupon[xii], which went public in 2011, faced criticism for its accounting practices and struggled with investor confidence, leading to a significant drop in its stock price.
Conclusion
The journey from a private company to a publicly traded entity is fraught with challenges. Financial stability, a robust business model, strong governance, realistic valuations, regulatory preparedness, and thorough market preparation are crucial for a successful IPO. Companies that lack these elements often struggle post-IPO, as seen in the cases of Reliance Power, Infibeam Avenues, Kingfisher Airlines, Paytm, Yes Bank, Vishal Retail & more. By understanding these factors, companies can better prepare for the complexities of going public and increase their chances of long-term success in the public market. Channelizing expectations and ‘asks’ of various key-stakeholders and parallelly identifying and navigating constraints forms key to successful IPO and even maintaining post IPO equilibrium.
[i] https://www.cnbctv18.com/energy/backstory-the-reliance-power-ipo-debacle-9644091.htm
[ii] https://economictimes.indiatimes.com/markets/stocks/news/how-a-whatsapp-note-triggers-crash-in-infibeam-avenue/articleshow/66002863.cms?from=mdr
[iii] https://www.jmra.in/journal-article-file/9272
[iv] https://www.moneycontrol.com/news/business/ipo/top-5-reasons-why-paytms-stock-price-is-falling-7932311.html
[v] https://www.deccanherald.com/business/explained-what-went-wrong-with-yes-bank-811559.html
[vi] https://business.rediff.com/special/2009/nov/17/spec-reasons-for-vishal-retail-big-fall.htm
[vii] https://www.idealsvdr.com/blog/need-know-wework-ipo-postponement/
[viii] https://blog.projectionhub.com/blue-apron-case-study/
[ix] https://discovery.dundee.ac.uk/ws/portalfiles/portal/51790798/uber_accepted_manuscript.pdf
[x] https://blogs.cfainstitute.org/marketintegrity/2017/04/18/snapchat-ipo-whats-wrong-with-this-picture/
[xi] https://www.theguardian.com/technology/2012/may/24/facebook-ipo-mark-zuckerberg-nasdaq
[xii] https://www.safalniveshak.com/groupon-and-the-great-stock-market-insanity-called-ipos/
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This article is written by Ms. Madhura Godbole – Senior Manager – madhuragodbole@mmjc.in and Ms. Hasti Vora – Research Associate – hastivora@mmjc.in
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