You Have Been Hired as an Investment Banker by L’occitane. Should L’occitane Do an Initial Public offering (ipo)?

Question 1

You have been hired as an investment banker by L’Occitane. Should L’Occitane do an initial public offering (IPO)?

L’Occitane is a privately owned French multinational operating in cosmetics and personal care industry which was established in 1975 and has experienced a rapid growth worldwide. Details reflecting cosmetics and personal care industry are presented in Appendix 1.1 (Table I & Table II). The core business model of the company is focusing on the usage of organic high-quality ingredients for product manufacturing in French plants. Revenues of L’Occitane are derived from Sell-In segment (L’Occitane stores, online orders, spas) and Sell-Out segment (duty-free resellers, airports, train stations, retail corporations). According to 2009 data, Sell-Out segment revenues exceeded Sell-In earnings by 50,1%.

Chairman and the largest shareholder of the company Reinold Geiger has always aimed to keep the multinational privately owned and has refrained from selling shares to public for a long time period. Under his management L’Occitane expanded significantly to both emerging markets (Russia, China, India, Brazil) as well as to mature markets (US, UK, Germany, Japan). In order to maintain and strengthen its global market presence, further develop its core business, increase brand awareness, develop R&D facilities and e-commerce expansion the firm is in need of additional funding. Thus, our recommendation is that the company should go public and generate new funds.

What are the benefits to the firm of doing so? Costs and disadvantages? Try to give as much empirical evidence as possible to back up your answers.

There are various costs and disadvantages associated with equity offerings. The first advantage of going public includes raising necessary funding for financing future expansion and growth. This is highlighted by Asia-Pacific President Andre Hoffman’s report to the press release in which he stated that he aims to double retail store numbers in China and Japan. Moreover the firm intended to enhance its presence in emerging markets, particularly in BRICS (Brazil, Russia, India, China, South Africa). Furthermore, L’Occitane targets to advance its product line particularly in Asia and offer widened product variety. By doing so the company can meet the needs and preferences of Asian customers. Secondly, going public would give opportunities to be involved in M&A projects. The desire to engage in M&A was emphasized by Reinold Geiger and he accentuated this interest in implementing these transactions in US, Brazil and Asia. Thirdly, this would increase brand recognition and awareness that listed companies tend to have. The fourth advantage is that L’Occitane would reduce its cost of capital and diversify its funding sources. The fifth advantage is increasing ownership base. The sixth advantage is that going public would make easier for the company to hire new skillful employees in terms of the labor market and would give opportunity for employee stock options. Last but not least this would attract different analysts’ attention.