Dismiss the public markets at your peril. Institutional investors have significant funds at their disposal and companies are increasingly confident about raising capital and accelerating growth through a listing. The challenge for senior management teams is to be clear about why they want to IPO and whether they have the breadth of experience to handle the pressures of being in the public spotlight.
An IPO presents a rigorous examination of a business and its personnel. For any management team preparing to float, the following are essential:
• Ensure the performance of the business doesn’t suffer during the IPO process
• Give yourself a 12 to 24 month run-up
• Bring in a chairman as soon as you can
• Identify and address weaknesses in the senior team
• Understand the key messages to deliver to the market.
As ever, this is easier said than done but complacency over any of these points can prove disastrous. Anthony Fry, Chairman of Dairy Crest Group, says: “It is not just the burden of the process which is time consuming, it’s this combined with making sure that the strategy for the listing and the appropriate shareholder profile is thought through properly and that the IPO team of advisors has been selected with great care… Above everything else, people sometimes forget that there is also a business to run – more forecasts are missed because management has taken its eye off the ball than any other single factor.”
Mike Tye, CEO of Spirit Pub Company, which listed on the London Stock Exchange after a demerger from Punch Taverns in 2011, comments: “The business has to perform brilliantly as you’re only as good as your first set of numbers; if you blow that it’s a hard recovery path. We brought in somebody to work with all of our external advisors, so the vast majority of the management team just did not get involved in the IPO. I would absolutely recommend it as it’s so easy to get distracted… when the critical thing is to serve customers and keep the team motivated. Without that, the rest is gone.”
Naturally, how early you start planning will depend on the composition of the board you already have as a private entity, but the general view is that the earlier you start acting like a public company, the better prepared you’ll be for crossing over to the other side.
Mike McTighe, Chairman of electrical cable maker Volex, comments: “For me, one of the critical steps for every director is to give personal warranties as part of the IPO prospectus as many boards don’t ensure early enough that they’ve a board that’s fit and compliant to conduct an IPO. Take private company boards, for instance, most have directors who are not independent because you have shareholders or founders around the table. You need to start early in order to hire the right people and get them up to speed so that when you put the prospectus together they all understand the business and can sign their representations off.”
Don’t underestimate what a well-respected and seasoned chairman will provide a business as it goes on the IPO journey. Alastair Walmsley, Head of Primary Markets at the London Stock Exchange, says: “Bringing in the right chairman can introduce a degree of rigour, both operationally and in terms of risk management, which will help that business be more successful in the long term. You need to do that as early as possible to get the chairman fully immersed in the business so they have run the board meetings and understand both the dynamics of the existing shareholder base and management team.”
Paul Staples, Head of Corporate Finance at BNP Paribas, comments: “The appointment of a chairman is a pivotal decision and forms an important dynamic within the IPO preparation process. He or she will exert influence on the shape and profile of this in the boardroom, together with achieving an appropriate balance between executive management and non-executive directors. Institutional investors will pay close attention to the reputation and track record of the chairman when considering the intrinsic appeal of any public offering during a pre-marketing exercise.”
Mike McTighe comments: “The key is always to ask whether you have a strong independent chairman. That would be the first person to hire and many businesses don’t… Really, you’re looking at planning an IPO at least 12 months in advance, but it’s more like 18 months because the chairman will have to assess the composition of the board, hire some independent non-executive directors and agree with others around the table when and how they will step down if they are not compliant, which is always the tricky bit.”
It’s crazy to think that companies rush this appointment. Linda Main, Head of UK Capital Markets at KPMG, comments: “It’s fairly common for a chairman to be brought on board quite close to an IPO date. That’s usually because companies underestimate how long it takes to find the right chairman. You need to allow upwards of six months to get someone.
“You need someone who’s got the right experience and is going to bring real benefit to the company whether the IPO goes ahead or not. That could be someone who’s an experienced executive or who has particular industry experience… essentially it’s someone who is used to chairing a board with strong personalities, which is often one of the main challenges.”
