According to Brau and Fawcet (2004), the most common reason CFOs choose to provide an IPO on their firm is to create public shares for use in future acquisitions. While Rosetta Stone may not have immediate acquisition plans, the public offering of their shares will provide new capital for them to continue to expand. Only 5% of their revenue comes from outside of the United States, and with increased capital from an IPO, Rosetta Stone can look to pursue new markets (Schill, 2009). Whether they plan to increase their market share through internal investment or acquisitions of competitors, the increase in available capital is a huge advantage for a firm with such an aggressive growth strategy in mind. Conversely, many companies chose an IPO as a first step when trying to create a fair price if they were to be taken over. There is the threat of major companies with deep pockets, such as Apple and Microsoft, entering the language software business and this IPO will help establish a market for the potential acquisition of their brand.
Another reason firms choose to go public is that it allows their investors and current shareholders to cash out. Private equity firms ABS Capital Partners and Norwest Equity Partners, who supplied a great deal of capital in order to allow for expansion in 2006, are in position to profit a great deal on their investment if Rosetta Stone goes public (Schill, 2009). Insiders with this strategy tend to be very opportunistic; seeking a time to go public when they believe the company’s overall value is at its highest. However, this reason alone is seldom the sole deciding factor amongst CFOs when determining whether to go public or not, as less than a third surveyed rated allowing venture capitalists to cash out as important in their IPO decision making process (Brau & Fawcett, 2004).
Half of CFOs surveyed stated that allowing their brand to enhance its reputation and image was an important motivator when going public. Maksimovic and Pichler (2001) recognized that an IPO could allow a company to gain a first mover advantage. Rosetta Stone is one of very few companies in the electronic self-study language market and with this opportunistic IPO generating a great deal of publicity, they will increase their likelihood to assert dominance and unrivaled brand recognition in this underpenetrated market. Bradley, Jordan, and Ritter (2003) added that analysts in IPO cases are often overly optimistic in their projections; further motivating companies to go public. While Rosetta Stone may be fully capable of achieving their future goals of an aggressive growth strategy without an IPO, the current high expectations for the company coupled with an improved reputation for the brand increase the attractiveness of an IPO at this time.
Loss of Control
It is also important to consider the disadvantages an IPO may present. The leading concern of CFOs who reject the idea of going public is the fear of losing decision-making control (Brau & Fawcett, 2004). Once Rosetta Stone is a publicly traded company, their main obligation will be to serve shareholders by creating as much value for the company as possible. This, however, will not change much for a company like Rosetta Stone who is looking to grow as much as possible in upcoming years. While the loss of control that comes with an IPO may present some concern to Rosetta Stone, it does not seem to be a strong negative factor.
While only a mere 32% of CFOs who decided to withdraw from and IPO stated their reluctance to disclose information to their competition as an important factor, this negative consequence of an IPO should be a major concern of a company in a young and growing industry (Brau & Fawcett, 2004). Upon going public, Rosetta Stone will be forced to reveal a great deal about their operations. Many software companies with deep pockets would learn more about...