The fundamentals of finance will beones guiding light throughout the life of one’s business. Whether one has an idea that will become “thenext Uber” or is an already established business that wants to expand you’regoing to need to raise capital and knowing the steps behind this process iskey. Tied to knowing the steps behind raising capital one should have anunderstanding of the basic structures of money markets and what they’recomposed of. Companies that are going to be raising capital should also knowthe difference between the primary market (the part in which they raise thecapital) and the secondary (more speculative) market. Finally the importance ofstudying a company’s financial statements cannot be understated especially whenone is in the process of raising capital and in the eventuality that the entireaffair turns sour (or extremely well) one should also know financialrestructuring actually entails. Nowwhile the “unicorn” club is certainly exclusive there are some out there andmore important for us some might be poised to go public.
Airbnb is one of those “unicorns”that many are eager to go public. The markets have given this company avaluation of $31 billionshould they decide to go public Not that Airbnb needs any help from us lowlypeasants as they’ve “reportedly turneda profit in the last half of 2016” (Santo, 2017) but let’s speculate a bit. Airbnbis planning on declaring a holy war on the hotel and hospitality business thatwill completely crush them out of the business and they have a surefirestrategy that will do this. But there’s a problem, they need cash, massiveamounts of cash. So what does Airbnb do? They go public and raise that cash.When they go public they come out with their IPO (initial public offer) andthey issue some combination of bonds, common stock, and preferred stock to theentire Wall Street trading market that’s been salivating for years to get a pieceof this company. This here ends the role they play in the primary market. Inthe primary market a company opens up some percent of their company to thepublic so they can raise the capital they seek to gain.
This here is the onlytime in which a company ever receives cash directly from the public. After thishas happened everything that happens with the different types of securitiesissued by the company happens in the secondary market. In the secondary marketall money made is by the public trading parts of the company they own and itmakes no difference if it’s debt securities (that includes notes or bonds) orequity securities (common or preferred stock).
Important to restate that thecompany that issued the stocks for example doesn’t make any money off tradesthat occur in the secondary market. The second step after they’ve raised thecapital is figuring out what they’re going to do with all the cash they’veraised. This cash can be used to recruit new employees or on an expensivemarketing campaign or simply buy stock in their competitors company and performa hostile takeover. For the sake of our example here Airbnb has successfullybeat every single competitor they have in the world. With their absoluteworldwide monopoly they have nothing but profits in their spreadsheets and theymove on to the third step of spreading around the wealth to their stockholders,bonuses to their employees, and paying off their debt.
And finally as they’renow publicly traded companies they need to keep track of the value of the stockout in the market to ensure the stockowners maximize their gains. As we saw the financial markets playa key role in bringing together companies that need cash now and those thathave the cash and are willing to invest said cash. That is the basic structureof the financial markets: on one side you have the borrowers (those that needcash) and on the other you have the lenders, aka savers, who lend out the cashthe borrowers need. These financial markets are separated in two separategroups: money markets on one side which have longevity of 12 months or shorterand on the other side you have capital markets which deal with those withlongevity of over a year.
When the company first goes publicinvestors will want to look at all the financial data available on thiscompany. The reason behind this is simple: they don’t want to make a badinvestment. While some companies like twitter we see on the news that keepreporting losses but continue to hold such high regards not all companies arethat lucky. As an investor I want to make sure that the company I’m going toput my hard earned money into is financially sound. I want to know how muchdebt if any they already have what percentage they’ve already sold off beforethey went public and how their cash flow looks. As a publicly traded companythe accountants that issue these reports have to abide by some guidelines. Oneof these guidelines is the full disclosure principle.
Accountants must make allinformation that may be of importance to the shareholder known. (AccountingPrinciples, n.d.) And the rules of the FASB (Financial Accounting StandardsBoards) must be followed. Although it’s nice to speculate aboutthe perfect scenario in which Airbnb becomes a monopoly in the hospitalitybusiness it’s nothing more than a fantasy.
Let’s say that things aren’t allpeaches and cream for Airbnb. In this scenario they may need to look into afinancial restructure of their company. Instead of opting for a take over theworld route they may opt for some horizontal restructuring and buy out some oftheir competitors. Instead of simply offering cheaper alternatives to expensivehotels they can join the standard hotel business as we know it and force thehotel industry not only to fight them in terms of affordability but change thehotel industry completely from within as well as from outside. In somewhatrecent news UnderArmour decided to buy two fitness apps to incorporate theminto their model. (Gibbs, 2015) Buying out companies doesn’tnecessarily need to imply a hostile takeover but instead a mutually beneficialagreement in which two companies in the same field (in this case fitness) joinsforces to become stronger together.
Another method they could go is thevertical restructuring route but from my point of view Airbnb already has thiscovered. They “franchise out” because they don’t own the properties beingrented. But if this were their model(like McDonalds) it seems like everything has lined up beautifully thanks toRepublicans in Congress to deliver another year of big growths. (Rogers, 2018) Airbnb however simplyact as the middle man for renters and those who want to rent. And the mostcomplicated of all is the corporative restructuring in which they need toaddress all the difficulties of changing how dividends are paid, establishing anew vision and mission for the company and much more.
Knowing the fundamentals of financeis important to guide one through the life of one’s business. First of all it’simportant for those going into the public trading game to know how they canraise their capital. When entering the money markets its key to know thedifference between the primary and secondary market as well as their basicstructure. The longer the life of a company the more likely it is that it willevolve and go through a process of restructuring and knowing the differenttypes available to the owners can be valuable. And throughout the entireprocess of going public the accountant’s role cannot be understated as they areresponsible for ensuring that the financial statements that investors will lookat are in order and not misleading in the slightest.