Break-up
Part A
Break-up involves analyzing the value of each business segment. The break-up analysis help in analyzing the value of a business gain as a result of the spin-off. Different companies have adopted this approach to increase efficiency in the production process hence increasing the value for the shareholders. The strategy to spin-off the company into a divisional segment should be able to increase finance for the shareholders hence increasing the dividends for the company shareholders.
Paypal was spun off as a separate entity from eBay in 2015. The sin-off was done in the best interest of the company as well as the interests of the company shareholders. After break up the eBay marketplace business unit remained to be the key driver for eBay. Revenue grew from $7 billion in 2016 to $8.5 billion in 2108 at CAGR of 9.7%. In the same period, the marketing and advertising business a health CAGR 8.1% was seen, revenue grew from $1.9 in 2016 to $2.3 billion in 2018. eBay spun-off 10% of shares to PayPal. The eBay marketplace is expected to grow to $9.2 billion in 2020 as a result of the break-up $9.2 billion in 2020 as a result of the demerger. The break up is considered to be successful for the company for it increases the revenue for the business. As a result of this, the shareholders were able to enjoy high dividends.
Another good example of a company that engages in a breakup is the British Telecommunication which spun-off its wireless business. The decision to break-up was to help the company to reduce its debt as well as regain confidence with investors. The company enjoys 38% of the British telecommunication market share. The external sales for BT sales are split into 22.8% of global service, 20.2% of retail, 22.1% EE, 19.3%) business segment, 8.2% wholesale while 8.4% consists of other operations. The company is considered to be over-valued.
General Electric CO. (GE) is the other break-p that has happened in the United States. The breakup (BU) was agreed on in May 2018 where GE was to spin-off was agreed to merge the transport segment with Wabtec Corp.
The breakup decision involved reducing quarterly dividend by 50 percent to $0.12/share. The company also intended to divest some of its business operations and concentrate on more profitable segments. The size of the board of directors (BOD) was reduced from eighteen to twelve members. Further, it involves cost-cutting initiatives. The initiative helped the company to diversify its portfolio and reduce losses for those who bought General Electric. GE sold 1,000 shares at an average process of $58.31. The share price declined $25.0. If the shares were sold at this price it means that the shareholders would lose $32.5 per share. The share price decreased by more than 50%.
In UK Reckitt’s pharmaceutical unit Indivior has been considered as the largest recent break-up. The breakup delivered 35% compared to the FTSE All-Share total return of 7%. The good performance result from the good management of the company. The concentration in one company segment enhances efficiency and hence increases productivity. The shareholder benefited from the increase in the value of the company as a result of the efficient management of the operations. In most case, the break up is observed to add value to the company
Part B
Initial public offer (IPO) is the process of selling the stocks of the private company to the public in the form of new issuance. IPO helps the corporation to raise capital from public investors. Today investors are not willing to accept financial excess for unprofitable initial public offers (Ritter and Welch, 2002). Today IPO is considered to be mis-practice and hence many investors are advised that it is not always a good practice. The major reasons for IPO mis-practice today include;
The Process is Expensive
The process of going public is time-consuming and expensive. To announce IPO the company must publish its reports on the U.S. Securities and Exchange Commission regulations on its intention for initial public offering (IPO). WeWork will be required to mobilize staff to IPO and also it will be required to a higher professional to take the management through the process, including underwriters, accountants, and attorneys.
Equity Dilution
The WeWork initial public offer was also postponed as a result of reducing the value of shareholders’ stock value. Going public will involve the selling portion of the company to other investors (Loughran and Ritter, 2004). Investors, therefore, prefer to source capital from other sources and maintain their current ownership in the company.
Loss of Management Control
Going to the initial public offering the management would lose control of the corporate affairs. The management of the company will no longer be able to make the decision independently. The minority shareholder will have to be involved in the decision-making process of the company even though WeWork is the majority shareholder. The IPO will reduce the control of the company over the board of director composition since the federal law restricts board composition.
Increased Regulatory Oversight
Initial public offering places the corporation under the supervision of the state regulatory agencies such as the security exchange commission (SEC) that regulate the listed company. The regulatory oversight increase changes the way in which the company is managed. In most cases, this slows the process of decision making.
Increased Liability is Possible
Going for an initial public offering exposes the company to extra liability. Implementation of the Initial public offering rises the debt of the company as well as the company directors. The obligation of the company is also increased as listed companies have the obligation of maximizing the shareholder profits and disclosing of operation information. The company management can be sue for making misrepresentation, self-dealing, and omission information that should be disclosed based on federal securities laws.
Mis-practice that lead to failure of WeWork IPO include;
In its Prospectus, WeWork is seen as a technical company though it trades in real estate business. The motive behind this was to go through a good initial public offering. Many investors show this as fraud or unethical hence making them perceive WeWork is a fraud company.
