Mortgage IPO Boom: Before Going Public, Consider These Pros and Cons
Following the IPO last August of Rocket companies, the parent company of US mortgage lender Quicken Loans, other mortgage originators seemed poised to follow suit. Non-bank mortgage company Guild assets went public in October, however, shortly after Caliber Home Loans Inc. and AmeriHome Inc. suspended their IPO plans. California-based lender Loan deposit also waiting backstage. Some of the recent mergers, such as the acquisition by Guaranteed Rate of Stearns, position companies for a successful IPO.
An IPO can have many benefits for the right company, but it’s not the right decision for everyone. IPOs often require complex decisions and difficult compromises. Many companies are starting IPO talks to ditch the effort along the way. Before embarking on this path, it is important that the management and board of directors of the company carefully assess the pros and cons of all capital alternatives.
In many cases, there are other options that better suit the needs of the business. In general, an IPO is more often the right answer for a bank than for a mortgage company; more often for a large cap than for a small cap; more often for a tightly controlled company than flexible.
For the right company, an IPO is the public culmination of years of hard work. In these cases, the pros far outweigh the cons, and the choice is clear. For a surprising number of companies, however, pursuing an IPO is a mistake.
Historically, the volatility of the mortgage business has translated into poor stock price performance. During boom times like the current wave of refinancing, companies are trading at very low earnings multiples. These low PEs are reasonable as investors are not only looking at this year’s earnings, but also the prospect of a huge drop once the party is over. Unfortunately, a low PE is a red flag for the business.
Here’s a look at some of the pros and cons that mortgage companies should keep in mind when considering whether an IPO is the right fit in today’s environment.
Launching an IPO can provide better market visibility while diversifying the investor base. It offers greater access to the equity markets to obtain growth capital; potentially greater access to more sophisticated debt markets.
Increased external and internal reporting requirements can lead to greater discipline in financial reporting. The IPO also means that the company gets active feedback from the market on its performance.
The ability to provide stock and / or options as part of the compensation can attract and retain key talent. A state-owned company has improved transparency and offers information dissemination to employees, customers and suppliers. It offers founders / investors the opportunity to monetize their investments and exercise financial exit strategies.
The IPO is labor intensive and therefore can be costly ($ 2-3 million in audit, management and infrastructure upgrades, plus an underwriting fee of $ 5-7 million) and entertaining.
The gross spread payable to the investment bank is generally 5-7% of the proceeds.
To gain traction with investors, the minimum share size for public stocks should be at least $ 100 million. Stocks also trade best when there is enough float to meet demand and more than 50% of stocks are available for trading.
The IPO creates new layers of ongoing compliance requirements – SEC, SarBox, etc. Financial and operational data are made public, including executive compensation. This can cause competitors to take advantage of the business with targeted sales or recruiting efforts.
A public offering can create volatility. Most non-bank financial services companies have short-term valuation windows that offer little visibility into earnings. Investors focus on the trajectory of earnings, which will often be discounted, causing management to “meet” or exceed performance targets for the current period.
Another factor to be deplored: the new fiduciary obligations towards investors can limit the flexibility of the operation of the company.
Public companies are subject to management and control restrictions regarding sales of personal shares, pledges and trades. Even when allowed, sales can send a negative message. These restrictions can make it difficult to obtain liquidity when needed or limit the upside potential.
Public enterprises open to the exhibition to activist investors, short sellers or other opponents / opportunists, which creates the potential for loss of control of the business.
Considering an IPO is one of the most complicated decisions a business faces. There are many issues that need to be addressed and prioritized. In some cases, the larger stage offered to a public company is complementary to the rest of the business strategy. If so, an IPO is the only answer.
For most businesses, however, there are viable alternatives. There is no single answer to this conversation. Rather, it’s about finding the right person based on the fundamentals of the business.