Michael Oppermann Partner Head of Financial Accounting Advisory Services Germany - Switzerland Austria

Transcription

1 THE EUROMONEY EQUITY CAPITAL MARKETS HANDBOOK 2012

2 Considering an IPO? Preparing your masterpiece in capital markets Michael Oppermann Partner Head of Financial Accounting Advisory Services Germany - Switzerland Austria Phone michael.oppermann@de.ey.com Dr. Martin Steinbach Executive Director (FAAS) Head of IPO and Listing Services Germany - Switzerland - Austria Phone martin.steinbach@de.ey.com

3 Pre and post-ipo readiness and recent trends in primary markets by Michael Oppermann and Dr. Martin Steinbach, Ernst & Young Despite turbulent times, initial public offerings (IPOs) are taking place all over the world in a primary market that has changed fundamentally. Globalisation is taking place in capital markets in a highly efficient virtual environment, accessing investors worldwide without physical barriers. But how does a company begin the all-consuming task of preparing for an IPO journey? What are the lessons learnt? When starting out, it s important to realise that the IPO event is not the end game. Rather, this will be a momentous process for the organisation that will continue long after the actual transaction. The journey begins with earnest decision-making and diligent planning. The paramount importance of internal preparedness becomes apparent early in the process. And readiness is defined, in part, by managerial diligence, endurance and organisational discipline Trends in global primary markets Consolidation of exchanges and ongoing rise of emerging IPO markets Global IPO markets exhibit a rich diversity of geographies, industries and types of companies. Such investment activity also demonstrates that investors are no longer limited to primarily investing in their domestic market. Emerging markets continue to fuel global IPOs, despite financial volatility. Vice versa high-quality enterprises, primarily from the emerging markets, continue to be well-received by the world s public markets. Serving these and the following trends, world s stock exchanges continue to consolidate through transatlantic mergers. The revolution in share trading has brought about fundamental changes With the evolution of capital markets over the past few years, investors and issuers are connected in a highly efficient global environment. High speed trading networks and technology and even lower prices for hardware and trades enable investments in milliseconds with no physical barriers. New virtual trading platforms, such as dark pools, have arisen with the liberalisation of markets and high frequency and algo trading accounting for more than 50% of trading volume, has changed the behaviour of market participants fundamentally, leading to a fragmentation of liquidity and information. Convergence of main listing and regulatory requirements globally Global liquidity and capital follows a good investment story wherever it s listed. Liquidity is not sticky anymore with the market of the primary listing. As international investors require high transparency of issuers, initial and ongoing listing requirements converge and listing standards in main

4 6 markets of major stock exchanges no longer differentiate that much. As a result, exchanges profiles are quite similar, but soft differentiation factors remain in terms of environment, location, profile and image. Going forward, serving and protecting investors a global prospectus standard could lower IPO costs for issuers in the future, accompanying investors buying IPOs worldwide. Dual listings going east or west again on the rise Secondary listings are again on the rise albeit with new motivations. And an additional stock exchange listing, particularly in emerging markets, is becoming increasingly important for strategic reasons. Companies with a core strategy in the market of the dual listing especially expect higher visibility towards end consumers, better access and commitment to the market and government. The reach of relevant perception and the result of such business rationale will prove the strategic goals of dual listings in the future. Acceptance of IFRS as global financial reporting language growing Markets moving towards accepting and adopting International Financial Reporting Standards (IFRS) as the global accounting standard will improve an investor s ability to compare and evaluate companies, provide more transparency and decrease the costs incurred by companies for accumulating, preparing and reporting financial information. It also helps regulators reach their ultimate goal to increase the efficiency of financial marketplaces, lower the costs of capital with an improved allocation of capital worldwide, and enhance shareholder value. Following high speed trading with a way of efficiently communicating financials to analysts and investors, XBRL (extended Business Reporting Language) could evolve as the global communication standard in the future. Challenging IPO markets come and go but winning companies are always ready The lessons learnt from successful IPOs are even more crucial in volatile economic conditions in an interlinked world that reacts at high speed to unpredictable external shocks. Even when the financial climate is not ideal for raising funding, it could be a good time to be planning for an IPO or any other deal. While waiting for markets to settle, executives may embark upon the IPO phases and, in the two to three year transformation process, fully prepare their company so that it is ready to go public when markets recover. That s why good preparation to achieve IPO readiness is key to success. 2. Key preparation aspects of IPO readiness Executing a company strategy requires access to capital. One of the primary ways to access capital is to go public. Companies that have completed a successful IPO know the process involves the complete transformation of the people, processes and culture of the organisation from a private enterprise to a public one. Businesses need to undergo many months of advanced planning, organisation and teamwork before they are ready to go public. The journey to public company status must prepare an organisation not only for the defining moment of the IPO ceremony at the remaining trading floors, ringing the bell, but also for a whole new phase of corporate life. That s why market outperformers treat the IPO as a long-term transformational process which brings change to every aspect of the business, organisation and corporate culture. Going public is not for every company. The pitfalls are numerous and the stakes are high. Lack of adequate preparation and poor market timing can jeopardise an IPO. It s important to understand the suitability of the IPO for the business, given a company s business model, growth potential and the stage of the company s life cycle. Preparation is critical. Successful IPO candidates often spend two years or more building business processes and infrastructure, recruiting executive and advisory talent, getting in front of financial and reporting issues and mastering the essential board of directors commitment to go public. In the life-changing journey from the private

