Although initial public offerings (IPOs) are sizzling in the U.S., they’re only tepid in Canada because of the sectors that dominate each region and the fact that the U.S. is a much bigger market where the cost of capital is perceived to be less.
And while entrepreneurs are gearing up to take their companies public, they warn that a deep stock market correction could derail those plans.
“The timing for an IPO now is good if market conditions stay robust,” said Roger Hardy, who owns SHOEme, which has brands such as Shoes.com, Onlineshoes.com and SHOEme.ca.
Hardy has not decided whether he will take his e-commerce venture public, although he has fielded plenty of phone calls from potential investors enticed by his past success at Coastal Contacts. He founded that online eyewear seller, took it public on Nasdaq and then negotiated its sale to French optical giant Essilor for $430 million last year.
“We’re market-agnostic,” Hardy told Business in Vancouver by phone from California, where he was attending the ROTH investor conference for small- and mid-capitalization West Coast companies. “We look for where the cost of capital is the lowest and it’s probably lowest in the U.S.”
Bond Capital founder Davis Vaitkunas said any company that goes public should have a market capitalization of at least $100 million.
“The maintenance cost of going public is between half a million and a million dollars a year,” Vaitkunas said.
The biggest reasons he sees for a company to go public is that it has a clear record of growth yet little cash flow and a need for capital.
Vaitkunas has watched plenty of companies with strong fundamentals go public only to be ignored by investors who seek an obvious history of growth.
And while Hardy’s fast-growing company is poised to sell $360 million worth of shoes this year and Hardy stressed that he does not need capital, Vaitkunas said that the company is a strong candidate to go public both for its growth prospects and Hardy’s successful e-commerce track record.
Not everyone agrees with Hardy that the cost of capital is cheaper in the U.S.
“There are no statistics to compare the exchanges on cost of capital,” said Strategic Exits Corp. principal Basil Peters, who helps take companies public or sell them to corporate buyers.
Exchanges are quick to reveal compliance costs but they are a fraction of the total cost of being public, Peters said.
Investor-relations expenses include courting investors and keeping in contact with them on at least a quarterly basis. More detailed bookkeeping is required for public companies than for private ones, which leads to higher audit costs, he added.
Peters believes that the Canada-U.S. border is increasingly irrelevant when it comes to determining where a North American company goes public.
“Companies on both sides of the border decide to do IPOs in Canada or the U.S. depending on which market is a better fit for the size and stage of their company,” Peters said.
Canadian exchanges have enjoyed little love because they are weighted disproportionally toward companies in the battered resource and energy sectors.
“Another reason to list in the U.S. is the cachet of being on Nasdaq,” Peters said of that technology-heavy index. “There’s still the belief that, if you’re on the full Nasdaq, you’re somehow better than if you’re on the TSX or the London exchange.”
2014 IPO market in U.S. was frothiest since 2000 bubble
Renaissance Capital, which researches and invests in IPOs, counted 273 companies that went public in the U.S. in 2014, raising US$85 billion. That is the highest number of American IPOs in a year since the 403 IPOs that took place in the heady dot-com-bubble days of 2000.
Offerings were spread across sectors and included the largest IPO in history, in September, when e-commerce giant Alibaba Group (NYSE:BABA) raised US$25 billion.
BDO USA Ltd. wrote in its 2015 outlook that it expects “incremental growth in U.S. IPO activity,” and companies such as Uber, Airbnb and Snapchat are waiting in the wings with rumoured IPOs.
Unlike in the U.S., where 2014 was a boom year in which the number of IPOs rose 24% and proceeds and filings climbed by 55% and 44%, respectively, the situation in Canada was mediocre.
PwC counted 14 Canadian IPOs last year, which combined to raise $3.5 billion. That compares to 2013, when 30 IPOs raised $3.4 billion.
Jim Pattison content to stay private
B.C.’s most successful entrepreneur, Jimmy Pattison, sprouted his empire from a Vancouver car dealership more than 50 years ago.
He owns large stakes in companies such as Canfor Corp. (TSX:CFP) and has purchased public companies such as Sun-Rype Products Ltd.
Through it all, however, he never considered taking his Jim Pattison Group public, he told Business in Vancouver.
“There’s a lot of different reasons you do an IPO,” he said. “One is you need capital. Another is that you are deciding that you don’t want all your eggs in one basket. There are a lot of different reasons that companies go public. There’s timing. You want to go when the timing is right. We have no intention of going public.” •
