IPOS an important long-term approach.

• Author: Yen, Chuck
• Position: Strategy - Initial public offerings

Initial public offerings remain an essential strategy for many companies to fuel business growth, provide liquidity to investors and create powerful employee incentives. In 2011, the stock market managed to squeeze out more than 100 IPOs and, though these numbers trail the boom years of the late 1990s, the question is not if but when the IPO market will rebound.

The allure and prestige of being a public company is ingrained in the DNA of corporate America. And until lending eases and investments pick up, company executives will continue to view an IPO as a potential source of capital. Moreover, there is evidence to suggest that an IPO could actually prove beneficial to a sales transaction.

According to a recent study conducted by professors at Brigham Young University and the University of South Florida, companies that pursue a dual-track strategy (i.e., an IPO along with putting themselves "on the block") could fetch a higher sales price--as much as 26 percent higher--that is partly due to the transparency of information and number of potential investors.

Regulatory Considerations

Life as a public company is not without its challenges. In particular, public companies face a host of regulatory requirements in connection with executive compensation. The compliance risks can be significant, as summarized below.

* CHEAP STOCK. The term refers to stock-based awards granted at artificially low prices preceding an initial public offering and creating a financial windfall for the grant recipient. Since private companies lack a public trading market to set the fair market value for their stock, the U.S. Securities and Exchange Commission will scrutinize evidence to support historical award valuations. If the SEC concludes that the company's determination of fair market value used to set the exercise prices of stock options or to determine the value of stock awards was set below fair market value per share on the grant date, then it will require the company to recognize additional (and unexpected) compensation expense for issuing cheap stock.

For example, suppose a company grants stock options to employees at an exercise price equal to $5 per share. A year later, the company files its registration statement in preparation for an IPO. The SEC disputes the company's valuations and concludes that the fair market value of the company's common stock at the time of grant was actually $8 per share.

As a result, the company would be required to restate its financial statements to reflect the incremental $3 stock option fair...