Right team, right story, right price:

but what could still derail your IPO?

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What we’ve learned from floats such as Mighty River Power, Summerset, TradeMe and Fonterra’s Trading Among Farmers indicates a successful Initial Public Offering boils down to three critical factors: attractive pricing, a compelling equity story and confidence in the management.

These are significant issues in New Zealand, where our isolated market and relatively limited ability to attract top talent means the growth story and strategy need to be more compelling.

And, in both the pre- and post-float environments, the finer details are what count. They can make the difference between a successful IPO and a flop.

If you’re about to embark on a listing process, here are eight top tips:

Lean on your advisors and use their experience and expertise
It seems obvious but if you use your financial, tax, legal and investment banking advisors only to tick the boxes, their time will be a cost to your business rather than an investment. A key part of the pre-listing process is ensuring the right systems and infrastructure are in place.

EY’s Global Institutional Investment Survey showed institutions rated the three most important areas of a company’s infrastructure to be financial reporting systems, corporate governance and compliance, and risk management and internal controls.

Use your advisors’ experience and global best practices to improve your processes and systems. This will make the lives of your management teams easier from a reporting perspective and allow them to focus on the strategic growth areas that shareholders want.

Be open to ideas and to challenges
Don’t see due diligence as a check-up or a process designed to identify your failings.  It’s there to help you improve and to step up, if appropriate, to a listed company environment.

Keep learning after the prospectus is filed and after you list
Use the insight from due diligence, and from your advisors, to continue improving your business. Listing isn’t an end game – it’s the start of a new growth period. Your information is now more public so continued improvement and innovation post-listing are essential.

Take stock of your company’s position at the three-month and six-month points after listing. Check your progress against your advisors’ recommendations. An improvements scheme, or an action list, may be a useful measure for both you and your board.

Start your listing process early
The ideal time to begin preparing your equity story and refining your management capability is some two to three years before listing.
In a fast-growing business, a shorter timeframe can be justified but don’t under-estimate the time commitment and strain on your key management team.
There is a real risk of deflecting them from the focus that has made your company successful.

Be clear about your future strategy and capital requirements
Investors don’t generally buy into a company’s history; they’re buying into its future.  They need to understand how their cash will be put to best use to improve shareholder value.

Consider future secondary raisings at the outset, not just the primary capital raising
You don’t immediately need to raise capital for the next three to five years.
Idle cash on the balance sheet isn’t a compelling story, even with a clear, medium-term business plan.

A key benefit of listing is the ongoing access to the capital markets so don’t view a near-term capital raising as a sign of weakness or poor foresight. Plan for it and be open about it as part of your company's capital strategy in the Prospectus.  

Sell-down listings need an even more compelling story
In this situation, the story must be more carefully articulated, particularly if key owners/managers are selling down materially or exiting completely.

You need to show clear transition planning, particularly for entrepreneurial baby-boomers who are looking to slowly remove themselves from the day-to-day business. The likes of Ryman have shown how this can be delivered successfully. If those historic owner/managers are largely exiting, then articulation of how knowledge and relationships have already been transferred or will be retained is key. Include a consideration of long-term incentives/shareholder plans to motivate and align new key management.

Sometimes the listing may not be the exciting growth story that gets the bulls snorting. Many listings involve mature businesses where an IPO is a natural progression and part of the owner’s exit or succession strategy.

These businesses are important to New Zealand. A diverse range of sectors, business sizes and strategies create a fully functioning and liquid equity capital market.  Solid, dividend-yield growth stocks are also important.

Communicate with internal stakeholders
Management and staff are often forgotten in the IPO process, meaning a large amount of time is wasted refocusing these stakeholders and bringing them back to the table.

The human impact of an IPO – the fears, the doubts and the questions – can quickly derail an otherwise efficient process.
Identify your key workstream leaders right from the start. Get them involved in issues like resourcing and setting up communication channels to other internal stakeholders.

If your people don’t buy into the process, or aren’t sufficiently incentivised to support it, staff will either start quitting at the most inopportune time or will not be fully committed to delivering on what is usually a tight timeline – even with the best preparation.

Your management will often be the best critics of your listing story. If they don’t buy it, you probably need to go back to the drawing board.

EY’s latest Global and Australasian Capital Confidence Barometer, released in April 2013, reveals a stark improvement in the view that C-suite executives are taking of the global economy.

The number expecting a better year ahead has leapt from 22% in October 2012 to 57%.  Confidence in economic growth, job creation, corporate earnings and availability of credit has more than doubled, to between 55% and 68%.

There is often a six-to-12-month lag between better confidence statistics, and IPO and M&A activity, but corporates are acknowledging that meeting stakeholder expectations may call for more strategic transactions in a modest global growth environment. With the valuation gap closing, and given the current IPO buzz about town, here’s hoping this heralds better times to come beyond just 2013.

Brad Wheeler is a Transaction Tax Partner in EY’s Auckland office. + 64 9 300 8165