August 8, 2017
The market for initial public offerings (IPOs) has been following a depressingly familiar pattern. We hear that a company is listing. But markets are skittish (they have been for years), the IPO window could close at any minute and potential investors – who claim to have been burnt before – are arguing back hard about price. “Where’s the value?” they ask. How will the company generate earnings growth after year one?
Barely have the company’s plans been leaked in the financial gossip columns then we read that the IPO has been pulled and the mystical IPO window has shut again. No one seems surprised. The only surprise is that the cycle continues to be repeated.
And the latest research suggests it’s the worst it has been for five years.
Why? There are a number of reasons.
Firstly, some IPOs are genuinely not very good. Value is not well articulated, or the value is not there. The IPO may seem more about the owners getting a quick payday. For nervous investors, unable to read the overall market, it makes sense, on balance to stand back. However, there is also the fact that a number of companies don’t do enough to avoid the stampeding of the herd, to differentiate themselves from the mass. The moment when they need friends, advocates who can testify the company’s bright future, they are essentially friendless.
Communications can play a vital role in IPOs, particularly in risk-proofing the business against financial market turmoil.
Investors will always look more favourably on a company that they know and like. Companies should be working on their profiles and acting as much as possible like a listed company from day one, even it is years before listing. Management should be skilled in being advocates for the business and demonstrating the depth of talent at its disposal. Don’t just start thinking about this before the investor roadshow. This is the period when you should be out and about winning advocates for the business. Every IPO approach should be tailor-made.
Often the owners of the business want to hide away in the background, maintain an air of mystery about what they do and avoid any kind of question about what returns they have made. Or it might be a founder who wants to step back, who doesn’t want their name in print. This is wrong. The good news these days is that owners are less likely to cut and run, and will keep significant skin in the game. However, more can be done. The owners need to be open and available throughout the IPO process – in fact, they should be there demonstrating what they are doing with the business under private ownership so everyone realises that the transformation is real – and stand alongside management. When investors genuinely feel that the major shareholders are aligned with them, there will be less focus on when escrow periods end and more on the long-term prospects of the business.
Many potential investors fear that the owners have taken out the best of the company’s growth and there is not much to look forward to after the first year prospectus forecast is – hopefully – met. Companies need to focus on demonstrating that earnings forecasts are concrete and that the company has the ability to find the right growth opportunities. Again this should start as early as possible. People should know about a reputation for innovation, an ability to deliver, and a strong culture when the business is in private hands. When the company comes to market, investors will be aware of the culture and have confidence in its continuation. Ascribing value to the shares on offer can be undertaken with greater confidence.
The above suggestions take into account the restrictions on pre-prospectus advertising when opportunities to highlight achievements can be limited. The real opportunity is to make more of the freedom that comes before, to get the market comfortable with the private company, otherwise the hamster wheel of IPO underachievement is doomed to keep spinning.