Executive Talent Magazine
IPO.itis,
An Examination of Symptoms and Remedies for High Growth – High Change
Organizations
By
Theresa M. Welbourne, Ph.D.
Associate Professor, University of Michigan Business School
and
Once
again, Wall Street Interactive hit my computer screen with their lead story
reading “Tech shares Lead Steep
Decline In Stock Market.” This
has occurred every other day for the last few weeks.
As a result of the volatile stock market for young firms, those employees
who were riding high with millions and concerned about what has been called
“sudden wealth syndrome” may now be suffering from “sudden loss
syndrome.” Stock prices for many
newer firms are soaring downward, and employees are finding their stock option
exercise price to be higher than
the price at which their firm’s stock is currently trading.
Employees are confused and concerned; many are watching stock price daily
– maybe even minute by minute as the ticker symbol and stock price scroll
across their computer screens. You
must be wondering what this means for your workforce.
What are the implications for retention?
Does this problem affect large as well as small firms, or only recent
initial public offerings (IPOs)?
IPOs
have drawn much public attention with the rush of dot coms and the huge success
stories that have been published, but the reality is that IPOs have been around
for years. And with all the
successes, there have been many failures. My
research over the last eight years has focused on IPOs, and as someone recently
told me, studying IPOs is like studying the fruit flies of management.
That’s because they live and die quickly, and in this type of high
change environment, important lessons can be learned that can be transferred to
other types of specimens – or in our case, organizations.
The
research that I have done involves obtaining data on cohorts of firms that go
public in a given year, profiling them by coding the data contained in each
prospectus, supplementing with surveys sent to members of the management teams,
and then doing statistical analyses to predict firm performance, which may be
stock price growth, growth in earnings per share, or firm survival.
The first IPO study that I did with Alice Andrews[1]
examined 136 firms that went public in 1988; a later study conducted with Linda
Cyr[2]
examined 535 that did their IPOs in 1993.
Since then, I have collected data on the nearly 1,000 firms that did
their IPOs in 1996, and the research effort continues with the 500+ firms that
completed IPOs in 1999, and we are tracking all IPOs in 2000.
In addition to the studies of yearly IPO cohorts, I have done case
studies of individual firms going through their IPOs.
This method involves interviews with employees and managers in addition
to surveys being collected from all employees in the IPO organizations.
It is the combination of large scale empirical studies and in-depth case
studies that leads me to several conclusions that will be shared in this
article.
One
observation from the IPO research is something that could be called the “dark
side” of the IPO. My hypothesis
is that firms, which could otherwise be successful, are harmed by the IPO
process itself. The phenomenon is
tied to the fact that the first year after the IPO is very critical for new
organizations. My observation is
that if you don’t do well the year following the IPO, you can fall off the
investors’ radar screens, stock will not trade, and you can suffer
tremendously. You have the
potential to become part of the “living dead” -
firms that are still public but whose stock is stagnant.
As you may guess, this is not a pretty place to be.
And – it is not a place where good employees want to come to work.
Why and
how do you enter the “dark side?” You
enter because the IPO is a critical and important organizational change event,
and most people don’t understand the IPO in that way.
The IPO is often seen as an outcome or an end event; it’s the time when
participants cash out. But life
goes on after the IPO, and if the IPO process is not managed well, a firm can
easily fall prey to something called “IPO.itis.”
Once this occurs, a business can quickly enter into the downward spiral
during the year after its IPO. And once the downward spiral, it is very hard to
recover. Let me describe the things
that lead to the IPO.itis.
C
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Symptom #1: CEO.itis.
Prior to the IPO, the senior management team goes on what is called the
“road show.” They visit with
potential investors and tell the company story over and over again.
They get lots of attention. They
waited for this event, and now it’s finally happened. The CEO (and other members of the top team) feel pretty good
about themselves; in fact, they feel really great about themselves.
And sometimes they forget that the company is not just them.
They can come back from the road show and the hype of the IPO and be very
much into “themselves.” Some people quit listening to employees.
The top team is wealthy - they buy lots of stuff.
They show up to work with new cars (maybe even more than one new car);
they buy yachts and mansions. And
employees see this. CEO.itis can
have an effect on morale, on feelings about equity, and on the CEO’s ability
to make decisions. When CEOs stop
listening to employees and start believing they are as great as people tell them
they are, they can start to lose touch with the reality of their business.
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Symptom #2: Everyone else
has more than me.itis.
I’ve seen this in every firm I’ve studied.
People don’t really know who’s a millionaire and who isn’t - but if
they’re not incredibly wealthy - they’re sure the person next to them is.
Perceptions of inequity are real, and they have a negative impact on
morale right away. In fact, it
starts before the IPO, when employees guess who has how many shares and
calculate how much different people will make on IPO day.
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Symptom #3: Investment
Banker.itis.
