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Cosmetics company L'Occitane en Provence is faced with the challenge of deciding whether it is the right time to go public and where to list if it so decides. It is looking into listing on Euronext in Paris which is close to the firm's headquarters in southern France. Or in one of the large exchanges in the United States or even in Asia where it is expected to grow. This case study discusses the advantages and disadvantages, including the costs, of going public. It also tackles valuation implications and how a prospective public firm that operates in a global setting resolves the challenges it is facing.
Bo Becker; Daniela Beyersdorfer; E. Scott Mayfield; Mayuka Yamazaki
Harvard Business Review (212051-PDF-ENG)
November 15, 2011
Case questions answered:
- Should L'Occitane en Provence do an initial public offering (IPO)? What are the benefits to the owners and to the firm of doing so? Costs and disadvantages?
- What is the value of L’Occitane’s equity? Use DCF and multiples to assign a price to L’Occitane’s shares?
- In case of an IPO, which stock market would you recommend? Why? What considerations should determine the location choice?
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Case answers for L'Occitane en Provence
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1. Should L’Occitane en Provence do an initial public offering (IPO)? What are the benefits to the owners and to the firm of doing so? Costs and disadvantages?
Mr. Geiger has to weigh the pros and cons of taking L’Occitane en Provence public. As an owner, he would be able to realize profits on his investment in L’Occitane although he might be constrained by a lock-up period. Moreover, he can liquidate parts of his investment and use those proceeds to diversify his portfolio which is likely to be highly concentrated in L’Occitane.
From an owner’s point of view, the disadvantages would involve less control over the firm as well as a reduced ability to pursue long-term strategies that might not be in the interest of short-term performance-oriented investors. From the firm’s point of view, there are various benefits involved.
Firstly, the capital raised can be used to serve the financing needs for further growth that L’Occitane en Provence targets. As another funding source becomes available, greater future financial flexibility is warranted.
In an industry that heavily relies on marketing and brand awareness, the status of a public company and hence the increased attention by media, analysts and investors may increase product recognition/awareness and serve as an advantage in hiring top talent. The latter can also be compensated with stock options which also ensures the alignment of interest between shareholders and employees.
The publicly listed shares can also serve as an alternative currency in acquisitions. By attracting the interest of analysts and establishing a close relationship with the book runner, L’Occitane en Provence can reduce its future financing costs. Additionally, with a broader ownership base that is diversified and has a lower cost of capital, the valuation of the company increases benefitting current owners as well as the company.
There are however also costs involved. First, the underwriter, accountants, lawyers, and marketers require fees that amount to up to 10% of the offering volume. IPOs are also frequently underpriced due to various reasons resulting in…
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