Services companies and IPOs

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May 15, 2013 by Tamara Piety

Here is a nifty little piece on The Washington Post Wonk blog about why the fictional advertising firm Sterling Cooper Draper Price wouldn’t be the type of firm that you could take public. Why Sterling Cooper Draper Pryce would be a Terrible Stock but I have to wonder how accurate it is.

Neil Irwin on the Wonk Blog says SCDP would be a terrible bet because “professional services firms — whose “product” is ideas, services or advice” are “a different animal” than companies like Proctor and Gamble.

“When you buy shares of Procter & Gamble, you are buying an interest in the brand names of Tide detergent and Crest toothpaste and Gilette razors and in the factories and equipment used to make those products. You’re also buying a share in what can loosely be called the organization of P&G — a process for developing, marketing and distributing consumer products that has had great success over the years and manages to funnel the efforts of thousands of people into household name brands.”

In contrast he writes, for a firm like the fictional SCDP “[t]here’s almost zero value in the firm’s physical capital; the office space is rented, and the desks and typewriters and (today) computers are of minimal value. The brand name may have some value, but it is intimately linked to the individuals who lead it, which means they could walk out the door any day of the week; Sterling Cooper Draper Pryce wouldn’t be much of a powerhouse without Don Draper.”

I get the “services and advice” thing, although I think he is right that there are many counter-examples, although perhaps not many that aren’t part of a regulated industry like Comcast, AT&T, etc.

But I do get a little stuck on the “ideas” part. Aren’t brands basically just “ideas”?  And isn’t brand value, when it is high, the ultimate “bubble” – that is, entirely dependent upon continued confidence in it for its value to remain high? This is to contrast it against a commodity, say pork bellies, which high or low at least still are a tangible good. Of course tulips are a tangible good too and look how much trouble you could have gotten into with tulips in 1637!

Still, it does seem as if there is less and less difference between services firms that rely on the personality of some of their key employees, like an ad agency or a law firm, and any other firm which has its value resides largely in image. Think about Martha Stewart or Oprah Winfrey and their multitudinous empires. Or what about Google or Facebook?

At least it seems worth pausing to consider how many companies which are publicly traded have “almost zero value in the firm’s physical capital” and are highly susceptible to shifts in perception.

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