Wednesday, May 4, 2016
The IPO market has slowed down in recent years. From 1980-1989 and 1990-1998, an average of 204 and 401 companies went public each year, respectively. Compare that to the 2001-2015 period, when an average of 119 companies went public each year. Although there are various reasons as to why the IPO market has slowed so dramatically, the end result is that raising capital has become more difficult for small companies. Regulation A+, part of the JOBS Act, allows companies to raise up to $50 million in a 12-month period under certain conditions. Importantly, Regulation A+ allows companies to raise funds from non-accredited investors. While there are several possible qualifications to be an accredited investor, such as an income of over $200,000 per year, the number of accredited investors is limited. Removing the accredited investor restriction opens funding to a much larger number of potential investors. As this article discusses, with a tight IPO market, we may soon see a surge in Regulation A funding.
A recent article on the McKinsey & Company website discusses the effect of dividends versus stock repurchases. We are happy to report that the article comes to the same conclusion as the textbook: Repurchases do not necessarily create value and are equivalent to paying a dividend of the same amount. However, the article does bring out a couple of interesting points. First, while repurchasing debt (re-leveraging the company) results in a higher EPS, this is offset from the lower company risk due to less debt. The value of the company is unchanged (M&M), and the PE ratio should fall. Second, a more important point is that the company should undertake profitable, positive NPV projects, if available, rather than repurchase stock. In other words, a stock repurchase is essentially a capital budgeting project. A company should only repurchase its stock if the NPV from the repurchase is greater than other capital budgeting projects. Of course, if the market is efficient, the NPV from a stock repurchase is zero.