All the hard work a management team puts into taking a company public needs to be repeated once it’s trading as a Plc. They should be prepared for engaging with new stakeholders and aware of the various reporting requirements. If executives believe for a second that it’s a case of ‘job done’ after the IPO, there’s a real possibility the business could miss its first set of numbers.
That would be a real pity, as the markets remain in a healthy condition in terms of raising capital for growth and expansion. From April 2014 to the end of March 2015, there were 134 new listings on the London Stock Exchange alone, up 12 per cent on the same period the year before. Although the total raised by those IPOs was down 20 per cent to £12.01 billion, secondary fundraising was up 16 per cent to £19.41 billion.
Institutional investors continue to back good businesses, but it’s an environment where management teams need to deliver on their promises. John Millar, Head of Primary Markets at the London Stock Exchange (LSE), warns: “It’s absolutely crucial that the expectations set during the IPO process are met or even exceeded [when] the first results are announced after the listing: that’s what really beds down the stock.
“While good initial trading builds a stock’s foundation in the investment community, it is that first crucial set of results that allows investors to relax and say: ‘The stock’s going to be fine.’
“If you’ve told them you’ll do X and you then do 10 per cent less… the UK market particularly is very unforgiving. It dooms the stock to trade badly for quite a long time until confidence can be rebuilt.”
The intensity of getting a company ready for flotation can result in senior executives getting drawn away from the business. Tim Eggar, Criticaleye Board Mentor and Chairman of water treatment company MyCelx Technologies, which listed on the LSE’s AIM market in 2011, says: “Senior management invariably underestimate the amount of time they’ll have to spend on the IPO.
“There’s a very high likelihood that the running of the business will have been downgraded so, during the first 100 days, the only thing that management should be spending time on is getting it back on track.”
It’s something that needs to be factored in at the planning stage in the run up to flotation. Tom Beedham, Director of Programme Management at Criticaleye, says: “IPOs require a major shift in executive and organisational capability. As such, it's vital for companies to increase awareness of capability gaps and develop a plan to fill them prior to an IPO, as well as having clarity on roles and responsibilities after listing.”
Mike Tye, CEO of FTSE 250 concern Spirit Pub Company, which demerged from Punch Taverns and listed in 2011, says: “You need to ensure you have the measurement systems in place – performance metrics which enable you to really say: ‘We are on track or actually we’re missing something here, let’s get back on it.’”
In the spotlight
For those executives new to the Plc world, it’s a steep learning curve. Criticaleye Board Mentor Ian Stone, who joined the board of Chinese media and entertainment conglomerate Tencent as an Independent Non-executive Director when it floated on the Hong Kong Stock Exchange in 2004, suggests that executives who are new to a Plc board are usually inadequately prepared for the realities of life after an IPO.
“The public eye, the extra pressure of having to answer openly, it's all new to them,” he says. “While management teams may know about investors – having been through a few rounds of funding before – that's all behind closed doors. As a public company, suddenly they're on the front page and so they really have to learn to cope with that – we all do.”
Tea Colaianni, Group HR Director at FTSE 100 company Merlin Entertainments, which floated in 2013, and Non-executive Director at FTSE 250 retailer Poundland, which listed last March, agrees: “Suddenly, all of the different advisory bodies and shareholders are producing reports and you’re given 24 hours to comment.
"There’s much more scrutiny, and you’ve got to explain what you've done and how you've done it, particularly around remuneration. There is so much more that you’ve got to do in terms of the governance piece, providing answers to a range of different stakeholders."
This is where guidance from those that understand how to navigate the Plc maze will be invaluable. Glen Moreno, Chairman of FTSE 250 financial services concern Virgin Money, which listed last November, comments: “A number of the NEDs should have extensive public company experience and they should serve as mentors and coaches to the executives.
“Public companies are more transparent: trading statements can be quite market sensitive, strategic reviews are closely scrutinised, remuneration policies have to be explained and approved, and CSR issues become much more public. Experienced NEDs can be very helpful in guiding the executives on how to handle these issues."
While there must be absolute focus around maintaining high standards, effective independent directors should take into account that there is a period of acclimatisation for the executive team. Ian comments: “The first 100 days are going to be pretty full-on and potentially sensitive for the business. As a non-executive, one thing you shouldn’t do is be overly confrontational during this time.
“You can absolutely question, but be supportive and understanding of the extra stresses that the sudden exposure brings.”
Shaun Chilton, Chief Operating Officer of Clinigen Group, a supplier of speciality pharmaceuticals which listed on AIM in 2012, says: “We’ve been very fortunate because our Chairman and NEDs are well respected in the City and gave us a lot of good advice about the process of floating... What we needed was guidance on how the processes work from a technical perspective.”
That said, the advice and framework of support shouldn’t necessarily be limited to governance and compliance. Mike of Spirit Pub Company says: “It’s fundamental that the relationship between the Chief Exec and Chairman is strong but, because technically the non-execs are not your boss, they are a good sounding board too.
“Having an external mentor is also really helpful. You just need to have someone who is completely divorced from the company to ask: ‘What do you think about this?’”
A business is arguably at its most vulnerable immediately following an IPO. For those executives that heed the advice of a well-constructed board and understand the considerable amount of work required if the company is to hit its first set of numbers, the public markets offer a fantastic platform to raise funds, conduct M&A and build a strong business which provides returns to investors.
It does, however, require careful thought and planning, and tough decisions will have to be made along the way, particularly about whether the skill-set of those currently within the business will be suitable for a Plc.
As John from the LSE says: “For executives an IPO is not a discrete, historic event, but rather the start of their life in a public company and their relationship with all the investors, brokers and analysts who support the capital markets.”
I hope to see you soon.