IPOs in the HR Space: Should I Stay Private or Go Public?

A recent Workforce Management eNewsletter article entitled Taleo's Next Version: Public Company discussed Taleo's plan to go public (there is no formal IPO date yet).

This got us thinking about IPOs and the human resources marketplace - we want them to succeed because it's good for the HR space.

But unfortunately IPO's in the human capital marketplace have been a mixed bag over the years. The following is a sampling of HR companies who went public over the past two decades, their IPO price and current share price. All prices are per-share and adjusted for splits. IPO prices are adjusted first-day closes.

Clearly, the most successful have been the payroll processing firms:

• ADP: IPO 1983 at $0.48. Current Price: $42.03
• Paychex: IPO 1990 at $0.21. Current Price: $33.10

Some other very successful companies have been:

• Ultimate Software: IPO 1998 at $9.00. Current Price: $16.38
• Kronos: IPO 1992 at $2.42. Current Price: $41.21
• TALX: IPO 1996 at $3.51. Current Price: $28.37

Hewitt Associates has been average:

• IPO July 2002 at $21.30. Current Price: $26.93 (about an 8% annual year return, not bad the last three years)

You can't retire on your returns from these two companies but at least you haven't lost money:

• Gevity HR: IPO 1997 at $15.41. Current price: $20.36
• Workbrain: IPO May 2004 at $16.30. Current price: $16.75

The Outsourcing firm Exult was not good (for investors) nor was Workstream or Webhire (as of recent):

• Exult: IPO 2002 at $10. Purchased by Hewitt in 2004 for $6.30 per share.
• Workstream: IPO 1999 at $8.56. Current price: $1.68
• Webhire: IPO July 1996 at $52.50. Current price $1.01

To soon to tell but Kenexa is the latest HR firm to go public:

• Kenexa: IPO July 2005 at $12.68. Current price $12.95
  

Why do companies go public? The Taleo registration with the SEC indicates that the company intends to use the proceeds from the stock sale for expansion of sales, marketing, and research and development; paying down debt; and potential acquisition of "complementary businesses, products and technologies." This is a standard boilerplate statement for most any S1 filing. But generally speaking, companies should go public in order to (and in this order): (1) raise capital for investments and expansion to benefit customers and investors and (2) reward and create equity stakes for employees and owners. Unfortunately, IPOs are too often motivated by the wrong reasons including the desire of Wall Street, VCs, and other financial backers to receive a "big pay day."

However, if your cash flow can support your ongoing investment and expansion needs, there are advantages to staying private. A number of privately held and successful HR companies have chosen this route. Management does not have to answer to stockholders, isn't bogged down with having to make regular filings with the SEC and having to comply with Sarbanes-Oxley, doesn't have to worry about "making Wall Street's quarterly numbers" and is generally free to actually run the company and make more sound business decisions -- even if they impact short-term earnings. According to Forbes (www.Forbes.com), the 10 largest private companies in 2004 were: 1. Cargil: Crops, 2. Koch Industries: Oil & Gas Operations, 3. Mars: Food Processing, 4. Publix Super Markets: Grocery, 5. Bechtel: Construction Services, 6. PricewaterhouseCoopers: Business Services (including HR services), 7. Ernst & Young: Business Services (including HR services), 8. C&S Wholesale Grocers: Grocery, 9. Meijer: Grocery and 10. HE Butt Grocery: Grocery.

Should Taleo go public? Taleo's senior leadership knows the reasons for their decision and we have to assume it is based on sound, fundamental business needs. We wish them success. It is always great to see this kind of activity in the Human Capital marketplace as it raises the visibility of the entire space which benefits all of us.