About Don Thurston

An Initial Public Offering is all About Timing

Imagine this scenario. To the outside observer some thing big was under negotiation. Only the wealthiest and well connected were engaged in the intense discussions.  They were surrounded by analysts, legal advisors, accountants,  and financiers. The subject was most certainly a very big deal. The investment banker’s mouths watered as they considered the magnitude of the transaction leading to a very generous transaction fee.

The agglomeration of assets was unprecedented. While a single product generated the majority of the cash flow, the assets  included minerals, energy, forest products, food products, real estate and retail, all with huge long term potential. Only the most visionary investors saw very far beyond the immediate opportunity. Many years passed before some realization emerged about their immensity.

Discussions ebbed and flowed as to valuing assets, to  recruiting  investors and to verifying the validity of land titles. Proforma income statements and balance sheets offered little comfort. While the immediate demand for the primary product seemed solid, there was doubt about the longer term. A secure supply of the principal product was a matter of conjecture. There was no certainty as to costs and reliable transportation could only be wished for. Security was an added risk. In favor of the project was an almost one hundred percent monopoly. Additional helpful factors were the emergence of the limited liability corporate structure and double entry book keeping which provided transparency.

Business people familiar with corporate financing cringe at the difficulties such a deal presents. Clearly the owners expect a very large premium, well over an amount supported by earnings alone. Exhaustive arguments lasted many weeks as all the parties strived for a mutually satisfactory valuation.

Some  additional exploitable assets had been identified, providing at least a rough estimate of future cash flows. A larger issue was the owner’s conviction that value existed well beyond any current quantifiable amount.  The underwriters had some sympathy for this based on the sheer vastness of the assets. But the parties had reached an impasse.

Additional financing for current operations was becoming a necessity in order to take advantage of the immediate opportunity. Finally a compromise was reached with the understanding that additional funds could be accessed when values were less opaque.

Now fast forward to 2012, about four hundred years after the original agreement. Today the owner of the Hudson Bay Company is in negotiation with investment bankers to raise additional funds once again by accessing the public markets. The asset is a shadow of its earlier self. Nevertheless the negotiations are as intense as ever and supported by an understanding reached four centuries earlier.

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