In the coming weeks, Workbrain board of directors will have a meeting to determine the best exit strategy for the company. This comes at a time when Workbrain needs to move through the next phase of growth; in an organization’s life cycle, growth and development is inevitable and, every entrepreneur wishes to see his/her company reach this level. This is exactly where Workbrain is at the moment. However, to many of you, the big question is whether Workbrain should go for an IPO or acquisition. As the company’s CFO, I have thought about this subject for quite some time now and, I share my insights with you.
As you all know, Workbrain has been in business since November, 1999. The fact that the company’s revenues hit $ 30 million after four years in operation, attests to Workbrain’s remarkable business growth. Again, Workbrain’s growth is evident through the number of people it employs; currently, Workbrain employs more than 300 staff members in Canada, US and Europe. In terms of business products, Workbrain has always been at the forefront of providing human capital management solutions and this has seen growth of the company’s client base. However, in order to continue serving the existing company clients and capture new markets, Workbrain urgently needs new capital injection of approximately $ 35 – 75 million.
Research shows that there are two main ways of raising additional capital for an existing enterprise: either through acquisition or through an initial public offer (IPO). Each of the models has its own merits and demerits. An IPO, for example, gives an organization the opportunity to raise capital, which may be used to fund research and development, business growth, acquisition of other small companies, and in settling debts. Other advantages accrued from public listing include broad media coverage, which increases the organization’s visibility, and the ability to attract better personnel (especially at the executive level).
However, IPOs have their downsides as well. According to research, the most common challenge is the huge costs associated with listing which small and medium sized may not be prepared to offer. Again, the bureaucracy and time associated with meeting the requirements set by regulators is another big challenge for private companies that are not used to that level of scrutiny.
Acquisitions, on the other hand, also have their own share of merits and demerits. The most distinct advantage of acquisition is the creation of synergy. Through acquisition, organizations take advantage of each other’s distribution channels to penetrate areas that would not be possible to venture. This allows organizations to grow by complementing each other. Another advantage gained from acquisition is lower risk for growth. Lastly, the acquisitions are preferable due to the ease of integration.
Although IPOs and acquisitions are the most common means of raising capital for existing enterprises, financing alternatives are not limited to these two only. Another preferred financing alternative is management buy-out. Management buy-out involves the current crop of managers selling the company to the incoming generation of managers. The arrangement allows the founders to gain immediate liquidity and allow for a seamless transition.
Addressing the question on whether Workbrain needs additional capital at the moment, the answer is yes. Workbrain needs additional capital to finance expansion in Europe and South America. According to our estimates, this will require capital injection of approximately $ 35-75 million. Unless, the expansion is facilitated, Workbrain will remain exposed to competitors and its long-term existence will be in jeopardy. Again, it is important for Workbrain to stamp its authority in the market that it serves, without ceding the current market share to rival companies. Therefore, this is the best opportunity to raise additional capital because all the financial fundamentals are doing well and investors would be attracted by the growth of the business in the recent past and future prospects.
If Workbrain decides to go for an IPO, two alternatives are available: listing through TSX and listing through NASDAQ. Although Workbrain is a Canadian Corporation, most of the clients come from United States of America. This brings in the dilemma on which of the two securities would be most appropriate for Workbrain. Currently, NASDAQ looks more attractive because of the huge of companies listed there (more than 4,000); the number of companies listed in TSX is approximately 1,600. However, listing in NASDAQ brings the question about whether investors would be attracted by the new entrant into the market – having in mind the fact that Tech. companies have not performed very well on the bourse. Therefore, in the long-term interest of the company, it would be more appropriate for Workbrain to list in TSX rather than listing in NASDAQ. The reasoning is that Canadian investors who have witnessed the growth of Workbrain would find the company shares attractive due to future prospects. However, we should not lose sight of the big question here: whether IPO offers Workbrain shareholders better value than acquisition.
With regards to small and medium sized tech company such as Workbrain, research also shows that acquisition is the best way to go. Although IPOs were preferred in raising capital during the 1990s, interest in IPOs has been waning lately. For example, only 135 IPOs took place in 2011 compared to 213 IPOs in 2007. In terms of finance, the IPOs carried out in 2011 raised 25 % less than the amount raised in 2007. At the same time, mergers between recorded booming business. For example, the number of mergers (of values less than $ 500 million) expected to take place in 2012 alone exceeded 2,000.
The reason why I share this figures with you is because I need to point out a fundamental shift that is taking place. Small and medium sized enterprises have realized that acquisitions offer the best prospects for raising additional capital without going through the rigorous scrutiny required when doing initial public offerings. Again, as pointed out earlier, organizations are finding it easy to merge so as to gain synergy with the parent company and benefit from the existing marketing and distribution channels offered each other. Moreover, the existing business model and management will not be subjected to a shakeup. Consequently, the management will still be in control, and this is important for continuity and long-term business growth. Therefore, it will be in the interest of the board of directors and Workbrain shareholders to consider acquisition as the most viable means of raising capital.
I would be honored to share with you more on this recommendation during the next board meeting and follow through on the decisions made by the board.
Best Regards,
Matt Chapman
Chief Financial Officer
Workbrain Corp.
References
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