Harmony with Financial Markets. Stock Markets

Relationship of a business entity with a stock market is substantially more involved than the one with a bond market. You enter into this relationship when you decide to take your company public by doing the Initial Public Offering (IPO) of your corporate stock – on a major stock exchange.

And continue this relationship (which changes significantly after the IPO) until your company either goes back private (which recently happened to a computer manufacturing giant Dell Inc.), is acquired by a strategic buyer or goes out of business.

IPO in some ways is similar to a bond placement; however, there are significant differences. First, you are offering a different type of security. Bonds eventually mature while corporate stocks exist indefinitely.

Second, in case of IPO you are offering your shares to just about every individual and are doing it publicly – via the chosen stock exchange. Therefore, you will have to develop a harmonious relationship with a new stakeholder – NASDAQ, NYSE or whichever you choose for your IPO.  

Also, to do an IPO, you have to get an approval from the SEC and register your shares with this regulatory agency. Which requires a lot of time, effort and expertise and therefore absolutely requires services of highly competent and experienced investment bank. That gets substantially more involved in your project than in the case of bond placement.

What would you want from your investors – new shareholders? In terms of financial value, you want them to pay the maximum possible price for your stock – and still your stock price to rise after an IPO.

Unlike the bond price, which is fixed at the time of placement, for the price of your stock at an IPO the sky is the limit. Everything depends on you and – to a much larger extent – on your financial advisor (investment bank).

Unlike individual lenders and bond investors, the ones that purchase your shares on a stock exchange, are passive (‘portfolio’) investors that do not study your company as thoroughly as the former to make an investment decision. Therefore, they seldom – if ever – dispense management advice. There is also little – if anything – they can offer in terms of functional or emotional value. On Wall Street it is all about money and nothing but money. Cold, hard cash.

Your relationship with investment bankers and various analysts in your IPO project is essentially the same as the one you have when you do a bond placement. Only your investment banker has to do a lot more and you need to contact many more analysts and supply them with much more information. And freebies.

After IPO, your relationship with the stock market changes. Now your primary objective is to make sure that your stock price (and, therefore, wealth of your shareholders and your shareholders’ value) goes up as fast as possible.

To generate financial value, you have to make sure that (a) market and industry analysts have and disseminate favorable opinion and high expectations of your stock price growth and (b) that owners of your stock are of the same opinion.

To make it happen, you need both the fundamentals (your sales, profits and cash flows must constantly at least meet and ideally exceed analysts’ expectations) and efficient ongoing communications campaign aimed at both analysts and investors. For the latter you would typically need to use the services of an experienced company that specializes in such campaigns.

At this stage, you generate financial value for your investors by making sure that return on their investments into your stock exceeds that of all alternative investments with the same risk profile. In other words, you have to make sure that your stock price growth faster than that of its competitors.

Emotional value of owning your stock is closely associated with the power of your corporate brand (which you must maximize anyway). You create emotional value for your investors by making them proud and happy to own stock in the company with such a powerful and attractive brand.