"Going public", or an Initial Public Offering ('IPO') as it is often known, is the process by which a listing is obtained for the shares of a company on a recognised stock exchange. Shares are made available to outside investors through the sale of new or existing company shares.
Stock markets are like clubs. They have differing facilities and services and suit different types of member. In recent years there has been a dramatic increase in the choice of stock exchanges available to companies for flotation. Details of these European and US stock market options are shown in our separate publication - 'Floating Around the World'.
Compare business and personal goals!
Plans for business development must be compared with the financial and personal goals of its owners. Reconciling these oft-conflicting aims is one of the most important aspects of understanding whether a flotation is the best route forward.
Why go public?
- on flotation, cash can be raised to increase working and investment capital
- after flotation, future fund raising can be both easier and cheaper
- financing acquisitions is easier with quoted shares
- to part realise the investment - total realisation would more commonly be by trade sale
- to increase confidence of existing/potential suppliers
- more accurate share valuations obtained
- prestige and company awareness increased
- share option incentives for employees / managers – especially relevant to the technology-media-telecoms (TMT) sector
Why stay private?
- to keep activities out of the public eye to maintain confidentiality on customers, suppliers, processes and selling techniques
- to retain management control and the right of its owners to act in their own best interests
- to stay away from the gaze of possible predators
- to avoid emphasis on short term performance
Who will invest in the business?
Investors range from private individuals to pension funds and other institutional investors, both UK and overseas based.
How do I go public?
As with everything in life, it needs people and paper. Stock markets require that company directors are properly advised by professionals to ensure that they have been made aware of their obligations and that their duties are fulfilled. These advisers will include a sponsor to the issue, which may be a merchant bank and/or stockbroker.
Lawyers with both corporate and flotation experience are required because in addition to the need to obtain 'public limited company' status, legal work is also involved in corporate matters such as amendments to the Articles of Association, setting up executive share option schemes and analysis of material contracts involving the company. In addition, a second firm of solicitors is normally engaged to act as solicitors to the issue; this role is to advise the sponsor on the contents of the prospectus, the placing and other documents together with advising the sponsor on warranties from the owners of the business.
Other parties involved will be reporting accountants, share registrars, printers of the documentation and financial public relations consultants. The latter ensure that the issue receives beneficial coverage in the financial and other national, local and trade publications. They also advise directors of the implications of press statements and organise press conferences and investor 'roadshows'.
Tax advisers will be required to ensure that the owners have arranged their affairs to minimise any potential tax liabilities prompted by the flotation.
It is important that the appointment of advisers is carried out sensibly so that a "cost effective" team is created that can expertly handle the flotation without creating any duplicated work, and hence cost!
Timing and costs of flotation
Timing can vary from a minimum of 3 months to a span of several years. It is generally accepted that a minimum period of 6 months is preferable to carry out the full process. The reasons that dictate the timing of the issue can be:
- the present state of the company
- present state of the stock market generally
- stock market sentiment towards the market sector
- tax implications for the owners
How would the business be valued?
This is based on:
- future prospects
- length and quality of track record
- strength of management
- future market view of the sector
- the general economic outlook
- confidence in reasons for flotation
- valuations of deemed "similar businesses"
Most likely entrants
- young or growing businesses requiring capital
- MBO's / MBI's where external equity investors wish to realise part/all of their investments
- family-owned companies where older generation seeks to withdraw capital
- companies with a spread of shareholders who wish to improve marketability
Commercial requirements
The rules vary considerably between different stock markets although traditional issues such as length of track record and profit size are less critical than the likelihood of rapid future growth. The following features are also likely to improve the prospects for a successful flotation or, in their absence, make it unlikely!
An improving profit record
- steady rise and/or well supported forecasts
- no big dips (unless explained by external factors)
Good prospects
- growing demand for products or services
- diverse range of products/suppliers/customers
- opportunities for organic expansion/acquisition
Capable management
- not a 'one-man band'
- experienced and able team capable of handling current business and future growth.
Size matters
The minimum size of company suitable for flotation is generally determined as much by the following as by stock market rules:
- creation of a realistic market in the shares
- costs of the issue
- vendor agreement with market valuation
- level of acceptable equity dilution
- time scale of owners re future participation
- requirement for acquisition 'paper'
- importance of 'highest' rather than current price
- existence of seasonal factors regarding trading
- the need to simplify the business and minimise flotation costs
In terms of expense, flotation has had the reputation of being so costly that if you had to ask you probably couldn't afford it. This is still true!
However, provided the commercial reasons for going public are sound, the cost should not preclude suitable companies from proceeding. It should again be remembered that going public is like joining a club and should only be contemplated if you intend to fully utilise the facilities that the club provides in order to obtain value for money.
Planning a flotation
The activities that take place before flotation are numerous and complex, but it is the responsibility of the professional advisers to ensure that the necessary action is taken to facilitate a smooth path.
Some of the matters requiring consideration are:
- choice of stock exchange
- analysis of requirements of size, trading record etc.
- market appeal of company
- company valuation and setting of share price range
- percentage of equity to be sold on flotation
- split between funds for company and owners
- timetable and setting of flotation date
- selection of professional advisers
- tax implications
- financial structure and accounting requirements
- preparation / verification of prospectus details
- profit forecasts if necessary
- accountants report and cash flow forecasts
- financial and commercial public relations activity
What should I do now?
- work out a business plan for the next three years
- clarify your personal aims and ambitions in life
- take professional advice to ensure that a flotation is the most appropriate strategy
Remember
When managing a business, flotation considerations are secondary to the need to achieve sound and sustainable growth if the ultimate value is to be maximised.