The question of whether or not industry expertise is required remains somewhat open. Mike Tye comments: “The critical thing is having the right reputation…The chairman we chose to appoint had no experience of the direct industry but had indirect experience and was well-known and regarded in the City. That is the critical thing. You are hiring reputation and experience, especially for a reasonably sized IPO.”
Anthony has a similar view. “Too often people think that the best chairs come from their own industry – sometimes it’s helpful but there are plenty of examples of chairs and CEOs clashing precisely because they both think they know ‘their’ industry better. The best chairs are sounding boards for their CEOs with long experience across managing businesses, running boards, mentoring executives and being independent of judgement and advice, which are worthwhile attributes for any business.”
The higher profile and ever increasing legal responsibilities of being a director will take newcomers by surprise. Bob Garratt, Criticaleye Associate and an advisor on board effectiveness and corporate governance, argues that management teams routinely fail to recognise the extra duties and liabilities that come with being a director as opposed to a private company manager.
He explains: “In preparing to become a public company, board directors must learn the seven statutory duties as required by the Companies Act and recognise that being a director as defined by the Act is markedly different from the recommendations of the Combined Code. The Act makes it quite clear that you are either a statutory director or not, and that there’s no such thing as a NED or Executive Director.
According to Bob, directors can have a hazy view of their role. He recommends that before embarking on an IPO, the directors, chairman and company secretary “get together for a long chat to really understand what it means to be a director of a publicly listed company”.
Dealing with investors, employees, analysts, brokers, advisors and the media requires a set of skills that won’t perhaps come easily to those who are familiar with running a private company. The Financial Director will certainly need to make the grade, as they will be working closely with the analysts and institutions, not to mention getting the accounts in order and fully compliant with IFRS.
Mike Tye recommends that directors are well rehearsed and drilled about what’s expected. “It doesn’t matter how much you describe to people what it’s going to be like, there’s no better reality than trying to create it ahead of time. For us, a number of people had the chance to stand up in front of investors and analysts and, in effect, knowing they were going to be at the front of the business, be judged as such.
“If they had not been in the spotlight in that way, they wouldn’t have known what hit them. You have to simulate it as much as you can. Explain to them, no matter what their expectations are, that they are underestimating it so you have to put them through the mincer.”
Neil Matthews, Partner & Head of Equity Capital Markets at law firm Eversheds, observes: “The management team must be comfortable in a public environment with all the scrutiny that it brings, and with the additional time spent with external shareholders and reporting requirements. It’s a great thing for companies to be able to raise capital, get a public profile and grow… but you have to be wary of the downsides and potential challenges associated with a listing.”
Alastair says that “the big difference from a management team perspective is clearly going to be the level of disclosure that you are required to make and ultimately the much greater emphasis on communication than you ever had in a private company context".
Executives must go into the IPO process with their eyes open. They've got to be able to explain why it is they want to list, what type of shareholder mix they need, how funds will be raised to develop the business, and to have given plenty of thought as to why another route of financing, such as private equity, isn't appropriate for their business.
If management can’t tell the right story in a convincing and confident fashion, investors will walk. And calling off an IPO at the last minute will be expensive and acrimonious.
They also have to be realistic about ongoing questions around liquidity on the public markets and the consequences of missing the numbers once a float is away. There are, as Linda says, “plenty of examples of companies missing market expectations and getting their price absolutely hammered as a result”.
Being a public company today is all about operational delivery and balancing short and long term interests. Provided companies execute well, the rewards for being listed are there. Andy Pomfret, CEO of investment management firm Rathbone Brothers, comments: “A lot of people would say it’s costly and there’s a lot of bureaucracy with a plc. It is difficult, that’s true, but I think a lot of those things encourage good business practice and you do have a whole range of shareholders who are supportive of what you are trying do and, therefore, if you want to raise money and convince them of your story, it’s quite easy to get that level of support.”
Is 2013 going to herald a great return of the IPO? The answer is probably not as there continues to be too much economic uncertainty in the eurozone, the US and beyond. However, this has been going on for a while and for the right businesses, with well-prepared and seriously talented management teams who understand and believe in their business models, there will be more IPOs over the coming year than we’ve seen for some time.
I hope to see you soon.