The market environment has led many mortgage lenders to consider at least one IPO in the last year, and we could still see a wave of IPOs in the industry in 2021.
Following the IPO of Rocket Companies, the parent company of US mortgage lender Quicken Loans, last August, other home loan originators appeared ready to follow suit. However, the non-bank mortgage company Guild Holdings went public in October, shortly after Caliber Home Loans Inc. and AmeriHome Inc. suspended their IPO plans. California-based lender LoanDepot is also waiting in the wings. Some of the most recent mergers, such as Guaranteed Rate's acquisition of Stearns, position companies for a successful IPO.
Going public can have many benefits for the right company, but it is not the right decision for all. IPOs often require complex decisions and difficult compromises. Many companies are discussing an IPO only to give up the effort halfway through. Before embarking on this path, it is important that the company's management and board of directors carefully weigh the pros and cons of all capital alternatives.
In many cases, there are other options that better suit the business needs. In general, going public is more often the correct answer for a bank than a mortgage company. more often for a large cap than a small cap; more often for a tightly controlled company than for a flexible one.
For the right company, going public is the public culmination of years of hard work. In these cases, the advantages far outweigh the disadvantages and the choice is clear. However, for a surprising number of companies, going public is a mistake.
In the past, the volatility of the mortgage business has resulted in poor stock price performance. In boom times like the current wave of refinancing, companies trade at very low value for money. These low PEs are reasonable as investors are looking not only at this year's earnings, but the prospect for a huge decline when the party is over. Unfortunately, a low PE is a red flag for the company.
Here's a look at some of the pros and cons that mortgage companies should consider when considering whether an IPO fits the current environment.
Going public can provide improved market visibility while diversifying the investor base. It provides wider access to the stock markets for growth capital. potentially wider access to more sophisticated debt markets.
The expanded external and internal reporting requirements can lead to improved discipline in financial reporting. Going public also means that the company receives active market feedback on its performance.
The ability to provide stocks and / or options as part of compensation can attract and retain key talent. A listed company has improved transparency and allows employees, customers and suppliers to disseminate information. It offers founders / investors the opportunity to monetize investments and exercise strategies for financial exit.
Executing the IPO is a significant amount of work and therefore can be expensive ($ 2-3 million for audits, management upgrades, and infrastructure, and a $ 5-7 million subscription fee) and distracting.
The gross spread to be paid to the investment bank is usually 5-7% of the proceeds.
To gain a foothold with investors, the minimum public equity stake should be at least $ 100 million. Stocks also trade better when there is enough float to meet demand and over 50% of the stocks are available for trading.
The IPO creates new levels of ongoing compliance requirements – SEC, SarBox, etc. Financial and operational data is publicly released, including executive compensation. This can lead to competitors taking advantage of the company with targeted sales or recruitment efforts.
A public offering can lead to volatility. Most non-bank financial services firms have short-term valuation windows that offer little earnings visibility. Investors are focused on earnings performance, which is often discounted, putting pressure on management to “meet” or exceed current period performance targets.
Another factor on the other hand: New fiduciary obligations to investors can limit the company's operational flexibility.
Public corporations are subject to administration and control restrictions on the sale, pledge and trading of personal shares. Even if it is allowed, sales can send negative news. These constraints can make it difficult to generate liquidity when needed, or limit potential upside.
Public corporations are open to activists, short sellers, or other naysayers / opportunists, creating the potential for losing control of the company.
Going public is one of the most complicated decisions a company faces. There are numerous issues that need to be addressed and prioritized. In some cases, the larger stage offered to a public company complements the rest of the business strategy. If so, going public is the only answer.
For most businesses, however, there are viable alternatives. There is no single answer to this conversation. Instead, it's about finding the right fit using the basics of the company.