[Inside Chodong]Why Employee Stock Ownership Associations Are Unhappy with IPOs

The IPO market in the first quarter of this year was dominated by small and mid-cap stocks. Despite unfavorable market conditions that seemed to dampen the IPO market, it managed to hold its ground to some extent. However, it was difficult to find blockbuster public offerings. It appears that not only the management of companies preparing for listing but also the securities firms handling the underwriting work judged that the market lacked the energy to command a 'fair price.'

It is understandable that management or major shareholders want to increase the corporate value of the company they have carefully nurtured to receive a higher price, but excessive greed can actually harm the employees. While early financial investors (FIs) are important for a company's growth, the contributions of employees cannot be overlooked.

Each participant in the IPO market has different views on what constitutes a 'fair price.' Most management teams who want to raise large amounts of capital through an IPO think the higher the offering price, the better. Investors in public offerings, who can only profit if the stock price rises after listing, prefer a lower offering price. Employees who receive employee stock ownership plans inevitably view the offering price more from an investor's perspective than that of management. The employee stock ownership association must wait through a one-year lock-up period before they can sell their shares. If the offering price is too high, the employee stock ownership association, which cannot sell immediately, is likely to incur losses, and there have been many cases of such damage.

For example, consider Bionote, which was highlighted as the 'last blockbuster' in last year's IPO market. Its stock price has been on a downward trend since it fell below the offering price just five days after its listing in December last year.

Bionote recorded sales of 21.2 billion KRW and an operating loss of 700 million KRW in the first quarter of this year. Sales decreased by 92.3% compared to the same period last year, and operating profit turned to a loss. Since the transition to an endemic phase this year, sales of COVID-19 diagnostic kits have plummeted.

Considering concerns about declining sales and the unfavorable IPO market conditions at the time, the underwriters calculated Bionote's per-share value at 34,979 KRW and applied a discount rate of 37-48%. The final offering price of 9,000 KRW was less than 30% of the per-share valuation suggested by the underwriters, but five months after listing, the stock price remains at about half the offering price.

Although the stock price may rise after the lock-up period ends in December this year, employees currently recording unrealized losses cannot help but feel distressed. At the time of listing, the employee stock ownership association received shares worth 7.1 billion KRW based on the offering price. The value of the employee stock ownership has decreased by more than 2.5 billion KRW.

Listing on the stock market at the stage of corporate growth is not the end but a process. It is a process of going public so that the fruits of the company's growth can be shared with employees and investors. Management should strive to ensure that employees holding employee stock ownership plans can take pride and develop a sense of loyalty while building their wealth. Efforts to select comparable companies solely to raise the offering price or to forcibly boost performance to match the listing timing should be avoided. When selecting underwriters, it is also unnecessary to give extra points only to securities firms that assign a high corporate value. Another approach is to go public at a time when bold investment is needed for growth rather than at a time when the offering price can be maximized. After listing, various options become available to reduce financial costs when raising funds. If the company continues to grow steadily after listing and this is reflected in the stock price, it can be a win-win for owners, management, employees, and investors alike.

This content was produced with the assistance of AI translation services.