Despite volatile markets the global economic environment remains positive and therefore conducive to floating companies. Experts reveal what finance heads need to know for delivering a successful listing.
There’s been much talk about the potential for Initial Public Offerings (IPOs) this year with names such as ride-sharing companies Uber and Lyft and rental marketplace Airbnb among the names touted in the US. In the UK, luxury car maker Aston Martin, Sky Betting & Gaming and petrol retailer MRH have all been mentioned as IPO candidates, along with Saudi Aramco– which would be the biggest IPO in history if it goes ahead.
But whatever the size of listing, some fundamental elements should be borne in mind by any finance chief involved in a flotation, says Geoff Nash, Corporate Finance Director at London-based broker finncap.
Nash says early planning is essential- the earlier you can meet advisers, the better as you will have a more detailed feel for what is involved and can address any structural points early on. “Issues that may arise could include board structure, including the need for independent non-executive directors, accounting standards followed, financial reporting framework and controls and legal structure and tax considerations.
“Awareness of such issues allows a company to make sure it is in the right shape prior to embarking on an IPO. Such early discussions should not have a cost attached and as broker our fees are very much success-based,” he adds.
Nash says that an IPO will take 12-16 weeks, a time scale CFOs should be prepared for. With the right advisers on board, it should be very manageable and you should have a good grasp as to what is expected in that time, he says.
“That said, CFOs often underestimate the amount of their time it will take because typically they are the conduit through which much of the information passes. Thus the CFO will normally be managing the flow of information to all advisers whilst at the same time running the process internally and, in all likelihood, finalising an audit.
“Alongside this the CFO will be working on historical numbers and forecasts and may well be tasked with first review and edit of the due diligence reports. Accordingly we would always advise CFOs to ensure they have sufficient resources to hand when they start the process. One can always get additional resource – either internally or seconded in from the company’s auditors on a short term basis,” he adds.
An important aspect to consider in being a public company is ensuring that you achieve your market expectations i.e. financial forecasts, warns Nash. He says failure to do so is extremely damaging to a company’s share price, to the confidence of investors in the business and thus the ability to raise future funds.
“There are countless examples of companies getting so involved in the IPO that customer service and new business is neglected. As a consequence, it can often be that the first news flow post IPO is a statement that revenues and profits are not where they should be. This is nothing short of disastrous,” he says.
“Thus whilst the IPO is a very exciting new chapter in a company’s evolution, it is absolutely critical that the business continues to perform in this period. As a result, early planning and the addition of any additional resource to assist through the process should be key considerations,” says Nash.
Aside from selecting a broker, good PR is vital to a successful IPO because markets are driven by information, says Peter Curtain, Director of UK-based group Allerton Communications. He says managing a flotation and leading a public company mean key executives must communicate. “The best growth-company entrepreneurs consider this well before an IPO, acting as though they’re there already,” says Curtain.
He says the rise of social media and digital has enabled tech-savvy boards to engage directly with their stakeholders, conversing, not just telling. “This can attract investors and more widely, improve public perception,” says Curtain- who has advised on several IPOs.
Any management team should expect their business to be rigorously evaluated in an IPO, says Curtain. “They’ll require a clear ambition for the future of the company, a vision of where it will be in five years and a sound strategy for getting there. They must be willing to take on the new culture and methods of operating that come with going public.
“The listing and fundraising process takes a lot of time. Directors will spend long periods with reporting accountants and financial, legal and PR teams so it’s important to ensure to choose teams with the ability and drive to make the IPO a success, and that you get on with them personally,” says Curtain.
CFOs need to ask questions of advisers, especially during the selection process. “This will cast light on their initiative, resourcefulness and understanding of your business and strategy. You’ll be paying, so put them to the test before appointing. Treat them like any other supplier,” urges Curtain.
A combination of financial, regulatory and cultural factors has led to a shift away from covering smaller companies by both the mainstream business media and sell-side analysts at broking houses.
As broker research on smaller companies is falling, it is more important than ever that the person responsible for investor relations, usually the CFO, acknowledges the amount of time to be invested in communicating with new and potential investors, says Curtain. “More interaction with investors will be direct, complementing what takes place through your broker.
“And as research becomes sparse, so your website and annual report become more crucial as the starting point for any potential investor. Positive media coverage can make a huge difference and journalists remain a vital conduit – getting your message across effectively via this route takes experience and skill,” he adds.
