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Friday, April 02, 2004

What Does an IPO Cost?

Reported by Theresa Sim

Just how much does it cost a fund form to go public? Because one dozen or so fund firms are publicly owned, chances to learn about the costs first hand are few and far between. Yet, Tuesday’s S-1 filing by New York-headquartered Cohen & Steers gives a glimpse at those costs.

The REIT fund specialist filed a preliminary prospectus with the SEC for a public stock offering to raise as much as $100 million. The company has 74 employees and manages over $15.3 billion in assets.

In the prospectus, the fund firm estimated the decision to IPO will drain approximately $10 million annually from its bottom line compared to its operations as a private firm. The new costs include $3 million for reporting and professional fees, and $7 million in additional taxes. In addition, investment bankers also typically take seven percent of the funds raised through the offering, but that is a one-time cost.

Those costs are substantial. Cohen & Steers posted net income of over $12 million in 2003 while its net income in 2002 and 2001 was $8.4 million and $6.6 million, respectively.

To be sure, the increase in taxes may be a shift rather than a new burden to the firm. It is now structured as a subchapter S corporation, which means its profits are passed on to its shareholders and those shareholders pay the taxes as part of their personal returns.

In preparation for the IPO, the firm will convert to a subchapter C corporation, meaning that it will pay taxes at the corporate level.

Still, as that leaves $3 million in new costs, is the IPO worth it?

While Cohen & Steers officials declined to talk about the IPO, the filing itself states that the firms has "planned increases in marketing, product offering, [and] distribution and targeted advertising."

The filing also states that company officials believe that going public will increase awareness of the Cohen & Steers brand.

While the filing does not discuss what shares will be sold -- existing shares owned by insiders or newly issued shares -- the IPO will likely create a windfall and create liquidity for the firm’s two founders and co-CEOs Martin Cohen and Robert H. Steers.

The disclosure of top officer compenstation also creates another, nonmonetary, cost of an IPO. That cost is the fact that everyone will now know just what the bosses are making.

Indeed, neither of the two co-CEOs and founders of the firm has been hurting in recent years. The filing shows that both Cohen and Steers earned a base salary of more than $1 million and bonus of $4 million in 2003.

Their payout was even greater in 2002 when the two earned a total bonus of $10 million on top of their salary. In 2001, Cohen and Steers each received $2.2 million in bonuses.

Still, the pair will each take a possible pay cut from previous years if the company goes public. Both has agreed to accept a $500,000 base salary with an annual bonus between $1 and $5 million over the course of their new employment agreements. That apparently caps their compensation at 2002 levels. 

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