The Secret to a Successful IPO
There are many measures of success for initial public offerings (IPOs). First and foremost is completing the deal and raising the intended proceeds. From the perspective of remaining and new shareholders, however, the subsequent short-term trading performance is more often seen as the measure of a good IPO as opposed to a bad one.
For the board and management of the newly listed entity, their measure of success and their reputation will depend on how well the newly listed entity performs in the medium term and delivers on the investment proposition on which new shareholders based their investment decision.
It is important for ongoing board and management to recognise that there are two quite different stages in the journey to becoming a successful listed entity.
The first is all about the transaction which delivers the listing.
Many management teams mistakenly see this as the ultimate objective and, following months of frenetic activity, expect their lives to return to the way they were pre-IPO when they can once again concentrate on running the business. Regrettably, that is not the case. It is quickly discovered, as they move into the relationship stage, that life will never be the same because new obligations and responsibilities require a significant cultural change.
The second involves building relationships with new shareholders, which requires time.
So, what should Board and management of a new IPO company be doing to ensure that the transition to a listed entity is as seamless as possible and places them in the best possible position to build a successful relationship with their new shareholders?
Firstly, thought should be given at an early stage to governance issues such as board composition – diversity, independence, and skills matrix – and remuneration structures. This helps to ensure that the entity does not run into issues with regulators, shareholders, and governance advisers once listed.
Much of this work is often done by advisers and bankers to the IPO who, understandably, are generally less available post-IPO. So, having a dedicated internal resource involved in the IPO process provides continuity and, possibly, a candidate to run the Investor Relations (IR) program post-listing.
Once the IPO is complete, the onus is on management to recognise that the act of becoming a listed entity will make a substantial difference to how the organisation is run. As well as having a significant number of new shareholders, who will not understand the business in the same depth and detail as management, the organisation’s reporting and disclosure regime will be quite different. Senior management need to understand new requirements covering issues such as continuous disclosure and dealing in the entity’s equities. Failure to adhere to these new rules can create serious reputational damage to the organisation, the board, and the management team.
The organisation also needs to understand quickly what its obligations are in terms of interacting with its new shareholders and how it plans to develop and execute an effective IR program. Like any corporate function, the IR program needs to be appropriately resourced, well planned and executed and monitored on an ongoing basis.
Both the CEO and CFO need to show leadership and be committed to its success, particularly for smaller organisations where the appointment of a dedicated IR function may not be cost-effective.
Often the IPO company outsources the post-IPO work to specialists who then work with the company on an ongoing basis. We can recommend a number of these specialists if required.
From the board and management’s perspective, the success of an IPO will not be measured by the issue price or the premium achieved on listing. Rather, they will be judged on their ability to take the new entity and deliver long-term value for shareholders. There are many factors that will impact performance, some of which will be outside of management’s control.
However, engagement during the IPO process with a view to recognising the interests of new shareholders and working in advance of the IPO to develop an effective plan to manage these new relationships post-listing will go a long way to delivering an excellent outcome for all stakeholders.
A foreign company completing a listing on the ASX may have a large part of its shares on issue held by management and pre-IPO investors and these are usually subject to escrow and may not be able to be traded for a period of time.
This means that there could be a smaller number of “free trading” shares in the market and the company has reduced “share liquidity”.
All companies completing their first listing have been private or unlisted public companies and may not have had an independent board of directors, limited internal controls and corporate governance or are not at the standard required for a listed company.
Unlisted companies have not had to bother about what the investing public thinks about them, nor did they have to concern themselves too much with corporate regulators or the stock exchange.
The owners of foreign companies often do not understand the Australian culture or the capital markets.
All the above are real challenges for newly listed companies and need to be addressed so that the company will flourish post IPO.
The company should aim at increasing its “share liquidity”.
An illiquid stock will not be attractive to investors, as they fear that they will not be able to quickly sell their shares and the market views with some suspicion the value of a company with low liquidity.
Ultimately the major owners of the company may wish to sell their shares, and this will be difficult in a stock with low liquidity.
Additionally, where there are few shares able to be traded in the market the sale or purchase of a small number of shares can detrimentally affect the price.
The usual and best way to increase liquidity is to issue more shares to new investors via a secondary issue after the IPO so that there are many investors holding and trading the shares. Before such a decision is made however, there are several matters for individual companies to consider.
