In an IPO market as flush as this one--28 companies are scheduled to go public this week, including an ice-cream maker (in February, no less) and more B2B companies than you even knew existed--the allure of going public must be pretty much irresistible. But while going public lets a company reap obvious and immediate benefits--all the money it raises in its IPO--it also has very real consequences, the most important of which is a responsibility to put shareholder value above all else.
Now, it's not as if a company's CEO will be sent to jail if it fails to exercise this responsibility (though overpaying top execs could reasonably be called criminal). Nor is it even the case that profligate CEOs will necessarily lose their jobs, since for the most part a company will go public only after ensuring that voting control of the corporation will remain in the hands of the company's founders or top management. (And even if that's not the case, too many boards of directors are still essentially rubber stamps for top management.) But it is the case that if you embark on foolhardy projects that are unlikely to give investors a reasonable rate of return, the stock market will punish you by driving down your stock price, and it will be right to do so. A CEO who takes the "public" part of "public company" seriously will pay close attention to what the market's saying. A CEO who doesn't probably shouldn't have taken the company public in the first place.
Take the case of the World Wrestling Federation, which on Thursday announced that it will be forming a new football league--the XFL--that will kick off a year from now. The league will have a 10-week regular season, beginning in February (after the NFL's season ends), plus playoffs and a championship game, and will start with eight teams with two more to follow. At the press conference announcing the plan, the WWF was circumspect about how the XFL would be different from the NFL in terms of play, although chairman Vince McMahon called the NFL "the No Fun League" and suggested that the XFL would be rougher and less subdued than the NFL; the company also mentioned "subtle rule changes" that it would introduce. The idea, in any case, is that the XFL will satisfy the hunger that football fans supposedly feel after the Super Bowl.
Given the size and speed of NFL players, and the rate at which they get injured, it's almost impossible to imagine how the XFL could be rougher, unless it's just going to do away with penalties entirely. And since McMahon promised that the games would be real, and not staged, the storylines and outlandish characters that have propelled the WWF's success will be missing from the XFL. In other words, this is not a project that builds on the WWF's core competence, which is not--contrary to the conventional wisdom--marketing, but rather showmanship.
WWF matches are great shows. But real sports fans are not interested in explosions and strobe lights. They're interested in competition. And as the performance of the CBA, Arena Football, and the old USFL suggests, they're not interested in competition that is, by definition, inferior to the real thing, namely the NBA and the NFL. In any case, there's never been any evidence that there's an untapped demand for football in the late winter. And no matter how good at marketing a company is, it cannot create demand where there is none.
The WWF insists that the league will be profitable by 2002, and that it will have to invest only $100 million at most. But $100 million is a lot of money for a company that was supposed to have just $80 million in cash flow next year, and that has a market capitalization of just $1 billion. (To draw an analogy, it'd be like Microsoft investing $50 billion in a project.) And it's especially a lot of money for a company to spend on diversifying out of its core business, when one reason investors liked the WWF in the first place was its single-minded devotion to its key product. Wall Street almost immediately rejected the plan, sending WWF shares down 25 percent on Thursday and another 6 percent on Friday. The company's shares are now well below the price at which they went public, which is pretty striking when you consider that the company is profitable and growing.
McMahon's reaction to investor skepticism was inimitable: "Wall Street can kiss my ass." And this would have been a great reaction to have a year ago, when the WWF was private. For that matter, the XFL would have been a fine thing to do a year ago. McMahon was then the company's sole stockholder, and he should be able to do what he wants with his money. If starting a football league made him happy, more power to him. But as the head of a public company, even one that he controls, McMahon cannot tell Wall Street to kiss his ass, because "Wall Street" is actually all those investors who are essentially trusting him with their money, and who are losing money because of his plans.
It's possible, of course, that Wall Street is wrong, and that McMahon will pull a rabbit out of his hat. But I doubt it. One of the best things about McMahon is that ultimately, I think, he cares more about entertainment, about putting on a great show, than he does about the bottom line. His enthusiasm is untempered, as is his faith that things will turn out right. This all makes him a phenomenal producer of the WWF and an excellent entrepreneur. But it doesn't necessarily make him the best person to run a public company. The WWF raised $170 million in its IPO, which is not pocket change. But what I thought then, and what I think now, is that everyone--especially McMahon--would have ended up happier if the WWF had just stayed private.