Not only is the management team focused on themselves, but as the IPO
details proceed forward, management enters into the world of
quarterly results (when most had really thought longer term prior to the
IPO). Executives are responding to
calls from the bankers, and they are taking time away from managing the firm to
managing the investment community.
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Symptom #4: I’m now left
out.itis.
A lot of companies that make it to the IPO get there because they developed a
culture that thrives on fast growth. Many of these cultures are open; managers shared information
with their employees (e.g. financial, sales, production, ideas, etc.).
But now as a public company, information is sacred.
It cannot be shared until made public.
Employees who felt part of something, and who felt part of an inner
circle because they had information, are now left out.
The culture changes, and to most people, it’s not for the better.
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Symptom #5: Oops, the stock went
down.itis.
One thing we know from the research that has been done in the field of finance
is that initial stock value (at the IPO) is usually
under priced. That means
there is a very good chance stock price will go up considerably immediately
after the IPO. And in a few cases,
stock stays “up.” But in most
cases, stock goes back down. Start-ups
strive to go public; employees and management see it as a major event. And the
psychology around stock price is amazing. Every
company I’ve met with (no matter what they look like) think they will be the
one to go up - and up - and up and stay up.
But reality kicks in quickly, and people are disappointed.
Consider the next symptom.
C Symptom
#6: Correlation.itis.
As part of my IPO research, I collected weekly data from employees who went
through the IPO process. The
measurement and communication process that was developed to study IPO firms has
since grown into a business called eePulse, Inc. (www.eepulse.com.).
The team at eePulse collects weekly data from employees in high-growth,
high-change organizations. In
addition to open-ended comments, a one-item metric that assesses employee pulse
or energy at work is also collected.
Studies
conducted by myself and the eePulse research team show that the correlation
between the weekly pulse measure and week-ending stock price is anywhere from
.40 to .90. That means that as
stock price goes up, employee energy goes up.
When stock price goes down, employee energy goes down.
Now, combine this tidbit with the fact that odds are very high that stock
price will go down after an IPO. And
what’s the cause – effect relationship? Short term, the direction is that stock price drives employee
energy at work. Consider how
readily available daily, hourly, or minute-by-minute stock price is with
today’s technology. Employees
watch stock price, and they react.
Longer
term, the result can be the “downward spiral.”
Stock price goes down; employee morale goes down; good employees leave;
they take company specific knowledge with them; employees who stay don’t feel
as good about their job; real customer service is affected; real sales are
affected; real production is affected, and then real earnings are affected.
Real earnings affect stock prices. Enter
the downward spiral. And in most
cases, management does not know how they got there.
Why? Because they are busy
with the other symptoms.
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Symptom #7: First
year.itis.
If you enter into the downward spiral in the first year after the IPO, and you
don’t stop it, it’s very hard to recover.
Bankers lose interest in you; the press releases are negative; it’s
hard to find good employees, and the management team is really distressed.
Avoiding
IPO.itis
How
do you successfully do an IPO and not enter into the spiral?
First and foremost, educate the management team – and keep educating.
And while educating, keep the management team humble enough so that
everyone in the group will sincerely listen to all employees.
It is impossible for management to know everything that is occurring in
their companies, and as rate of change increases (which happens with an IPO),
it’s even more important to listen. If
you listen, then you can head off problems before they spiral out of control.
Additionally,
each IPO firm should invest time to teach employees that stock price is
unpredictable. And it’s important
to continue sharing this message with employees.
If they work only for stock, and stock price goes down, your company can
quickly enter into the downward spiral. I
have done focus groups with employees and showed them graphs depicting the
correlation between stock price and weekly employee pulse.
Comments from employees are usually some variation of
“we worked so hard that week, why would they (the market) do that to
us?” Many employees, like most
people in general, don’t understand the stock market.
And the hype down the road to the IPO is strong - particularly if you
live in a geographic area that has a lot of start-up activity (such as Silicon
Valley). The press is focusing on
the successful cases, but there are more than enough failures or near death
experiences to make managers take IPO.itis seriously.
I
think that companies should bet on themselves and their own success.
And my research shows that success comes from the inside - from your
employees. In multiple studies, I find that companies with a high energy
culture succeed when they value their employees. And by success I mean stock price growth maximized, earnings
per share growing, and surviving when others do not.
Case
study: Indus International
One
of the IPOs I studied in depth is that of a firm called Indus International.
The CEO, Robert W. Felton (Bob), gave me access to his organization as it
went through its IPO in 1996. In
exchange for studying all employees at Indus, Bob asked me to share overall
trends and alert
I
knew Bob and Indus for three years prior to the IPO, and I found Bob to be a
visionary CEO who listened to his employees.
As Indus entered into its IPO, he wanted to maintain the clear and
continuous communication that he had been able make a key component of Indus’
culture. And to his credit, he
understood the temptations on the road to the IPO.
