Most studies of the costs associated with initial public offerings focus on the dollars needed to comply with everyone’s favorite bugbear, the Sarbanes-Oxley Act. According to conventional wisdom, it’s those compliance costs that are holding back companies from going public and choking the capital markets in general.
But a new survey from Ernst & Young takes a broader view. Based on data from 26 companies that went public in the last two years, the survey finds that there’s also a hefty price tag attached to compensating officers and directors post-IPO, not to mention the costs of various advisers. The sample consisted of companies with revenue ranging from below $100 million to more than $4 billion, in the health care, real estate, biopharmaceuticals, technology, retail, industrial-products, financial-services, and manufacturing sectors.
Operating as a public company adds about $2.5 million, on average, to a company’s cost structure, with $1.5 million of that devoted to higher compensation for CEOs, CFOs, and others in the finance function, such as investor-relations professionals, according to the survey. That figure also covers increased board costs, as more than 80% of companies had either added new members to their boards or increased director compensation prior to their IPO.
Indeed, Angie’s List, which went public last month, notes in its S-1 filing that it boosted executive cash compensation to hit the 75th percentile, based on a study of other pre-IPO companies, in advance of its offering. “As part of the compensation committee’s comprehensive review of executive compensation levels. . .we found that our base salaries generally fell significantly below the median in both of our pre-IPO and public companies studies,” according to the S-1.
E&Y found that public companies spend another $1 million annually on advisers, on top of a whopping average of $13 million for advisers that help execute the IPO. Most companies retained at least 11 third-party advisers in connection with the IPO, the survey found, including, universally, investment bankers, attorneys, and auditors. About 70% of companies hired an investor-relations firm, while 40% hired a road-show consultant.
Such figures shouldn’t scare firms away, say some experts. “Every company is unique, and some have done better than others in terms of building in efficiencies, getting the right people in place internally, and the right advisers in place externally, to keep costs in check,” says Stephen M. Graham, an attorney with Fenwick & West. Graham is the co-chair of the Securities and Exchange Commission’s new advisory committee on smaller companies that is examining such costs.
Technology was another notable aspect of IPO-related spending, though the E&Y survey did not quantify the costs. Eighty percent of the companies surveyed said they made new investments in IT or software as they prepared to go public, with a quarter buying a new ERP system.