In light of global telecoms firm Digicel’s decision to cancel is IPO, here are four learnings from that experience.
Since around June of this year, the world was put on notice that global telecoms carrier, Digicel, had planned to trade in the New York Stock Exchange (NYSE). Though an Initial Public Offering (IPO), which was set for 8 October, the firm hoped to raise upwards of USD 2 billion. Should that target be achieved, Digicel planned, among other things, to improve its fiscal position and its infrastructure, and to add new services to the Digicel platform and ecosystem.
However, on 6 October, the firm announced that it was cancelling the IPO. According to Digicel Founder, Chairman and majority shareholder, Denis O’Brien,
Given our growth outlook, an IPO for Digicel was optional and predicated on achieving fair value for the company. Recent volatility in equity markets has seen a number of IPOs listing at a discount to their signalled price range and this was a less attractive route for us,
(Source: The Gleaner)
This news was a surprise to many. However, here a four things we – not only in the tech/ICT industry, but also as business owners and leaders – can learn from the Digicel experience.
1. A big fish in a small pond is likely to have no impact in a big pond
Digicel is a well-known telecoms firm in the Caribbean and the South Pacific, where it operates in 31 markets and has a customer base of around 13 million. In most of the markets in which it has a presence, it is the market leader, and in many instances, it was the first new entrant when then monopoly markets were opened to competition.
Although Digicel is considered a major player in the countries in which it operates, outside of the individual country or the Caribbean context, when compared with other firms trading on the NYSE, it is a small firm, with a modest customer base and revenues. Hence although a business may have a strong brand and customer base in its home country, or even in the Caribbean (for that matter), may still be seen as insignificant in environments such as New York, Silicon Valley or London.
2. The market determine the value of one’s business
In order to generate USD 2 billion from the IPO, Digicel had proposed a share price of USD 13—16 per share. However, stock market analysts were of the view that such a range was exorbitant for such a modest operation, and when compared with similar firms, a share price of less than half of what was being proposed was considered fairer (Source: Nasdaq).
From Denis O’Brien’s statement, which was corroborated by other sources, firms who recently launched their IPOs had to “cut their offer price below the expected price range” (Source: CNBC). Hence markets globally appear to be erring on the side of caution regarding the perceived value of businesses new to public trading.
3. Potential for growth and profit are critical for favourable investor response
Digicel has been and continues to be a privately held firm; hence there is no obligation for its financial reports to be made publicly available. However, in preparing for the IPO, the firm had to give some insight into its finances.
The consensus from the records it shared was that Digicel is in a weak financially. It has been recording a loss, and revenues and its customer base have not been growing, to name a few. Those challenges did not bolster investor confidence, and put the firm in a position to command the share price it wanted.
In essence, if a firm’s balance sheet does not point to a profitable venture, or if the potential to offer a significant return on investment is not readily evident, prospective investors are unlikely to pay top dollar for a stake in the business.
4. Sometimes the market is not ready for what is on offer
Finally, although speculation has been rife about the reasons why Digicel cancelled its IPO, and the implications therein, by its own admission, the firm was not desperate for capital and so could afford to make the decision it did. Having said this, other firms might not be in such an enviable position. In those circumstances, it may be necessary to carefully consider whether to sell part of the business at considerably less than what one would have liked, versus pursuing other options.
Regardless of the choice made, there will be consequences. Should one decide to cancel a share offering, it could mean (for example) that the business will not be able to scale as envisaged. Nevertheless, it is important to recognise that business owners do have a choice, as unpalatable as they may be.
Image credit: Guillaume (flickr)