When Globant filed with the SEC for an initial public offering last August the software and IT services company said it expected to raise $86.25 million in shares, rendering it Argentina’s first technology company to be listed on the New York Stock Exchange. The timeline: Q1 2014. The kicker: it’s now April, and so far, no dice.
Something is clearly holding the Globant IPO up, and it’s likely that a number of factors are at play. The company is radio silent on the topic (they declined to commented when contacted), leaving room for speculation as to what is causing the delay.
The Argentina Problem
Given the state of Argentina’s political and economic climate, it’s hard to imagine the firm’s location isn’t a factor. The country is suffering from an inflation problem that seems to be spiraling out of control, and the value of its currency is virtually indecipherable (it was devalued 20% in January alone).
Globant’s costs stand to be affected by skyrocketing inflation rates, perhaps especially with respect to employee salaries. Numerous unions throughout the country are requesting pay raises, with workers across various industries demanding increases of 30%. Globant is already struggling with employee attrition rates, and it will have to pay to keep its workforce happy.
But whatever ground the firm loses with inflation it gains on devaluation. Most of its clients are based abroad, meaning that it remains unscathed by the instability of the Argentine peso and, at times, benefits from it. “If most of their service contracts are still abroad, their revenue line shouldn’t be too affected,” explained Patricio O’Gorman, Digital Strategy Professor at the Universidad de Palermo Graduate School of Business and co-author of Diginomics.
Be that as it may, Globant isn’t entirely in the clear. “What I’ve seen with companies that do internationalization projects from Argentina is a combination of challenges. In general, sometimes, due to the macroeconomics of Argentina, what we’ve experienced in years before – the gap between official currency and other rates, the inflow and outflow of dollars through Argentina – makes companies believe it’s a good idea to establish their entire operations in Argentina,” outlined Alex Contreras, co-founder of Founders Latam and Partner at CBA Abogados. “But in my opinion, there’s a problem when you have a massive operation – almost the entire operation – in Argentina, and you have little income in Argentina and all of your income abroad.”
One major potential red flag: taxes. Businesses that employ models where their most of their income comes from abroad may find themselves explaining to Argentina’s tax authority, the AFIP, why they’re not invoicing locally. Case in point: Despegar, which was under investigation earlier this year with regards to its tax practices. The issue has since been settled, but it seems as though it was Despegar that gave in, fearing tax irregularities in Argentina could lead to problems with a potential IPO for them later down the line.
Maintaining operations in Argentina may make investors uneasy as well. Even though Globant is able to circumvent most local obstacles, the financial community is likely weary of the idea of a business located in a place with so many uncertainties surrounding the inflow and outflow of cash.
“Argentina is excluded from financial markets,” Contreras remarked. “The [Argentine] financial market is so sensitive that one little thing can impact and make a company delay a filing, hoping for better commissions in the future.”
Emerging Markets and Tech Bubbles
Beyond Globant’s specific local situation, there are also other market factors at play that could influence the timing of its IPO.
Investors have scaled back on emerging markets in recent months, and on Tuesday, the IMF warned that they pose one of the greatest risks to the economy this year. “The U.S. now is attracting more capital than it was a year ago. Emerging markets are a bit less attractive than they were a year ago. We’re seeing the same thing across Brazil, where recently Standard & Poor’s downgraded 13 banks and companies. Overall, I think Latin America may be a little bit less attractive than a year ago, and that certainly poses some challenges to anyone wanting to open up their capital,” O’Gorman noted.
Also in play might be what looks like a tech bubble inflating on Wall Street. Last year, 45 tech companies went public in the United States, and the share prices of companies like Facebook and Netflix soared. Now, investors are starting to wonder whether these firms are worth as much as their current market values. And as insiders have started to unload shares, concerns have only grown.
Will Globant be affected by a potential tech bubble? According to O’Gorman, probably not. “They have a real business. They have real contracts with real companies who need to continually develop outsourcing, do outsourcing, etc. They’re very much B2B, they’re not dependent on traffic or engagement metrics. They have something that’s very concrete,” he said.
The WPP Deadline
Also worth noting in contemplating Globant’s IPO timeline is the involvement of WPP. The British advertising and communications multinational holds a 20% stake in Globant, purchased in late December 2012 and January 2013.
Globant’s SEC filing makes mention of the WPP purchase and stipulates: “If our initial public offering is completed prior to June 27, 2014, the number of common shares WPP received from the selling shareholders is subject to upward or downward adjustment, depending on whether the initial public offering price per common share is lower or higher than 125% of the price per common share paid by WPP, so as to provide an effective entry price per share to WPP for its equity investment in our company no greater or less than 80% of the initial public offering price. This upward or downward adjustment in the number of common shares received by WPP will be satisfied exclusively by the selling shareholders and not by us.”
Prior to June 27th, and assuming that shares are initially priced at a 125% difference from the amount paid by WPP (a likely scenario given it paid about a dollar per asset), WPP stands to receive its shares at 80% market price. With the prospects of a better entry price and guaranteed returns, the firm will likely put pressure on for the IPO to take place sooner rather than later.
Timing is Key
“It may be a matter of choosing the right moment. I would be more concerned about the overall attractiveness of emerging markets as a whole, leaving Globant aside. You might have a very big company, but you may pick the wrong moment, and that may be unfavorable just because of the general link,” O’Gorman reflected.
Contreras noted that there are often a number of issues at play in scenarios such as this – not all negative, and not all out on the open. “There are multiple, multiple factors that might be a reason. Sometimes, there’s not a single bullet that would explain why X company is delaying an IPO or a placement in an international market. Sometimes, there are a couple of reasons. And sometimes, that delay is not a failure, and companies are looking for the best time for the placement or for the issuing,” he remarked. “In public markets, information is key. Companies working through the process usually explain a lot, and in my experience, they feed the market with information. Sometimes, the lack of information reveals something.”
When it comes to IPOs, timing is everything. And Globant can apparently afford to wait, at least for a little while.