New E&Y Survey on Costs of Being Public

By Cydney Posner

An article in CFO.com, "The True Costs of Being Public: More Than You Think," discusses the results of a new E&Y survey of costs incurred by 26 companies (with revenue ranging from below $100 million to more than $4 billion) that went public in the past two years.  And no, the primary contributor to escalating expenses post-IPO was not SOX; rather, it was the "hefty price tag attached to compensating officers and directors post-IPO, along with other newly useful advisers."

According to the article, "[m]ost studies of the costs associated with initial public offerings focus on the dollars it takes for newly public companies to comply with everyone's favorite scapegoat, the Sarbanes-Oxley Act. According to conventional wisdom, it's those compliance costs that are holding back companies from going public and choking up the capital markets in general.… Being public adds about $2.5 million, on average, to a company's cost structure, with $1.5 million of that devoted to higher compensation for CEOs, CFOs, and others in the finance function, such as investor-relations professionals, according to the survey. That figure also covers increased board costs, as more than 80% of companies had either added new members to their boards of directors or increased director compensation prior to their IPO." (The argument that the costs of SOX compliance are not really as great as some suggest was also supported by anecdotal evidence at the meeting of the SEC's advisory committee on small and emerging companies, where the Chair of a public company commented that, as corporate executives became more familiar with the process, the initial increase in costs the company experienced disappeared. http://www3.cfo.com/article/2011/11/credit-capital_sec-advisory-committee-emerging-small-growth-companies-capital-ipo)

After higher compensation, "[a]nother $1 million goes annually to advisers, on top of a whopping average of $13 million spent on advisers who help execute the IPO, according to E&Y's survey. Most companies retained at least 11 third-party advisers in connection with the IPO, the survey found, including, universally, investment bankers, attorneys, and auditors. About 70% of companies hired an investor-relations firm, while 40% hired a road-show consultant. Those finding are in line with the results of a recent survey by Protiviti, which found that compliance costs tend to be highest in the first year of being public, then fall to a range of $100,000 to $1 million annually. " Additionally, the E&Y survey indicated that 80% of companies going public made new investments in IT or software as they prepared to go public.

The article notes that these types of expenses "can't capture the full toll. ‘The bigger cost is that as a public company you're constantly considering what impact your decisions will have on your stock price,'" according to one CFO quoted in the article. Properly articulating the story and keeping investors apprised of decisions can be time-consuming, he said, but the costs are worthwhile, given the ability to raise larger amounts of funds through the public markets. <br>

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