Going West in the 1850s was the American path to business success. It made the railroads the dominant economic power in America in the 19th Century. Going overseas was the business success strategy after World War II. It led to the US being an economic superpower in the 20th Century. In the 21st Century, going public is the only road for companies that want to grow into multinational corporations and achieve business success.
Risk Capital and Private Placements
For Private Companies, Risk Capital is almost impossible to find. American Venture Capitalists are currently funding only one business plan in every ten thousand that they review.
The odds of a public company arranging a Private Placement are about one in one hundred. The reasons that a public company CFO can raise risk capital in this way are that investors in a public company can sell their shares and thus have liquidity in their investment, liquidity that is lacking in a private company investment. Also, since a public company's share price tends to trade well above its book value, the public company investor gets leverage in that the shares should be worth more than the equity that they represent in the public company.
Spending Your Equity
From the CFO's (Chief Financial Officers) viewpoint selling discounted shares is a better deal for the public company than selling equity in a private company. Investors in a private company will expect at least 50% equity in the company for their money. To raise the same amount of money, the CFO selling publicly traded shares usually gives up much less than ten percent of the equity in his public company. Here's an example.
Let's assume that you are the CFO of a public company and want to raise one million dollars. The company's share price is ten dollars per share. Your public company has already issued five million shares of stock. You, the CFO, arrange a million-dollar Private Placement at a 50% discount to the share price (at $5/share). Your public company will issue 200,000 shares of new stock for its million dollar Private Placement. Your company gives up only 4% of its equity for the funding. If the company were private, the million dollar private placement would cost the company at least 50% of its equity! This is simple addition and subtraction. These figures cannot lie. Take your company public!
Your Company Shares Are MONEY.
A wise CFO realizes that a public company's shares are money. I will repeat this important point. Your public shares are money. They can be used to buy other cash producing companies.
If the shares trade at ten dollars, the company is issuing ten-dollar bills and can issue millions of dollars of its currency. While shares won't buy food at the Supermarket nor pay your electric bill, they can be used to buy cash-producing assets for your public company. All major corporations do this as a regular activity.
By converting shares into cash producing assets, you are converting a currency with limited exchange potential into a currency issued by some Government. After all, the private company you buy is making money in some Government issued currency. Usually, the public company has the right to convert all currencies it receives into free trading currencies like the Euro, US Dollar, etc. Using this strategy, you as the CFO can convert a private or public company grossing a million dollars a year into a public company grossing a hundred million dollars a year within a few years. Let me show you how.
CISCO Leads the Way
CISCO Systems, a multi-billion dollar international corporation, built itself into a high tech powerhouse by using its shares to acquire private companies. Its formula was 75% shares and 25% cash.
Let's assume that your public company grosses one million dollars a year. Your pretax one million dollars a year with a 25% pretax profit. You agree to pay one million dollars for the private company. The payment will be the CISCO 25% cash and 75% stock. While the purpose of the acquisition is to increase revenues and profits for the combined companies, we’ll assume that the private company integration with your public company doesn't enhance revenues or profits. Thus, next year's pre-tax profit of your combined companies be $500,000. The $250,000 pretax profit of the acquired private company would offset your public company’s $250,000 cash outlay the previous year.
With the public company’s $500,000
in pretax profit, you would be in a position to buy a private company grossing two million dollars. Its pretax profit would be $500,000. In the third year, your public company could buy a private company grossing four million dollars and so on. This simple model of stock leveraged progression doesn’t factor into the equation taxes and integration issues. Its purpose is to show that using publicly traded shares, a company can leverage its growth by using those shares as money. If the public company trades in the United States, the shares are valued in U.S. Dollars. In many parts of the world, US Dollars because they are a free trading currency are preferred over the local currency.
If in the first year of our example, your public company combined your $250,000 pretax profit with a million-dollar Private Placement, your first acquisition would be for five million dollars. In the second year, you could acquire a ten-million-dollar cash-producing asset. In the third year, you would acquire a twenty-million-dollar asset. Within five years, your annual revenues would exceed one hundred million dollars a year. It's all a matter of leverage and a mathematical reinvestment progression. You could work a lifetime and not convert a million-dollar private company into a hundred million-dollar enterprise. Going public allows you to do it within five to seven years. I run a merchant bank willing to do the million-dollar Private Placement to jumpstart this leveraged investment progression. However, you must adopt the cash and shares acquisition business strategy to qualify.
Becoming a Multinational Corporation
Public company status is a major step toward becoming a multinational corporation. What's the difference between being a national company and a multinational corporation? It's the difference between receiving Government funding or, instead, supporting the local Government with corporate income taxes.
A company doing business in the United Kingdom, for example, must pay British taxes on its profits. The same company doing business in the Global Village will pay far lower taxes because it can select the jurisdiction in which it pays its taxes. Within the European Union, companies pay anywhere from 20% income tax to over 50% income tax. A multinational corporation can choose the 20% tax jurisdiction. The British company, operating from Great Britain, has no such choice.
Government Funding For Your Public Company
Governments fund multinational corporations that create local jobs. A multinational corporation with markets in the West and production in the East will find most Asian Governments anxious to supply at least 50% of the plant development costs and offer other inducements to creating local jobs. Governments in Africa, the Middle East and Latin America have similar incentive programs. If the multinational corporation chooses its production areas wisely, it can avoid import taxes into either the EU or NAFTA.
Profiting From Being Public
Eventually, the owners of your public company will want to sell their company. They'll sell their public company for at least four times the balance sheet value of the public company. The same leverage of share price over balance sheet that attracted your Private Placement investors will now work in favor of your public company insiders.
From raising money to selling the company, the benefits of being a public company far outweigh any advantages of remaining a private company. The key to success is using the advantages of being public while avoiding the mistakes made by most CFOs who take their company public. If you fail to avoid the common public company mistakes, being public will be a nightmare. You'll have little choice but to take your public company private to avoid bankruptcy.
The Only Strategy For Success
Going public and becoming a multinational corporation is the only workable 21st Century business strategy for success. If you need advice and help on making the public market your key to business success, email me at: Beowulfinvestments@Earthlink.net
Author’s note: I expect this article to be translated into Chinese and appear in a PRC financial publication in the Summer of 2005.
About the Author
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
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