5 realm to the public markets, senior managers face numerous leadership challenges which test the IPO readiness of their business. Therefore, the key question that a CEO, CFO and senior executives need to ask is: Are we prepared? So how does a company begin the all-consuming task of preparing to go public, which starts well before the IPO event and continues long after? From the company s perspective eight main areas are usually covered by the question and answer session of an IPO readiness workshop. Shareholders, CEO and CFO typically want to know and to evaluate the following aspects: Potential IPO strategy This basic topic assesses the motivation, use of proceeds, relevant market, right exchange, adequate listing segment, first check of equity story and main cornerstones of issuing concept in an IPO base case. Legal structures as listed company Questions are about the right potential issuer, transparent company structure, design of articles of association, and type of shares. Tax optimisation pre-ipo Considerations address the country of registration, tax optimisation for shareholders and the company and transformation process into the relevant legal form. Efficiency of finance and reporting Discussions are around accounting efficiency, reporting and disclosure periods with regards to fast closing ability, IFRS-conversion and integration and the ability to deliver relevant content for prospectus preparation. Systems infrastructure readiness As the capital market requires additional information, the IPO assessment includes relevant systems like the readiness of internal controls, compliance and risk management supported by an efficient IT infrastructure. New functions for the being public phase Questions in the assessment are about the readiness of corporate governance processes, investor relations and capital market requirements like the internal preparedness for insider regulation, directors dealings, ad hoc disclosure etc. Leadership structure and organisation Is an experienced board in place? Are they well-trained for media purposes and for the life as a public company? How does the remuneration fit to capital markets expectations? What about long-term incentive plans? Timing the right IPO window Considerations include a potential IPO schedule, the relevant alternatives of plan B in a potential multi-track process and the ability to staff internal resources for IPO project management. 3. IPO readiness assessment: why, where and how to go public? To start the IPO process on the right foot, the IPO readiness assessment is a structured approach designed to guide the company through a successful IPO transaction to a strong debut in the capital markets. Executives want to Michael Oppermann Martin Steinbach Michael Oppermann, Partner Head of FAAS Financial Accounting Advisory Services tel: michael.oppermann@de.ey.com Dr. Martin Steinbach, Executive Director Head of IPO and Listing Services (FAAS) tel: martin.steinbach@de.ey.com Germany - Switzerland - Austria 7

