Mastering the Initial Public Offering (IPO)
Stephan Wellink
CSIRO Australia
PP: 37
Article Text
The recent spate of Internet millionaires has increased interest in investing in technology development to create wealth. Technology-based start-ups are proliferating through out the APEC region, many of them modeled on Silicon Valley models. Once through the precarious start-up stage, technology-based businesses are looking to grow and to grow quickly, particularly those based upon fast-changing information and communication technologies and/or those offering novel products with short life cycles.
Financing growth, traditionally a challenge for young companies, has become easier in many countries, particularly those whose economies are closely linked to the booming US market. A mechanism of increasing interest in this climate is the Initial Public Offering (IPO), which is currently perceived by entrepreneurs and start-up executives as a good way to secure money to expand the business without over-reliance upon third-party debt.
Public offerings on the stock market are complex exercises. They require months of preparation by skilled teams of commercial, financial and legal experts. Required activities include rigorous due diligence investigations, market preparation, sometimes through elaborate promotional activities, and establishment of an appropriate listing price. Without the right team of experts, often working in concert on a complex set of activities, insufficient support may be generated. Many months, or even years, of hard work may be lost.
A recent conference, held in Sydney, Australia on 28 February to 1 March 2000, highlighted the challenges of IPOs, both those floated on the attractive US NASDAQ exchange and those on regional stock exchanges such as the Australian Stock Exchange (ASX). This well-attended IIR conference presented views of a range of experts. Highlights included the presentation of ASX Executive Director, David White.
White offered a range of practical tips to enterprise managers considering an IPO. For example, he emphasized the importance of selecting a Board of solid performers who will have good investment appeal and generate confidence. Offering a theme that would be echoed many times throughout the conference, he stressed the need for conscientious preparation, suggesting that the IPO prospectus would be put under a microscope by the stock exchange, the financial media, competitors, among others. He urged management to put great care into developing prospectuses which contain critical information. Thorough, positive representations of the company's potential were needed, for which details must be true and not misleading, he said.
He said that selection of a balanced IPO management team of legal practitioners, merchant bankers, technology advisers, financial advisers, share registry advisers, was essential. A Public Relations firm, particularly experienced in IPOs, forms a valuable part of the team, in White's view, often shepherding senior manages through road shows to recruit investors, both nationally and internationally.
Also critical was the development and representation of a 'compelling story' or presentation of a case for good return on investment, with a convincing representation of the competitive advantages of the technology in question. White said that it was important, in the current climate, to clarify the relationship of the new firm to Internet business.
John C Porter, CEO of Austar United Communications Ltd, spoke about his experiences preparing, transacting and managing a company that has gone through an IPO. Austar was the third largest float on the ASX in 1999 and was nineteen times oversubscribed. He said that before mounting an IPO it was imperative that the reason for listing is clear (eg money for expansion). Issues such as governance, a clear articulation of what the business is about, the management team of the company, selection of analysts, the business plan, the allocation of offering proceeds and the allocation of stock must be dealt with decisively.
Post-IPO, the ability to execute the business plan and a good use of the proceeds are fundamental to success of the listed company. Porter said that there is no formula for IPOs and therefore, each one is different. In his view, if an IPO is done well, you only need to do one, do an IPO badly, and you only get to do one.
Another speaker, Minter Ellison partner Margaret Taylor, discussed the importance of carefully forming an IPO management team. She described each of the critical players and their roles in the funding processes.
Public offerings on the stock market are complex exercise. They require months of work by skilled teams of commercial, financial, and legal experts. The market will punish the ill-prepared.
The perspective of the venture capitalist on the IPO process was presented by Andrew Savage. He outlined both the negative and positives arguments for IPOs. Among the negative factors he identified were the need for companies to continuously disclose information about their operators, profitability, management, and other issues. Other ongoing pressures on the company emerge from the need to continuously support and communicate with large stakeholders.
In Savages' view, firms should consider an IPO only when they have a stable management team and when they have completed an effective business plan. They must be in a high growth phase and their managers must be emotionally ready for the pressure of an IPO. He concluded with the observation that an IPO always takes twice as long as expected, costs twice the expected amount, and depends, among other factors, upon good relationships with the underwriter.
The importance of equity distribution networks was presented by Alan Murray of Deutsche Bank Technology Group. Murray said that distribution and not valuation is the key to an IPO as the share price of a company is a function of supply and demand at any given time and even a great company will be undervalued if it does not get its story out to the investment community.
He said that effective links need to be established and maintained between the company, the sell side analyst and the buyer and he outlined the respective roles of each player in the equity distribution supply and demand chain. Murray also provided a checklist for companies selecting a broker that included questions such as: does the analyst understand my business? Can the analyst sell my story? Will I get attention of the lead analyst? Will I get support following IPO?
The issue of maximising a company's value through effective communication was covered by Burson-Marsteller's Steve Silva who made the point that it is crucial to articulate the story of your company in order to maximise its value. The communication strategy should be employed to not only promote the company, but also because many industries are new, to educate investors about the industry in which the company will operate. He said that about 40% of a company's value is linked to the perception of the CEO and it is therefore important to showcase the CEO properly. In his view, Silva believes that whilst the usual communication tools can be applied, managing the perception is a key issue particularly as the IPO process is quite different and regulatory provisions need to be heeded.
The conference investigated some of the issues surrounding capital markets, using the example of the ASX and recent changes to its admission rules. This was compared with benefits of seeking capital from the NYSE and technology-based NASDAQ. Legal differences between US and other national markets were explored, and conference speaker Denis Hanley provided some tips about how to prepare for NASDAQ compliance. He provided some case studies of successful companies that had substantially increased their value through NASDAQ listing.
The conference concluded with an exploration of what is often referred to as the least appealing aspect of IPO preparations, due diligence preparations. How the due diligence exercise is scoped, how the report is to be prepared, who will be the users and what their information needs are was treated, as were procedures for establishing reporting responsibilities.
The speaker provided a number of salient messages concerning the IPO process that can be summarised in the following way:
- Pre-IPO: Don't lose control of the listing process via your key advisers. Look at key indicators of strong ROI and rapid growth. Assess market demand, communicate strategy and pricing to investors via a well planned 'road show'. Have a good story to tell, and effectively showcase the CEO.
- During IPO: Initiate coverage of stock and help manage the first day supply and demand of stock by discussions with key investors.
- Post IPO: Celebrate success. Grant share options to your employees. Maintain regular interest in the stock. Obtain regular feedback on market issues. Look for new investors (especially overseas) as the company grows. And engage in face-to-face meetings with investors by undertaking regular (half yearly) global road shows.
The lessons are clear. This is a complex process requiring hard work by a skilled team: in the end, the market will punish the ill-prepared.
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