He wanted to stop rumors and misunderstandings before they occurred, and
he wanted critical, honest feedback from his own management team and employees.
As the
weekly data revealed trends and potential problems, Bob responded to them.
He did not wait until it was too late; he communicated with his employees
extensively during the IPO. At the
end of long and grueling days spent with potential investors during the road
show, Bob took time every evening to write to all employees in what he called
his “road show diary.” He
shared the experience with all employees, thus making them partners in the road
to the IPO. And as important issues arose via our weekly
communication process (that we called pulse) Bob and his management team
responded to issues even while they were on the road show.
I think
As
Indus employees expressed their fears and communicated rumors that were only
starting, Bob communicated to reassure them, and he made changes when
appropriate. For example, early in
the IPO process a rumor started that Bob was going to leave immediately after
the IPO. The rumor was not based on
fact, and Bob quickly wrote to employees assuring them that he was not leaving
Indus. Additionally, employees
wrote about problems with vesting, and the management team made last-minute
changes to assure more participation by employees and thus helped minimize
another symptom of IPO.itis (Everyone has more than me.itis).
After the IPO, when we studied the data and found the correlation between
stock price and pulse, Bob and the management team met with employees, sent
e-mail messages to them, and did their best to explain the reality of the stock
market (thus minimizing Correlation.itis and Stock went down.itis).
With
employee data on the radar screen, the management team avoided the temptation to
focus solely on Wall Street (avoiding Investment Banker.itis).
Even though the management team could not immediately share much of the
information as they once had been able to communicate with employees (due to
regulations associated with being a public company), maintaining the on-going
weekly communications that we started as part of the IPO study assured that
Indus did not suffer from “I’m left out.itis.”
The
symptoms of IPO.itis are complex, but the remedy may be simple.
Ongoing, sincere, and honest communication with employees can be a key
variable in helping a firm maneuver the IPO.
I studied Indus intensively during the year after the IPO, and through
real-time communication, I think Indus successfully avoided First
year.itis and entering into the downward spiral. This is not to say that Indus has not struggled after the IPO.
But under Bob’s direction, I think that Indus avoided many of the
pitfalls of a new IPO firm. And
those lessons learned were used to help the company as it went though further
growing pains, including a merger, international
expansion, and changes in the top executive team.
Lessons
for other high growth – high change organizations (moving from fruit flies to
mammals)
IPO.itis
is a disease that can attack an organization when it goes through a particular
organizational change event, the initial public offering.
But you don’t need to conduct an IPO to grow your business and/or
experience significant change. That
means you do not have to be an IPO to experience symptoms such as those found in
IPO.itis. Any organizational change can engender the same types of
human responses, and as such, I think you can minimize the negative impacts of
growth and change with the same remedy – constant communication and learning.
Fortunately, with today’s Internet-based technology, information and
processes to enhance fast and real-time communication are readily available to
organizations.
However,
the keys to success are not only getting information but being willing to answer
employee questions, make change happen, and communicate back to employees.
Bob Felton made his communication tool work by listening and responding.
He did not respond to every comment made by employees, but he carefully
chose issues that he knew were key to firm success and that were brought up by
multiple employees. The non-IPO
clients of eePulse, which include firms like Citigroup, Honeywell, and the
University of Rochester also make the weekly tool work because the managers
utilizing the system are anxious to take action in response to information
provided by their employees. And
their responses to employee suggestions have led to positive change that has
translated into improved productivity, morale, quality and firm performance.
I
suggested that the downward spiral starts because stock price causes changes in
employee energy level at work. But
a company continues downward or escalates upward because employee energy affects
real company productivity, sales, and earnings.
And these real outcomes eventually affect long-term stock price growth.
Companies that are here to stay and
that care about creating long-term value for their customers, whether
IPOs or not, can benefit from understanding organizational change through the
eyes of their employees. Because if
they do so, they can learn more and be better equipped to handle the types of
change that successful firms must master.
Contact
information:
Theresa
M. Welbourne
Associate Professor
of Organization Behavior and Human Resource Management
University of Michigan Business School
701 Tappan #4207
Ann Arbor, Michigan 48109-1234
Phone:
734.764.2321
Fax: 734.764.2557
twelbour@umich.edu
Chief
Executive Officer
eePulse, Inc.
1705 Woodland Drive
Suite 101
Saline, MI 48176
Phone: 734-429-4400
Fax: 734-429-4404
theresa@eepulse.com
www.eepulse.com
[1] Welbourne, T.M. & Andrews, A..O. 1996. Predicting performance of initial public offering firms: Should human resources be in the equation? Academy of Management Journal, 39(4), 891-919.
[2] Welbourne, T.M. & Cyr, L.A. 1999. The human resource executive effect in initial public offerings. Academy of Management Journal, 42(6), 616.629.