A Practical Guide to IPOs – Chapter 13: Five Years in the Wilderness

KEY LESSON: The only way to recover from a broken IPO is a string of good results, and a lot of time.

One of the last IPOs I worked on as an analyst did not go well. The shock from that process still strikes a nerve with me, and was a large part of why I undertook this series. The company made all the mistakes listed in Chapter 9. And it did not help that the CEO and CFO bore uncanny resemblances to a movie star and a cartoon character, respectively. Their board (and their top-tier lead underwriter) pushed for too high a valuation, leading us analysts to set our models way too high. Then, their 60%-of-revenue customer renegotiated their contract before the company reported its first quarter.

Everyone thought the company was going to grow sales 60% that year, but with the new customer contract sales were going to end up declining. The stock lost 60% of its value the next day. I remember talking to the management team the day they released those results. It was not my finest hour. I was angry at them, and lost my cool a bit. But I remember the last thing I said to them was “Welcome to five years in the wilderness.”

That was certainly not what I should have said. However, it was the truth. Six years on, the stock has not recovered.

When IPOs break like that, there is never an easy fix. There is, however, a hard fix. Do not abandon hope, but know that it will take time.

Before I dig into that solution, I have a disclaimer. Every company that faces this problem is going to have to deal with it in different ways. There is no common solution for everyone. Which is something that keeps my consulting business busy.

The best advice I can give a company that has gotten itself in a bad way is to forget about the stock price. Find some new way to incentivize employees, and then stop talking about it internally. Instead, management teams need focus on the business. The most important part of getting out of the hole is to continue to put in good numbers. Eventually, investors will start to take notice.

Externally, companies need to tone down all language when speaking with investors. Management teams need to become incredibly humble. They should not go dark with investors, but they can probably dedicate less time going to conferences until the business outlook is much better. They also have to be incredibly conservative in issuing guidance. Every time the management misses consensus, it adds a year to the amount of time it will take for them to come back. It probably also pays to hire someone from the outside to rethink the investor relations strategy. This is not just a subtle ad for my own services, but it is a smart marketing to ploy to give the company a new voice with the Street. He or she will have some grace period to build credibility without being painted with mistakes of the past.

The next step is to repeat all of that for years. I would guess it takes five years for companies to come back from these sorts of blow-ups. In some cases, the duration of the penalty box can be shorter, but that happens only under certain circumstances such as a very specific reason for the earnings miss followed immediately by a rebound. Everyone else has to slowly rebuild credibility, and in many cases that will mean outlasting the investment analysts who participated in the IPO. There are always new investors coming on stream, and lots of contrarians who buy when others sell, but those people also have plenty of other stocks on which to spend their time.

Put simply, the goal is to rebuild the company’s reputation. Often, this means a turnover in management, but that is not a guaranteed solution. Instead, demonstrating good business practices, and a new story.

A few other strategies can sometimes work under the right circumstances. The list below should be seen as tactical adaptations, not strategic cure-alls:

  • Become recognized as a barometer for some other, larger industry. For instance, many component companies attract investor interest because their results can sometimes be proxies for the business at the larger companies who they supply. (It should go without saying that management teams need to do this without antagonizing those customers, or breaking any laws.)
  • Launch new products or enter new markets. This needs to fit in with the real business strategy, not some publicity stunt. Sometimes, if the product is a big deal, the company should consider announcing it earlier than normal, a year or so ahead of time, to give them something to talk about, but only if that does not hurt marketing for that product.
  • More broadly, refer back to the IPO roadshow item of giving some far out tangible goal. Even if earnings do not track initial expectations, a good management team that included a few long-term targets in its roadshow, can now refer back to those, assuming there has been actual progress made.
  • Once business stabilizes, become very open with the Street. Invite investors to meet with the company at industry conferences, attend Street events, and eventually host an analyst day that can draw a large crowd. (Pro tip: host the event in New York or Boston, to make it easy for the largest number of investors to attend.)

Truth be told, for smaller companies, true recoveries may never come. The tech landscape is still littered with dozens of companies that have zombied on since the 90’s, largely forgotten by investors.

Of course, being forgotten by investors is not the end of the world. Companies have real work to do, selling products, developing markets and the like. Nonetheless, a healthy stock price is better than the opposite, and the path back to that stock price will take time.

This is Chapter 13 of “A Practical Guide to IPOs”. You can find Chapter 1 here and the previous chapter here.

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