sometimes investment banks work behind the scenes to help sell off or allow private companies to conduct sales. These deals take a bit more massaging because there are no publicly traded securities from which to glean a value of the company. When dealing with publicly traded companies, there’s really no secret in terms of what price tag investors are putting on the firm. The value of a public company is its market value, which is the per-share stock price multiplied by the number of shares outstanding.
But with private companies, there is no objective and dispassionate way to measure the value of the company. The value is, plainly stated, a meeting of minds between what potential buyers are willing to pay and how much the seller is willing to accept.
Appreciating the rationale of private sales
It’s a classic American story. A young entrepreneur invents a technology in a garage or dorm room and knows he or she is onto something big. Some entrepreneurs, like Bill Gates of Microsoft, may stick with the idea and build and expand and create a giant publicly traded company.
Other entrepreneurs, though, know that building a company takes time and a string of not just one-hit products, but several, to fend off competition. Additionally, building a company requires the ability to tap many business skills, ranging from marketing to finance, not just research and development.
For that reason, it’s not uncommon for young fledging companies with a hot technology to simply sell themselves to bigger companies that already have an organization in place to put the technology to use right away. In deals like this, investment bankers are called in to put a price tag on the company and technology being bought.
Seeing where private transactions are the best choice
During the Internet boom of the late 1990s, going public was the ultimate goal of many companies. The dream of creating a company, selling the shares to the public and becoming instantly fabulously wealthy was the reason many Internet companies existed.
But some companies actually want to do just the opposite. There are major, short-term pressures associated with being a publicly traded company. The biggest obligation is that public companies must provide the investors a complete rundown of their financial performance during the quarter, disclosures you can read about in Chapter 7. This required disclosure is fine when the company is doing well — kind of like plastering a grade-school paper with an “A” on it on the refrigerator door.
One classic example is computer maker Dell. The company had been struggling with slower sales of personal computers. It wanted to go private to give it the time to restructure its business. Dell’s management team offered to take the company private for nearly $25 billion in a bid in early 2013. Going private would allow the company to make the necessary long-term investments (which short-term investors may not like) to make it more competitive in a world where mobile gadgets have become a big threat to traditional desktop computers and laptops. It worked. Dell returned to the public market as Dell Technologies in 2018 as a much stronger company.
Understanding the unique traits of private deals
IPOs may get all the attention. Splashy sales of stock to the public, such as ride-sharing company Uber Technologies in May 2019, grab headlines and investors sometimes line up to buy shares.
But sometimes companies raise money in more subtle and private ways. One example of a way investment banking pairs up companies and investors, away from the prying eyes of the public, is with a private placement. In a private placement, a company can sell stock directly to investors even if there’s no public offering or shares listed on an exchange (a regulated marketplace for securities to be bought or sold). Companies may use private placements because they offer a few advantages:
Lighter regulation: IPOs are heavily monitored by regulators. Every risk the company faces must be disclosed along with audited financials, meaning the books have to be studied by an accounting firm. But because private placements are not offered to the public, the securities don’t have to be registered with the Securities and Exchange Commission (SEC). This means the company and investment banks don’t have to jump through all the hoops to get the sale done.
Limited to sophisticated investors: Private placements can’t be offered to the general public. Instead, they must be extended only to accredited investors (typically, professional investors like mutual funds or high-net-worth individuals). These investors are the ones who are supposed to know how to research risky investments, or have the wherewithal and understanding to take losses.
Lower costs: Because a private placement doesn’t require as much regulatory oversight, the costs of putting out the offering tend to be lower. Fewer lawyers are needed because there are fewer documents to create. And there’s less cost associated with investment banking, because private sales tend to be smaller and don’t require the lining up of a massive group of investors to get the deal done.
Initial public offerings
The IPO still remains one of the pinnacles of what a company can achieve in its early life. When a company sells stock to the general public for the first time, it’s a sign that the company has a compelling enough story that it can attract outside investors to buy a piece of the company.
IPOs are a financial transaction that requires the heavy involvement of investment banks. You’ll read more details about these important deals in Chapter 4.
In this section, you find out the basics of IPOs. In a traditional IPO, the investment banking operation gets involved very early. The investment bankers