Many experts of economic prefer to analyze their business model as a risk since WeWork has never gone through an economic recession. It usually gets a space on lease for 10-20 years. During the economic decline, everyone expects to have many organizations close down leading to fewer requirements of co-working spaces. This leads to many questions to WeWork on how they will manage to pay the upcoming leases and salaries which might lead to losses( Ly, T.H. and Nguyen, K., 2020).
The analysis of profit and loss conducted in WeWork revealed that the company was never a profit-making. In a published statement covering the losses and profits of 4th quarter 2018, it indicated that the profits consisted of $1.4 Billion where the losses were $900 Million. This came as disapproval of how the firm will manage the expenses and salaries at $500 Million. Despite making a loss in business, in January 2019, it got a valuation of $47Billion it resulted from the huge investments from many investment banks. After the company was faced with some negative challenges, many investment banks predicted its valuation to be around $10-$12 Billion.
Adam Neumann who was the CEO with no corporate agreement with the company and the company corporate were questioned with some voting power. Some special powers in the company gave Adam’s wife apriority of deciding his successor in the firm. These unnecessary privileges given to both Adam and his wife reflected a negative message which made shareholders think about the organization as a non-governable body.
Adam Neumann started selling his share to the organization even before the IPO. This indicated that the CEO is under-confident with the IPO making the shareholders reluctant.
Adam Neumann was seen as working on his interests alone instead of the company’s interests, this resulted whereby it was found out that, most of the co-working space of WeWork was fully owned by Adam Neumann (Paine and Hurwitz, 2019). This was termed as being ethical.
The conspiracy of WE Holdings came up immediately after the IPO prospectus of WeWork was launched. It indicated that around $5.9 Million were given to WEHoldings to be used in its development and growth, another revelation was that WE Holdings was a separate organization managed by Adam Neumann. It was also found out that WeWork supported Adam Neumann with large sums of cash to an external body with no caution. This made Adam Neumann to be seen as a fraud since he was benefiting a lot from the company’s cash.
(b) your own in-depth diagnosis of what you contend is the more important considerations, with articles and similarly used to support & test your own original analyses.
The decision converts a private company in public through an initial public offering (IPO) should not be taken lightly. IPO has both advantages and disadvantages and hence the management should be very careful when making such a decision. Before making the decision to implement IPO the management should ensure that the IPO is feasible and will generate profits for the company. To determine whether IPO is feasible the company should satisfy some criteria.
The first consideration is the size of the market and its growth capability. The bigger the market the more profitable the company will be. The company should, therefore, access who faster the company will grow in the selected security exchange market. If the company has a huge market then there is potential for IPO being successful.
The company should also consider defining the company with long term goals. IPO help in generating money to change the business operation. Financial planning is concerned with defining the goals and values of the company. Working backward will help the company achieve its desired goals. The company should also consider improving its credibility with customers, lenders, and investors as well as better the morale of employees.
For a growing start-up, it is always important to expand its pool of executives who can keep good records of activities. The senior officials are in a position of managing cash burns which will assist the organization incorrectly in estimating the value. Transparency with shareholders is one of the best factors that are likely to sustain the company for a longer period. For the Corporate leaders who have the interest of going into an IPO must let the company and people are the prime attention point. They need to come up with a major mission for the company, led by example and allow the organization actions to speak for its self.
WeWork IPO was a valuation mistake. Since from the viewpoint, things appeared to be working well but when deeper digging was found, things were not working well, there were a lot of hidden problems. Looking at it from a financial perspective, The Company was found to be suffering from fraud and unable to generate enough revenues. The burn rate was found to be high thus leading to an increase in companies’ finance year over year. Shareholders without trust would not risk putting their cash with it, as it happened with WeWork. The management should be considerate of ethical issues as this gives more confidence to the investors. In case the shareholder is not confident ablaut the company that has announced its intention to go public most likely the company may not succeed. Before making the decision to implement IPO the management should ensure that the IPO is feasible and will generate profits for the company. This will play a critical role in ensuring that the IPO is successful. The management should, therefore, communicate the right information to the public making sure that there is no misrepresentation of the information provided.
Reference
Loughran, T., and Ritter, J., 2004. Why has IPO underpricing changed over time?. Financial management, pp.5-37.
Paine, L.S., and Hurwitz, W., 2019. WeWork Files for an IPO.
Ritter, J.R., and Welch, I., 2002. A review of IPO activity, pricing, and allocations. The journal of Finance, 57(4), pp.1795-1828.
Ly, T.H., and Nguyen, K., 2020, February. Do Words Matter: Predicting IPO Performance from Prospectus Sentiment. In 2020 IEEE 14th International Conference on Semantic Computing (ICSC) (pp. 307-310). IEEE.