Having an informed public which is commented on below is vital as is having a “house” stockbroker / market-maker whose duty is to ensure as far as possible orderly trading in the company’s shares.
Independent Board of Directors
The corporate and ASX regulations governing listed companies require that there be a reasonable number of independent directors on the Board.
An owner of a previously unlisted company can face a learning curve having to share his control with other directors on a listed company.
Learning how to deal with independent directors is a matter of getting to know them over a period, establishing proper communication between directors and having them committed to the company’s values and aspirations.
An unlisted company owned usually by one or two persons might not have internal controls over the safeguarding of its cash and its various assets to the standard required of directors of a listed company, where the very highest standards are required.
A company can obtain assistance to achieve and continue such controls.
The corporate regulator and the ASX require remarkably high standards of corporate governance by listed companies.
Most companies strive to have a high level of corporate governance.
These days it is not enough for a company to merely be profitable, it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behavior, and sound corporate governance practices.
Corporate governance essentially involves balancing the interests of the many stakeholders in a company-these include its shareholders, management, customers, suppliers, financiers, government, and the community. Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance, measurement, and corporate disclosure.
Breach of these standards could lead to suspension of the company from the ASX, a large downturn in the value of the company’s shares, legal action taken against the directors and even class actions taken against the company.
It is vital that the company’s reputation be spotless
Ensuring a high standard of corporate governance rests with the directors, however they should be supported by assistance from specialists knowledgeable in this field.
The investing public
The public markets must be kept aware of the company’s activities and how it is progressing and prospering.
If the company does not inform them then how are they to know? An uninformed public will have little interest in the company’s shares.
Informing the public should be a priority of a listed company and a corporate public relations program and investor relations programs managed by professionals often achieves this.
The Australian culture and the capital markets
This is one of the major problems for a “foreign“ company listing in Australia or for that matter in any Western country, however it can be overcome in most cases by having some professional assistance.
Dos and Don’ts
The following tips are for companies which seek to go to public:
|Keep the market fully informed, especially with materially significant information||Overhype the stock prior to IPO|
|Have a small board with a mix of technical and commercial experience and qualifications||Set-up overly large board|
|Separate technical and commercial director roles and physical separation of offices||Directors that do not have the right skill set|
|Have a proven track record of success with directors||Appoint directors with little or no industry experience or who have “background” issues.|
|Approach governance as a value adding process for shareholders, not a compliance nuisance||Ignore or downsize the importance of governance.|
|Invest in a culture of transparency||Be wary of directorship conflicts|
|Automate email news alerts and build your email database||Miss strategy milestones.|
|Communicate frequently and regularly with stakeholders||Complicated or highly technical presentations no one can understand|
|Have a combination of quality assets||Have mediocre or substandard assets.|
|Implement a sound capital structure||Have haphazard and careless company financing,|
|Pitch and refine the investment story||Poor timing trying to raise capital during major holiday periods|
|Seek external help in non-core areas such as marketing and financial PR||Avoid long periods with no news flow to investors|
|Keep momentum in your second year||A lack of support from a major broking house or institutional investoron|
It is vital that the company commits time and some costs to post-IPO matters which usually include:
- obtaining the services of a “house” stockbroker / market-maker
- Issuing more shares to new investors at an appropriate time to enhance share liquidity
- managing and enhancing the relationship between all directors
- ensuring that as far as possible the share price is not affected by the sale of shares below market expectations
- continual road shows to investors
- continual public relations and media coverage
- understanding its future objectives and assisting the company to achieve these
- having observers at Directors meetings and strategy meetings who are available for advice on corporate matters as needed
- ensuring that the company has strict internal control and corporate governance procedures
- ensuring that culture issues are considered and overcome
Examples of Good and Bad Post-IPO Performance
The value of the company’s shares is one of the most important factors to shareholders. An increasing share price can allow the company to raise more funding in the future and use its shares in transactions such as an acquisition of another business. If the share price increases, it means that the existing shareholders suffer less dilution. If the share price decreases the opposite of the above usually applies.
About BlueMount Capital
BlueMount Capital specialises in bringing US companies to the ASX, and has an office in Los Angeles to service its American clients.