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Dan Loney: Why do companies decide to go
public, and what does that mean for employees? What should they
expect during and after the IPO
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process? That's an area that's
being looked at by our guest today, Matt Josefy, who's a
visiting Associate Professor of
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Management here at Wharton. He's
also an Associate Professor of Strategy and the Shoemaker
Faculty Fellow in
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Entrepreneurship at Indiana
University. Matt, great to talk to you. How are you today?
Matt Josefy: Fantastic, Dan.
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- You know, I think it's interesting, because
when we talk about the IPO process, we talk about the
company itself. We don't
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necessarily talk a lot about the
assets within the company and the employees themselves. What
was it that had you interested
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about this in the first place?
- Yeah, Dan, my interest in this dates
back several years when I was
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really studying firm lifespans,
and we were able to document in some earlier work that firm
lifespans are shrinking, even
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for the largest companies in the
US. Firms that have managed to achieve this successful
milestone of going public, they
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only had a 50/50 shot of still
being listed on that US stock exchange 10 years later, and
that's down from what
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historically would have been
more like 20, 25 years. And so when I began thinking about the
shrinking lifespan of firms, I
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was really interested in what
that means from an employee's perspective. When I'm being
asked to stay late, stay at work
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until midnight, is the firm even
going to be around to pay me back for that extra attention
and extra effort that I've put
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in? So my initial interest in
this comes from that lifespan direction. - And part of this, as you wrote, is
the element of layoffs. And
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whenever you have, you know, two
companies coming together, the amazing word synergies comes up,
and that usually ends up meaning
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layoffs. Is there an element of
this that plays out when you go through the IPO process? - That's
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what we hadn't quite expected.
When we first started studying this, we were looking at it from
the direction of firms growing,
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that in the lead up to the IPO,
historically, we have this idea that firms would kind of clean
up the balance sheet, clean up
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the income statement. The goal
is to make -- essentially window dress, such that when you raise
all these funds from additional
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investors, that the company
looks as strong as possible. And so in the past, that would mean
that maybe you were trying to
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get towards profitability. But
increasingly, over the last decade, I'd say that firms
actually just want to project
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growth. And so actually, in the
lead up to the IPO, they might be on a hiring spree. And so
it's not until after the IPO,
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that now you've brought in these
additional block holders, large investors, great diversity of
investors, and they want you to
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then start moving towards
profitability, and you realize that you're not going to be able
to continue to grow forever.
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What is the long term setup of
the company and what are its true human capital needs? - But then, doesn't
that put even more on the plate
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of the company leaders in terms
of making a lot of these decisions as to how this process
plays
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out? - Absolutely. That's been one
of the most fascinating pieces that we've been trying to unpack,
is imagine that the founder of
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the firm is still in charge,
still the CEO, even post IPO, and we were essentially trying
to ask and uncover, would that
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person be more or less likely
to fire employees? Because, on the one hand, you may have hired
and been involved in the
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hiring process of these
individuals pre IPO, that might lead you to be more emotionally
attached. But on the other hand,
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the firm itself is your baby as
well, that this is an organization that is a mirror
image of you to some extent. So
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would you be more likely to show
commitment to those employees? And so that's something we're
still trying to get to the
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bottom of, is would founders be
more or less likely? - But let me ask you this, because
I know the work you do in
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entrepreneurship. I would think
then, to a degree, this even has to be on the radar of
entrepreneurs as they're kind of
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even starting out, and maybe
many years down the road, but at least it's a component
they have to have in the back of
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their minds as to, I mean, look,
they want to grow the company, they want to build it up. They
would like to, you know, see the
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level of growth, it may end up
being through a sale, whatever, but they still have to think
about these
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components as they're playing
out. - That's absolutely correct. So as
the firm is building, this is one
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of the reasons why I love
studying IPOs, to be honest, is because it's the intersection of
entrepreneurship and strategy.
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In a way, it's like the handover
from the incubation period of the organization to it being a
more formal structure, a more
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formal company. So as that
entrepreneur is building the organization, they want to bring
the right people to the table
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for that stage. And the IPO is,
in one way, a way of unlocking value for many of those
individuals, many of the
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original you know, employee
number two, employee number three would have a lot of equity
in the firm, and the IPO is
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their first true chance to
completely cash out on all the efforts that they've invested.
And firms are actually taking
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longer to IPO than in the past.
They might be eight, nine, ten years old by the time they IPO. So many
Individuals who have been
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with the firm from the
beginning have been there for a while. - And then there are those
times where it just seems like
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it's it's more of a challenge to
go through the IPO process, the dynamics of the market, and you
know, what we're seeing play out,
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and that obviously is part of
the process as well, correct? - For sure. So in some of my other
work, I try to look at ways that
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firms have tried to short
circuit the process or do things a little bit more easily because
of the scrutiny of a traditional
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IPO. So a couple years ago, we
saw the special purpose acquisition company boom. These
SPACs were everywhere. Every
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company that was trying to get
to the moon or solve a really difficult medical challenge
would try to IPO through a SPAC
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because it allowed you to
shortcut, to some extent, this traditional process that might
take 18 months to two years to
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be vetted in a traditional way. - What do you think then the
thought process of the employees
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should be, especially when a
company does go through an IPO, and maybe even looking on the
back end?
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- I mean, in the current
environment, layoffs are something that is occurring
even among the stalwart
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companies. The biggest tech
firms have announced layoffs of 10,000 people or more over the
last couple of years. So in some
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sense, all of us obviously
approach our jobs, hopefully most days, not thinking about the
threat of layoffs. But
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obviously, many of us know
individuals who have been directly impacted, whether it be
a family member or someone else.
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And that's why I care so much
about this research, because layoffs are highly disruptive at
the individual level, even if
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they can be, at times, a
necessary tool of retrenching a company or re-preparing it for
its next phase.
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- But again, it's important to
have this understanding, whether you're part of the company or
whether you're a potential
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investor, of understanding how
these companies are thinking about things as they go through
the IPO process
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and come out the other side. - Absolutely. We used to think of
employment as more of a lifetime
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commitment by both parties. And
so kind of a highlight in our research is that you can
actually learn about which
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firms are more committed to
their human capital. So it really has surprised us that
when we look at the prospectus
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of a company at the time of IPO,
that still has lingering effects three, four, five years after the
IPO in predicting which firms
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are less likely to lay people
off. So when a firm tells you who it is and how much they care
about their employees and what
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they signal there, dig deep into
those claims, and in some cases, we do see firms that are willing
to take the financial hit to
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keep people on board. Because
look, basic economics tells you if resources are being made
available, if it is a time when
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other people are letting go of
great talent, the firms that can and are committed to scooping up
the best talent, staying loyal
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to them, those employees will
pay that back many times over. - That loyalty, aka the old golden
watch theory, right? Given the
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golden watch after 20 years,
right? - Absolutely. - Matt, great to have you with us. Thanks very
much for your time today.
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- Fantastic. Really enjoyed it.
- Thank you. Matt Josefy, who is a visiting Associate Professor of
Management here at the Wharton
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School.