03.12.2020

Family businesses belong to the stock exchange. They will receive new financial capital and resolve their succession issues

Every IPO is one of the key business events. Often, family businesses decide to take such a step. In this way, they can effectively resolve their succession issues, preserve the business value for future generations and obtain funding for further expansion, says Jiří Kovařík from the Prague Stock Exchange in an interview.

The pharmaceutical company Novartis, the German carmaker Volkswagen or the South Korean technology company Samsung. Examples from around the world show that family businesses belong to  the stock market and can be successful there. Business size does not matter. For example, the Prague Stock Exchange has launched the START market, thanks to which even small and medium-sized companies can receive capital from investors. And it works.

“We can recall the recent successful primary subscription of shares of the family company Pilulka, which enjoyed great investors´ interest. The successful IPO also showed the strength of local investors, “says Jiří Kovařík, who is in charge of the acquisition of new issuers on the Prague Stock Exchange.

According to him, the START market can be a pre-stage to how to behave in a stock market environment and possibly prepare to enter the senior main market, where the companies can reach out to foreign investors.

Why do you think family businesses are listed on the stock exchange?

A family business is a company like any other. That is why its needs are identical to the needs of any other companies. It regularly addresses issues, such as growth, expansion, acquisitions, investments, and related financing. Regarding the financing, the stock exchange is one of the possible solutions.

So, they can go to the stock market mainly for capital…

Admission to the stock exchange is not just about securing financial capital, but it also brings several positive side effects that may be important for different types of companies. For example, for a company that sells its products to a wide group of people, a very important element associated with entering the stock market is increased publicity, and therefore, an increased brand awareness. For other companies, increasing the credit that publicly traded companies generally have can be a very welcome added value. This can play a positive role in tenders.

Nevertheless, family businesses have their own specifics compared to other players in the market.

Definitely. What I would like to mention for family companies is undoubtedly the opportunity to preserve the value of the company for future generations. Even in a situation where the next generation does not want to participate directly in the management of the company.

What do you mean?

Many founders of successful companies deal with the issue of succession. Take a situation where you have been building a company all your life, the next generation is not interested in management and is dedicated to a completely different field.

What to do in such a situation?

If you decide to sell the entire company, you will capitalize on your efforts so far, but you will get into the second problem that you will have to solve – where to invest the funds obtained. You left a field that you had known well for decades. You are heading in a new and often unknown direction. You need to find suitable investment opportunities for your money, either alone or with the help of professionals. So, you are moving significantly on the investment risk scale.

What about to keep a smaller share, withdraw from the company’s management and enter the stock exchange.

Yes, that is exactly the preservation of value I have mentioned. The solution offered by the capital market, which many family companies west of our borders have taken, is to list part of the company on the stock exchange. This not only partially capitalizes your efforts so far, but also hands over the company to the professional management. You have an influence corresponding to your share as a shareholder on the further functioning of the company.

Are there any other benefits of listing that you didn’t mention? 

An important advantage is the possibility of re-raising capital, much faster and easier than with the primary subscription. In short, you can benefit from the work you have done during the initial subscription of shares and use it very effectively for financing in the future.

There are many examples in the world of successful family businesses that are publicly traded on a stock exchange.

For example, Walmart US belongs to the Walton family. The stock exchange listing is also common in Germany, the Volkswagen carmaker is still controlled by the Porsche and Piëch families. What can Czech family businesses take from this? First of all, it is a clear proof that family businesses belong on the stock exchange and can thus operate efficiently for generations. As already mentioned, the preservation of value works great. The capital market is therefore definitely one of the options that family business owners should take into account when considering the future re-organization of the company.

And what about companies that do not achieve billions in turnover? Isn’t the stock market just for the biggest players?

The START market, which is similar to the main stock exchange, is intended for small and medium-sized Czech companies. Entering this market is less administratively demanding and companies can get along better with the stock market environment. Their next step may be the transition to the senior market, which entails slightly more obligations, but also offers a much wider range of investors, especially among foreign investors.

The company Pilulka, managed by the Kasa brothers, can be mentioned as a very successful entry into the START exchange market. Were you surprised by investors´ interest?

In the case of the Pilulka issue, several factors came together perfectly, which greatly supported the success of its entry to the stock exchange. The combination of the e-commerce sector with the pharmaceutical industry is simply the absolute winner at this time. Add to this the charismatic management of the company and the owners who have extensive experience in the field of e-commerce. We have expected that this subscription could be very successful among investors. The banks that participated in the IPO also did a perfect job. oFr example, they abolished fees for placing a purchase order for retail investors, which undoubtedly also had a very positive effect on the demand for Pilulka shares.

How will the Pilulka story help the Prague Stock Exchange?

From the point of view of the stock exchange, this IPO was, of course, very important. First of all, it has demonstrated the strength of local investors, both small and institutional ones. There was also an interest among the funds, even though it was a relatively small issue from the point of view of this type of investor.

What are the costs for a smaller family business that decides to go public? What must they meet?

Costs vary from case to case. However, in any case, I can say that they are undoubtedly competitive with charges that are included in other types of financing. The company will need a professional advice for all the tasks, and the charge for this service will be the main cost. In general, it can be said that the charges are low units of percent of the capital raised.

So, can we say that the START market has proved to be successful?

There is a great interest among companies, and this confirmed that the establishment of such a market was the right step. Finally, Pilulka, although it is one of the companies that could aspire to enter the “senior” market due to its size, preferred to choose the START market as its first step.

I have a feeling that many Czech companies are afraid that they will have to lay out their cards and publish detailed financial information.

This is not just your feeling. Virtually everyone has concerns about public disclosure. However, it is also a very well-known myth. Although publicly traded companies have to share their financial results with their shareholders, this is nothing unusual. Finally, every joint-stock company is already obliged to publish its annual results in the Business Register. The idea that such information will be used by competitors is thus completely odd. Competitors in the market know each other well, even if they are not publicly traded companies. After all, it is a necessity for their successful functioning. The fact that one of the companies decides to enter the stock exchange will thus give it advantages we have already mentioned.

What are the risks of listing during a coronavirus pandemic? Many companies around the world have withdrawn from the primary share subscription.

On the other hand, many other companies have made very successful subscriptions. Every exceptional situation brings risk on one side and the opportunity on the other. There are certainly fields that suffer greatly in the current situation, but on the contrary, there are fields for which the current situation is a great opportunity. And it’s not necessarily just e-commerce, where it’s obvious. In any case, the market has not stopped, and companies are successfully entering the stock market even at this time. Finally, we also recently had two very successful primary share subscriptions at Prague Stock Exchange.

AUTOR: JAROSLAV KRAMER, E15

03.12.2020