For J. Mario Molina, a physician and CEO of Molina Healthcare, an IPO provided the fuel to help propel his health-maintenance organization into a new dimension of growth.
Molina Healthcare's offering raised $115.5 million on the first day of trading; selling 6.6 million shares at $17.50 each. A few days later, the company received $107 million in net proceeds (after expenses, including the 7 percent that went to investment bankers).
For Mr. Molina, son of emergency room physician and company founder C. David Molina, the money quelled the frustration he felt watching competitors expand through acquisitions funded by money raised in the capital markets. Although Molina had been able to grow from a small, regional care provider to a multistate HMO with half a million members in four states and 21 primary care centers in California, the company lacked the funds for acquisitions.
"We wanted cash to allow us to take advantage of the opportunities we were seeing," says Mr. Molina, adding that funding expansion for his Long Beach, California, company through retained earnings would have taken far too much time amid a fast-moving competitive market.
Many in the business world consider a public offering a rite of passage, a day when a business earns a certain cachet and takes its place alongside Wall Street giants. But while it may be an attractive financing option for many companies, experts caution that offerings are a long, arduous process with significant long-term implications for a company.
|Molina Healthcare Inc.|
CEO: J. Mario Molina
Headquarters: Long Beach, California
Ticker symbol: MOH on the NYSE
IPO date: July 2, 2003
Number of shares in IPO: 7.59 million
Total outstanding shares: 25.4 million
IPO managing underwriters: Bank of America Securities, CIBC World Markets, SG Cowan
Before deciding to go public, Mr. Molina says he considered a variety of funding options, including loans and a private placement. But as an HMO without collateral, few wanted to provide loans. To obtain the amount of funding he wanted, Mr. Molina says a private-equity placement would have diluted the company: Molina Healthcare, which before its IPO was 100 percent family-owned, would have had to sell as much as 40 percent of its stock in such a placement compared to just 25 percent in an IPO. Mr. Molina also found that few want to buy stock in a privately owned company because no market exists for selling those shares.
The main advantage of going public is the ability to reach a larger and more diverse investor base that offers the potential to raise more money, says George L. Rodriguez, senior vice-president and head of capital markets at Guzman & Company, one of the nation's largest Hispanic-owned investment banking firms. The New Jersey firm is the only Hispanic-owned investment banking firm to be a member of the NYSE.
A public offering also creates a "pool of liquidity" for the original investors, who can sell shares whenever they need capital, and an "acquisition currency" for the company because it can trade stock to fund further acquisitions, says Philip Colbran, a New York attorney who has represented issuers and underwriters in dozens of IPOs.
Mr. Colbran says it takes about a year for an IPO to take place, with six months of background work needed to make sure a company is ready to be scrutinized and another six months after an investment banker has been hired to guide a company through the process.
|Hispanic-Owned Public Companies|
Although Hispanic-owned companies are growing, they account for just 13 of the 7,200 companies listed on the stock exchanges, according to Gary Mizel, a New York securities consultant for minority businesses.
Mr. Mizel says that small number is due, at least in part, to a lack of access to attorneys, accountants, and investment bankers who take companies public and underwrite their stock. Mr. Mizel is working to create a liaison between minority firms and Wall Street that would help create a market for minority-owned companies in the investment banking community, noting that while business and market factors are important to successful IPOs, relationships also play a key role.
"It seems to me, given how much minority businesses are ignored, there probably is a fantastic amount of worthwhile companies that could go public," he says.
Mr. Molina says the IPO took his company 19 months and cost about $2 million, partly because the company took its time and the offering market was soft. Molina Healthcare also hired a consultant who had taken other companies public and had relationships with investment bankers that would underwrite the deal.
Among the most important factors in preparing for the IPO, Mr. Molina says, was obtaining audited financial statements. "You have to have that … track record, even if it's for a couple of years," he says, noting that because Molina Healthcare held contracts with state government that required such records, the company already had audited financial statements going back 12 to 14 years.
Another important step, Mr. Molina says, is making sure the corporate governance structure is appropriate for a publicly owned company, which is required to have a majority of independent board members (a requirement that Molina Healthcare had already met due to requirements of state contracts). And choosing a solid investment banker who can help underwrite an offering is vital. Mr. Rodriguez says it's important to choose an underwriter who will sell to quality clients and who has a relationship with long-term investors looking to buy and hold. Good underwriters also can help attract other banks to underwrite portions of the offering, and help a company craft its "story" for the road show to potential investors in the weeks before the IPO.
"The road show is basically the management's opportunity to go around and address groups of investors to explain … the story of the company and why it's a good investment," says Mr. Colbran.
Typically one to three weeks long, the road show takes place before the stock price is established and ends on the day of the pricing or the day before. Most companies bring their CEO, CFO, and COO, Mr. Colbran says.
Mr. Molina says his company brought its COO to explain how Molina Healthcare had streamlined administrative processes to increase profitability; other companies, he says, might want to bring different officials on the road show. For example, a company that sells a new gizmo might want to bring someone from research and development, Mr. Molina says.
Before embarking on its more-than-2-week road show, Molina Healthcare staff rehearsed their presentation with company employees, investment bankers, and investment banking sales staff. Armed with that experience, Mr. Molina says his staff approached the road show, which included about 90 potential investors, with confidence and experienced no major surprises.
After the road show, the underwriter determines a price for the company's stock, aiming to raise as much money as possible without triggering a rapid valuation decline immediately after the optimism of the initial offering. If an offering is successful, the stock price holds steady or continues to rise after opening day. But challenges still remain.
Mr. Molina says that one of the biggest changes for his company after the IPO has been handling a market mentality that can emphasize short-term, quarterly results. He says Molina Healthcare continues to take a long-term view, but Mr. Colbran says the pressure of trying to meet short-term market expectations has led other companies to make detrimental decisions and has contributed to the recent spate of high-profile corporate malfeasance cases. Other pressures that add to a company's workload and stress include a plethora of SEC rules and restrictions and increased analyst and stockholder scrutiny.
Some company founders are frustrated after their company goes public, Mr. Colbran says, because they no longer have the same level of control they once had. "It's like bringing up a child and watching them head off on the horizon with a (bundle) on their back," he says.