Before Going Public, a Dress Rehearsal
By David Liss
Taking a company public can be risky under the best of circumstances -- much less during a war and protracted economic downturn. Yet that didn't stop Molina Healthcare (MOH ), a Los Angeles-based company that offers health insurance for low-income patients, from going public on July 2, 2003. Selling 6.6 million shares at $17, it raised $115.5 million on the first day of trading, in line with its own and analysts' expectations. After peaking at $29 in October, Molina's stock now trades at around $23.
Dr. J. Mario Molina, CEO and son of Molina's founder, might not seem an obvious choice for leading his business into unchartered waters, yet he says his medical background is a help. "I approach business in much the same way I would approach a patient," he says. "First, gather as many facts as possible. Second, make my own examination, and verify the facts -- and call in the help of specialists when necessary. Once we have determined what the problem is, we can determine on a course of action, just as we would with a patient." That approach led him to conclude that going public was the best chance for raising growth capital.
Founded in 1980, Molina Healthcare provides insurance to some 530,000 members, primarily in California and three other states. Sales in 2002 came to $642.2 million, with net income of $30.5 million. The Molina family owns more than 50% of the outstanding stock.
Molina explained how he went about an IPO when I spoke with him recently in BusinessWeek Online's New York offices. Edited excerpts of our conversation follow:
Q: You took your company public in July, when an economic recovery was far from certain. Why then? A:
Q: You took your company public in July, when an economic recovery was far from certain. Why then?
A:We had looked at the private equity market first but concluded that, given the size of our company and its track record, we could go public. We went out when we felt that we were ready. As we were preparing for the IPO, the economic effects of worldwide political instability did cause us some concern. It took us 14 months.
We probably could have speeded up the process, but we were in no great hurry, given the condition of the stock market and the uncertainty of war in Iraq. Our need for capital for growth was a long-term need, so we didn't feel any pressure to get the IPO done as soon as possible. It was more of a situation that we wanted to do it when it made sense and was likely to be successful.
Q: What should companies do before they consider pursuing an IPO? A:
Q: What should companies do before they consider pursuing an IPO?
A:If you're thinking about going public, you should act as if you're already a public company.... You should prepare your financials as if you were filing with the Securities & Exchange Commission. You should rehearse earnings calls. We even asked employees to play the role of our investors and analysts.
If you decide that going public is the best way for your company, you have to realize that you're going to face a great deal more scrutiny than you did before. We hired a consultant who had experience taking a lot of companies public. If you haven't done this before, you need to find someone who has experience to guide you, because you don't know what you don't know. You must have a clear and detailed plan for how you're going to use the money that you would get from the public offering.
Q: Walk me through some of the basics, once you've made your decision to go public? A:
Q: Walk me through some of the basics, once you've made your decision to go public?
A:You have to choose your investment bankers well. We were looking for firms that had experience in health-care IPOs in our sector, specifically HMOs. Second, we wanted to be sure that our deal would be important to our bankers -- we didn't want someone who thought it was too small, but at the same time we wanted a firm of sufficient size and experience.
Perhaps most important is chemistry. We were going to be working closely with the bankers. It was very important that we felt comfortable with the people we were going to work with and could form a cohesive team. These are the people that you're going to go on the road with to tell your story to investors and analysts.
You really need attorneys who work with the SEC on a regular basis and who have recently done an IPO. You want people that are current on filing requirements and the kinds of questions that could come up as objections relative to your specific industry.
Strong audit functions and reliable financial statements are your foundation. You have to have a large and reputable firm do the audits -- a firm with knowledge of your industry, who will know what the pitfalls are for your field. The biggest change in going public has to do with the financial-filing aspect. You must be able to correctly close your books and get your public filings done correctly. You need someone who knows how to present and file 10-Qs correctly to the SEC. It's not enough just to know your company's financials. You have to be able to explain them. By David Liss
Q: What's the most difficult part of the IPO process? A:
Q: What's the most difficult part of the IPO process?
A:The road show. When you go public, institutional investors and investment bankers will purchase most of your company's stock. As CEO, you and your team of investment advisers spend hours and hours making presentations across the country to these potential investors. You need to have people that can coach you through the process. In our case, it was the people at Bank of America and CIBC Markets Worldwide.
I made the same presentation again and again and again, and did 80 to 90 one-on-one meetings in a several-week period. By the time we got through making all the presentations, I could do it in my sleep.
Q: Why is the road-show presentation so critical in the IPO process? A:
Q: Why is the road-show presentation so critical in the IPO process?
A:Based on what you say and the prospectus you prepare, investors decide whether to invest in your company. It's a lot like a job interview. Over 3,000 companies are traded on the New York Stock Exchange, and each of them is another potential stock investment or candidate that an investor could "hire." You have to make the strongest case possible as to why an investor should hire you.
Q: How do you run a company when you're out on the road like that? A:
Q: How do you run a company when you're out on the road like that?
A:The whole IPO process can create a huge distraction for the management team. In our case, we took our CEO (myself), our CFO, and our COO out on the road show. [Because the three of us were on the road so much] it was important to have a sufficiently strong management team so that the distraction of the IPO didn't hurt the company's day-to-day operations. Nothing could be worse than to do the IPO only to have the company's performance deteriorate as a result of the process.
We have a central financial team, but we delegated many of the operational functions to the CEOs of the subsidiary companies. That helped quite a bit. But even with cell phones, BlackBerrys, and other technology, it's difficult to run a company and be out on the road for three weeks. My advice is that before you go public, make sure you have the people and systems in place so that the company can operate in your absence for a period of several weeks.
Q: How should employees be considered during the IPO process? A:
Q: How should employees be considered during the IPO process?
A:It's critical that you consider the impact on your employees. You have to create opportunities for them to own stock and make them feel secure that there's a place for them in the future. We had a lot of meetings with employees when we were going through this process. We wanted everyone to understand that we were successful only because of them. You need to hang on to all of those things that made you successful as a private company. It's not the time to make changes.
Q: Did the corporate scandals of the last few years and the current climate of increased scrutiny influence your corporate-governance structure? A:
Q: Did the corporate scandals of the last few years and the current climate of increased scrutiny influence your corporate-governance structure?
A:When we became licensed as an HMO in 1994, we adopted a board structure that required that a majority of our board members be independent directors. This has served us well, and it helped us make the transition to being a public company more easily. Still, we had to make some adjustments to comply with some of the more recent requirements. The audit committee is a good example -- we added a board member who's a CPA.
On the whole, though, our previous governance structure didn't require much in the way of changes. This might not be the case for other private companies. However, I think that anyone interested in taking a company public should consider adopting public-type governance well in advance of an IPO.
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Liss is a contributing correspondent for BusinessWeek Online. His background includes six years as a management consultant and as a legislative aide on Capitol Hill. He has a master's degree in public administration from Columbia University
Edited by Patricia O'Connell