Honestly, it’s an uncertain time to take your growing tech firm public.
Not a single tech firm went public in the first quarter, and analysts don’t expect much improvement before the year’s end. That situation might be behind recent reports that Brian Lee and Jessica Alba’s socially conscious Honest Co. could be considering a sale to a corporate parent rather than an IPO.
Whether an exit through a sale is more beneficial than one via a stock offering, which might have to wait until the markets ripen, could be a matter of how much pressure the Playa Vista company is facing to unlock shareholder value.
“What apparently feels like a sellout for the fans of the products might actually be what’s most beneficial for them,” said Michael Napoliello, a professor of entrepreneurship at USC’s Marshall School of Business. “There is precedent for this, and it’s typically a win-win.”
Napoliello noted that companies such as Procter & Gamble and Johnson & Johnson are the most likely suitors if Honest were to go the sale route, both in terms of interest and the ability to afford the eco-friendly home goods and family-oriented products brand. Honest, which reported revenue of $150 million in 2014 and was said to be on track to hit $250 million last year, was valued at $1.7 billion in August when it raised a $100 million round of VC funding.
Core identity
One of the company’s greatest assets is Alba, 34, whose star power drives the brand.
She and her partners put in three years of research before approaching investors to launch the business in 2011, and when asked if she would stay on after a potential acquisition during a talk at USC last spring, Alba replied, “Yes, if they’ll keep me.”
She noted her interest in launching new lines, such as her latest Honest Beauty makeup products, and maintaining a direct-to-consumer approach to find out what the most urgent needs are in the marketplace.
That desire to continue to have a say in a brand’s future has been achieved at other mission-focused small companies.
Burt’s Bees, for example, was acquired by Clorox Co. in 2007 for a reported $925 million, and natural toothpaste and personal care products manufacturer Tom’s of Maine was purchased by Colgate-Palmolive Co. for $100 million in 2006. In that deal, the founders of both acquired companies retained a 16 percent ownership stake to assure continuity in the brand.
If the culture can be maintained, a sale might prove more appealing than an IPO.
While a stock offering offers an infusion of cash, it doesn’t bring with it the infrastructure of a corporate powerhouse that can boost efficiencies in research and distribution and, in turn, free up resources that allow leadership to focus on the broader mission.
“It’s a paradox, really, because it seems like the idea that a people’s product – a socially-conscious company like Honest – should have a public component to it,” said Napoliello. “But the public likes mission companies with their hearts, not necessarily with their pocketbooks.”
Defining issues
Who the right buyer might be will depend in large part on how Honest is defined. Is it a tech company or a consumer-products business? Though it sits firmly on the consumer products side, 70 percent of its revenue comes from online purchases, so the answer could make a difference when it comes to striking a deal with a suitor.
Honest certainly planted its physical flag on the digital side, decamping from Santa Monica to move into an 83,000-square-foot headquarters in Playa Vista, where tech giants such as Google Inc. and YouTube have set up shop.
“Setting aside the IPO market, the question is whether or not the standalone life associated with going public fits the goals of the Honest Co.,” said Jennifer Post, a securities lawyer at Raines Feldman in Beverly Hills.
Being absorbed into a public company would allow Honest the benefits of going public without the stress of meeting quarter-over-quarter growth demands from shareholders.
What’s more, having a corporate parent might offer the company, already facing two class-action lawsuits that question claims Honest has made about its all-natural product line, recover from missteps. That’s not an option when management is directly answerable to the public.
How much the cases – whether Honest prevails or not – will affect valuations must also be considered.
“Bad publicity never helps in the capital markets – in public or private,” noted Post. “Whether these issues are valid or not, any kind of insecurity can affect these transactions. Emotion is part of it.”
Going public
Lee, Honest’s chief executive, reportedly met with representatives from Goldman Sachs and Morgan Stanley in February to prepare for a public offering, though nothing has yet been filed.
“If they’re feeling pressure from their investors for liquidity – to have the ability to sell their shares and unlock the value of their stock – it makes sense to consider a sale instead,” said Post.
Common wisdom is that the IPO market is soft and will remain soft through the rest of the year, driven down by a few tech IPOs last year that haven’t performed to expectations.
Post said the IPO window – and whether or not it’s open, closed, or even a possibility now or in the future – is a question a number of private firms are facing right now in the tough, slow-to-recover economic climate.
“It’s an election year and it’s a particularly tumultuous election cycle,” she said. “There are a number of wild-card factors here at play, too.”
