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Go Public, Go Private? It’s Complicated

Slack logo against a black stone wall.

A tale of two companies recently illustrated that there is no one right answer to the question “Should a business aim to be publicly traded?”

The first company is one you’ve likely heard of: Slack Technologies Inc. The business software company was valued at $1 billion before it reached a full year of operation. Slack provides workplace messenger solutions to hundreds of thousands of companies, including ours. The company extended its reach even further after it acquired the intellectual property behind its competitor HipChat last year; as part of that deal, HipChat will go dark on Feb. 15, and former users have been encouraged to migrate to Slack. Now Slack has filed paperwork for a proposed public listing on the stock market, and some estimates put its potential value above $7 billion.

Slack’s approach to going public is a bit different from a traditional initial public offering. The company’s filing indicates it may pursue a “direct listing,” a technique pioneered by Spotify Technology SA in 2018. In a typical IPO, the company uses underwriters, usually investment banks, to line up buyers for shares in advance; this helps ensure demand and reduces the potential for major volatility in early trading. In a direct listing, the company’s stock enters the public market without such underwriting. The Wall Street Journal reported that this approach can be attractive because companies can avoid large underwriting fees associated with traditional offerings. Direct listings also allow a business to avoid restrictions on when insiders can sell shares. The technique does, however, represent a heightened risk of a disappointing or highly volatile share price when the company debuts. It also means the company is forgoing the chance to raise additional funds, traditionally a major attraction of going public.

The second of our two companies is moving away, rather than toward, public trading. Almost simultaneously to Slack’s move to go public, Ultimate Software announced it had agreed to go private in an $11 billion deal. Ultimate Software (which, like Palisades Hudson, is based in Broward County, Florida) provides cloud-based human resources software services. A group of investors led by private equity firm Hellman & Friedman is buying the company, though its existing leadership structure will reportedly remain in place.

Since the company’s employees are also stockholders, many commentators have pointed out that this deal could represent a major windfall for the roughly 5,000 people who work there. Ultimate Software routinely offers new employees restricted units of company stock, and employees can earn additional shares as a performance incentive. All units that have been granted to employees by Feb. 9 will have the same value as common stock, which means that employees will receive $331.50 per share, just as other stockholders will when the deal takes effect.

Looking at Slack and Ultimate Software, it’s reasonable to ask what motivates a company to go public or, alternatively, to go private once it has gone public in the first place. In reality, both companies may be making the right choice, even though this may seem contradictory.

Going public offers a variety of benefits, including increasing brand awareness among consumers and – at least in a traditional IPO – raising significant capital that a business can use to expand, improve operations, bolster research and development, or pay off existing debt. Some companies go public in order to give founders and early investors a viable exit strategy, since selling a stake in a private business can be complicated and difficult.

Of course, going public entails taking on new complications too. Public companies must follow rules laid out by the Securities and Exchange Commission, and must stay abreast of a variety of sometimes-complex filing requirements. All of this extra compliance and administrative work represents increased costs. And once a company goes public, its leaders face pressure from a wider array of investors to manage the company in particular ways. The necessity of reporting quarterly earnings arguably makes it harder to justify choices that will take a long time to show results, rather than strategies that will secure short-term gains for shareholders.

This last consideration is often, though not always, a major factor in a public company’s decision to go private. That’s because the decision to go private is often a way to give a company’s leadership greater control. Company leadership in a public enterprise not only must worry about shareholders getting spooked and selling their stakes if a short-term earnings dip occurs; in addition, leaders must often convince shareholders that major changes are a good idea in advance. If they fail to sell their bold vision sufficiently, they may not be able to pursue it at all.

Not all companies seek to go private by actively seeking buyers. A company may also receive an unsolicited bid from one or more major investors who think it is undervalued. If the majority of voting shareholders think the proposed deal is worthwhile, it can proceed. While private investors, like stockholders, may have expectations for how the company will be run, they are less likely to pull a company in several conflicting directions.

A private company’s decision to go public, or vice versa, can affect employees in a variety of ways, especially employees with some sort of stake in the enterprise. If a public company like Ultimate Software goes private, employees could find themselves with a significant windfall, which may have unexpected pitfalls. They also stand to suddenly have much more liquidity in their assets than they expected, which can seem daunting in contrast to simply holding company stock as a benefit of employment. Employees should also be prepared to pay capital gains tax on the shares sold back to the company.

As for a private company going public, employee stakeholders will now generally have a better market in which to sell their interest in the company, if they wish. Especially for senior staff members, it might make sense to diversify a previously concentrated position, for instance. Employees whose company pursues a traditional IPO, rather than a direct listing, must wait through a lockup period before they can sell their stock, however.

Ultimately, there is no one right answer to whether going public, or private, is in a particular company’s best interest. At least from the outside, it looks like both Slack and Ultimate Software are making sensible decisions for their unique circumstances.

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