Companies of all sizes face turbulence after going public. Take one of the social media unicorns that went public. Its shares jumped more than 40 percent the day of its hotly-anticipated $24 billion initial public offering (IPO) in March 2017, but by July that year the stock had dropped below its $17-a-share issue price and now trades 30 percent below that level. Many U.S. companies that listed in 2018 faced a similar fate: by late December last year, two-thirds of newcomers to public markets had dropped below their IPO price.

There are a variety of reasons for shares “breaking” their issue price: market volatility, weak earnings reports that miss expectations, product delays, a lack of experience when communicating with shareholders or too little support from the investment bank that underwrote the share offering. In the case of the previously discussed social media company, sentiment cooled as investors became concerned about increasing competition from another social media juggernaut. In 2018, monthly active user-metrics stalled and drove a steep decline in the share price.

What should newly public companies do when sentiment turns against them? When scrutiny is intense, one must take action quickly. Investors need reassurance, says Jim O’Donnell, Senior Director with Alvarez & Marsal’s (A&M) Corporate Transformation Services practice. “Companies that fall below their IPO price are vulnerable,” he says. “This vulnerability can shed a negative light on the independent board members, whose role it is to advocate for shareholders and seek to facilitate shareholder value creation. If the stock price has fallen and you cannot get institutions to buy it, then you’re not creating shareholder value.” In some cases, he adds, “you get an avalanche of selling, then the stock has no buyers, research coverage dries up and nobody wants it – it becomes an orphan stock.”

“Due to the increased amount of private capital available from investors such as PE firms, venture capital firms, as well as cross-over products run by traditional long-only and hedge funds, companies have had the flexibility to stay private longer. As a result, they are going public at a later stage of their development,” says Ashley Myles, Director with A&M Corporate Transformation Services practice in New York. “The net effect is that post-IPO shareholders may miss out on the initial spurt of rapid growth experienced by many startups. Potential shareholders may be buying into a company that has matured past the growth acceleration of its start-up years, therefore limiting the price appreciation potential of the company’s stock post-IPO,” Ms. Myles explains.

A notable ride-hailing and food delivery app plans to raise $10 billion in an IPO slated for later this year which may ultimately value the company at $100 billion, however figures in its S1 IPO prospectus filing indicated revenues were plateauing in the final quarter of last year as competition was increasing from rival service offerings.

“For companies that have raised several rounds of financing on the private side, the valuation demanded upon going public is often even higher and the public offering tends to be priced for perfection. The management team needs to execute perfectly to justify the lofty valuation,” says Ms. Myles. “As companies go from private to public, there is a transparency that comes with that move. The bright light of quarterly earnings calls and research analyst notes highlight potential flaws that were previously less apparent. Whether that’s supply chain issues, burdensome SG&A or a new competitor in their market putting pressure on top-line growth, the flaws are magnified under a microscope.”

“Valuing stocks for an IPO is a balancing act between the expectations of the early-stage investors looking to cash out and the interests of long-term shareholders seeking a price which can continue to appreciate. At the end of the day, though, IPO valuations are based on financial fundamentals, and when a public company has to adjust these figures downwards, it has a ‘profoundly negative’ impact on the share price,” says Mr. O’Donnell. “Valuations can sometimes look eye-popping, but within that is a financial thesis based on an implied growth rate. For instance, if the market’s expectation is for a 25 percent growth rate and it then slips to 20 percent, that can have a very adverse impact on the stock price - not a 5 percent price decline but potentially a 50 percent price decline.”

“When working with companies in this position, the first step to turning the share price around is to quickly diagnose the problem,” says Mr. O’Donnell. The next step is to identify the changes the management team must put in place to improve performance and attract institutional buyers. “Newly-minted companies may not have seasoned management teams, they may not know how to scale profitably or how to operate at the level of intensity required by public capital markets,” he says. “A&M’s advisers work with management teams to put in place best practices across the board, whether that’s controlling SG&A spend or addressing the cost of goods. As a public company, you have to be really top-notch with how you handle those measures,” adds Mr. O’Donnell.

Even top management teams and board members cannot rest on their laurels. They need to look at their business objectively and figure out where they can continue to improve. We work with management teams and boards by providing a third-party, unbiased, outside-in perspective. This can highlight areas of the business that make the company most vulnerable and ultimately create change and shareholder value. “We bring a sense of urgency and a mandate for change,” he adds. “As a responsible board member, how do you restore the value that has been destroyed?”

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