Preparing A Company For Public Listing

By David Perry, Associate

How does a company know when its ready for listing?

Companies typically look at an ASX listing when they are in a growth phase, have a need for additional capital, reach a certain size that makes this feasible, and the sharemarket is rising and there is an investor appetite for new IPOs. Another driver may be the desire of equity holders in a company to monetise part of their shareholding.

In a normal year, about half (by number) of all IPOs have problems and end their first year with their share prices below the issue price. A number recover the initial setbacks and learn from the mistakes, but many do not, cannot, and languish in no mans land. This means that in effect that while many companies think they know they are ready for listing, their perceptions of this knowledge are misplaced.

Of the 14 IPOs in the March quarter, 7 finished the quarter with a share price lower than their issue price.

What are the most common mistakes a company makes in the lead-up to listing?

Some of the more common mistakes are:

 Companies list when they are too small. There will be little liquidity in their shares, and little, if any, broker or institutional interest. Moreover, if the company falters, any interest from these groups can disappear with lightning speed and it can take a long time to win back the trust.
 Companies may have a too-sanguine view of the increase in value (pot of gold at end of rainbow) that surely must flow from the listing, i.e. the higher price-to-earnings multiple.
 Underestimate the time and cost of the listing process that can take up to three months or more, and can lead to the managers taking their eyes off the business.
 Underestimate the costs of being a listed company in terms of board, head office, compliance, investor relations and so on. In the area of investor relations, for example, CEOs and CFOs can (and may need to) spend up to 20% of their time with this activity.
 Underestimate the difficulty of moving from private company to public company status under which there is a whole new environment to navigate (e.g. corporate governance, ASX and ASIC disclosures, and communications), new owner-share-holders, and a new business lexicon to be learned.

How can a company best prepare for listing?

Consider the following:

 Planning and execution well in advance of listing.
 Getting experienced people on the board of directors and within management who have established track records with listed companies
 Understanding the costs/benefits trade-off of listing. Growth and access to capital is one of the big benefits.
 The need to do the homework and having some sound, trusted independent advisers upon whom it can rely and who will educate it about the pitfalls.

Is now a good time to list?

Conventional wisdom holds that it is best to wait until sharemarkets are rising, and this is mostly true. It will depend on how much money is proposed to be raised, coupled with the immediate prospects for the company. If one is looking at a compliance-type listing where there is little money to be raised, and/or the immediate prospects for the company are strong, then a listing in a difficult time may still make sense.

It really depends on how much money is to be raised, the industry sector for the company, and the companys (managements) longer-term strategy. The other point of course is that you need to have a sponsoring broker who is enthusiastic to assist you with the IPO and it is generally better to have the issue underwritten. 
 

Post listing, what needs to happen to make sure the company remains healthy?

 There needs to be vision and leadership, not of the star studded variety but of the practical, human variety that underpins an enduring culture
 There needs to be much greater financial discipline in tandem with board and management depth.
 Companies need to make year one a key focus and ensure that they deliver in line with their earnings forecasts.
 Companies need to manage expectations and ensure that they dont over-promise or allow others (e.g. equities analysts) to do so.
 There needs to be a focus on both:
 the primary financial indicators EPS, ROE, gearing etc; and
 the non-financial indicators including corporate culture, talent management, employee and customer satisfaction, solid corporate governance and employee turnover.

Conclusion

Many companies have IPOs planned for the second and subsequent quarters. In my view, a number will attempt it too soon with the consequences outlined above. An IPO needs very careful planning, professional advice and a very supportive relationship with a sponsoring broker.