Becoming an initial public offering (IPO) is an exciting development in a company's business. It's one that comes with stringent securities regulations and high expectations from shareholders. It's imperative not to get so caught up in the elation of qualifying as an IPO, that a business doesn't diligently dot all of its i's and cross all of its t's.
Much careful preparation and forecasting need to be done before a company is truly ready to enter the marketplace. Business owners need to be aware that while shareholders are always looking for companies that are innovative enough to become industry leaders, they expect honesty and transparency at the time of the IPO announcement and in the days following. As the new IPO company, Blue Apron, is finding out, not being honest and transparent with shareholders can lead to serious financial consequences.
Shareholder Expectations of an IPO
Companies that fail to anticipate all of the extra costs that come with becoming an IPO may find themselves unexpectedly cutting into marketing and production costs. Legal and accounting fees range between $200,000 and $500,000. Shareholders expect that the company is primed to continue making strong profit margins beyond any additional start-up costs related to compliance.
Business owners need to be aware that shareholders will be continually scrutinizing their strategic planning, financial results and share prices. Shareholders will also be looking at executive compensation, management and director's performance, and the insider trading record. Shareholders expect to see records that are current and in tip-top shape, including detailed audits, a public quarterly report and annual financial reports.
Prior to the IPO, business owners have been used to running the show according to their own business plans. After the IPO, shareholders will have more influence in board decision-making. Business owners must have a willingness to share their decision-making with board members and shareholders.
Shareholders will expect the new IPO to abide by the Sarbanes-Oxley Act and other important laws and regulations. This includes knowing and practicing good corporate governance, such as having a majority of board directors who are diverse and independent.
Blue Apron: A Great Concept with a Bad Start
The owners of Blue Apron came up with a new product that quite literally caters to the busy, two-person wage-earning family. For a nominal cost of about $9 per serving, Blue Apron delivers dinner kits to their customers' doorsteps, complete with fresh ingredients and recipes to make fast and healthy meals. After a busy day at the office and tending to the kids' after-school activities, families can get a nutritious dinner on the table in record time. Families also save time in making grocery lists, planning meals and grocery shopping.
Another thing that Blue Apron did right was to create a culture and vision that appeals to today's environment-conscious consumers. Blue Apron promotes regenerating the land and reducing food waste, along with eliminating the middle man.
While the concept of Blue Apron's meal kits was visionary and innovative, marketing costs started high, at about $94 per customer. Unless Blue Apron can bring marketing costs down, the company's profitability margins will be difficult to justify to shareholders.
To make matters worse, stock prices quickly dropped, alarming shareholders, who took swift action against the company.
Shareholders Quick to Confront Missteps at the IPO Offering
Shareholder Ahmed Chaudhry, along with purchasers of Class A common stock, filed a class-action lawsuit against Blue Apron for 'misleading' and 'untrue' statements in its filing with the SEC, prior to its public offering. The suit names Blue Apron's IPO underwriters, which include Goldman Sachs, Morgan Stanley, Citigroup Global and Barclays Capital, for failing to disclose certain issues prior to the IPO.
The lawsuit targets four allegations that shareholders believe will negatively affect their investments:
- Delays at the new factory in Linden, New Jersey, would cause new product rollouts to be delayed.
- Blue Apron made a decision to reduce advertising expenditures in the second quarter of 2017, which could negatively impact sales in future quarters.
- Blue Apron was aware that Amazon was actively looking to acquire assets to enter the pre-packaged meal delivery business and they didn't disclose this information to shareholders.
- Blue Apron was not always able to meet their standards of on-time delivery and meal boxes sometimes lacked ingredients, which negatively impacted customer retention rates.
Blue Apron has since acknowledged having setbacks due to the factory production issues at the Linden, New Jersey, facility.
Blue Apron Faces Multiple Class-Action Lawsuits and Financial Consequences
The public concerns and actions of shareholders have had dire consequences for Blue Apron. The company reduced the cost of IPO shares to just $10, down from the initial projection of $15-$17.
Recently, additional law firms have come forward with similar allegations, and they are seeking additional plaintiffs.
The Impact of Competition and Growing Pains for IPOs
Amazon purchased Whole Foods Market for $13.7 billion shortly before Blue Apron's IPO offering to set the wheels in motion for them to enter the meal kit delivery business. The acquisition, along with Amazon's public intention, was well-publicized, so settlements could consider it a heads-up for Blue Apron's investors that a strong competitor was on the horizon.
It's worth noting that IPOs are no strangers to class-action lawsuits. Shareholders take notice when stock prices drop and position themselves to lay blame somewhere. The problem has coined a new term called 'stock-drop challenges.' IPO class-action lawsuits typically get settled because the burden of proof is difficult to overcome. Lawyers for the plaintiffs have to prove that the company's statements were material and false, and that the plaintiff relied on them as true statements.
Important Takeaways for IPO Companies Related to Shareholder Relationships
It takes more than a great idea and large assets to take a company into the public trading arena. Business owners need to anticipate shareholder expectations and actively cater to them. They also need to stay on top of and address any developing problems related to production.
Shareholders expect companies to know, acknowledge and disclose issues where competitors might gain an edge.
It's also wise to be transparent with shareholders about changes in marketing plans that may negatively impact the returns for future quarters.
Companies that fail to get out of the gate with a strong, trusting relationship with their shareholders will have troublesome consequences with shareholders over the short and long term.