6 8 understand more the measures that matter what it takes to win in the capital markets. The assessment is also a gap analysis tool. Its purpose is to diagnose those areas of the business which require the most development and management attention before the IPO process begins, helping the company to be listed more quickly and efficiently. It identifies gaps between the company s current state and where it needs to be for an IPO to be successful. It includes main questions about why, where and how to go public. Why? IPO motivation and strategy For many companies in an early stage the key question is: could an IPO be the right next step. The preparation starts with the careful evaluation of pros and cons of an IPO, the potential use of proceeds and examination of alternatives. This is in line with the first questions from investors at an IPO roadshow: why are you going public and what is the use of IPO proceeds? Answering these fundamental questions is key to the success of an IPO. Therefore outperforming companies weigh the benefits of going public against the drawbacks, as well as against the company and shareholders objectives. The possible motivations shown in Exhibit 1 of going public are numerous, including: improved financial condition, liquid mergers and acquistions (M&A) currency, more capital to sustain growth and innovation, better incentives for management and employees through stock options, enhanced corporate image, better future financing opportunities and the ability to benchmark operations against other public companies from the same industry. The potential drawbacks of going public can include: loss of control and privacy, limits on management s freedom to act, the demands of periodic reporting, initial and ongoing expenses, the burden of dealing with shareholders expectations and increased disclosure requirements. Where? Strategic question about the right IPO destination The decision to raise capital is no longer limited to exchanges in a company s local market companies now have a real choice. Companies deciding to go public need to map out all the necessary steps and tasks. But first they have to set down their goals in order to determine the specific requirements for the IPO. And that means determining which capital market or listing zone (the Americas, Europe/EMEIA (Europe, Middle East, India and Africa), Asia), and which stock exchange and segment will actively support the company s strategy. Up to now, companies have as a rule chosen their home market as the location for their primary listing. But, as the saying goes, the exception proves the rule: many high-profile examples of businesses, e.g., the Italian brand Prada, have gone public abroad. A company today faces a wide range of options for registering in markets in addition to, or possibly, instead of, the company s local exchange. To achieve the right combination of corporate and capital market strategy for the IPO or secondary listing, companies can choose from more than 100 stock exchanges and listing options worldwide. There are three self-contained regions for companies wishing to go public Europe/EMEIA, Asia and Possible motivations of going public Higher visibility towards all stakeholders Lead strategies M&A transactions and consolidation Better execution of LTIP/SOPs Equity: finance innovation and growth IPO Better HR: higher attractiveness for new people Exit option for PE/VC brand recognition Positioning alongside global industry leaders PE/VC = private equity/venture capital LTIP/SOPs = long-term incentive plan/stock option plans Source: Ernst & Young Exhibit 1

7 the Americas each distinguished by its different time zones, currencies and economies. But where is the stock exchange that is right for a company? This question can be approached from two perspectives the national and the sectoral. The national perspective: a company s home market is often regarded as the country in which it is incorporated. This is where companies usually go public. And it is here that investors expect the listing, as the company is intimately linked to economic development in its particular country (the economy, culture, infrastructure, technology base, taxes) and also shows its commitment to the relevant capital market regulations. The sectoral perspective: a company can also be said to be at home where people can best understand and evaluate its business model. As a result, the marketplace where many comparable companies (peers) are listed, which has sector-specific analyst expertise, and which attracts investors in the sector can also be regarded as a company s home market. Does it make sense to go public or to have the primary listing outside the company s country of incorporation? How mobile is the company on the capital market? Finding the answers to these questions can pose complex challenges particularly if there are strategic benefits to listing the company far from its familiar national market. For example, entrepreneurs can expect a listing abroad to attract consumers attention to the company s products and media presence, facilitate access to new markets and positively impact business operations. specifics. These include the size requirements implied by the regulations that have to be fulfilled, uncertainties regarding the listing process, and the waiting or processing times during the approval of the prospectus and the registration of the securities. How? Internal preparation of the company IPO readiness requires a sturdy infrastructure to facilitate regulatory compliance, to protect against risk exposure and to provide guidance to meet or beat expectations. Based on the experience and lessons learnt from many transactions, companies preparing an IPO can count on the following recommendations based on the most challenging milestones and with relevant assessments in context. Start early and commit substantial resources Preparing for an IPO is an intense and arduous process, and it s easy for management and employees to become distracted by the enormity of the task. The company must strike the right balance between 9 Considerations about IPO destination Exhibit 2 These factors shown in Exhibit 2 must be carefully examined and weighed up against each other. It involves a number of considerations from various perspectives: strategic motivations and goals; considerations relevant for valuation purposes; access to and perceptions of investors; costs and regulations; and other preferences. Other factors that motivate companies to go public outside their home market vary according to their country of incorporation and require in-depth knowledge of various Source: Ernst & Young

8 10 managerial focus on the IPO transaction and the dayto-day operation of the company. Companies should begin the IPO readiness process early enough so that the prelisted company acts and operates like a public company at least a year before the IPO. Substantial resources should be committed to the IPO process. And an experienced management team, robust financial and business infrastructure, corporate governance and investor-relations strategy that will attract the right investors need to be prepared. IPO candidates often underestimate the amount of time the IPO journey will take, and the level of scrutiny and accountability faced by a public company. This is the reason why successful companies approach the IPO as a transformational process rather than the end game or just a financing event. Main questions of the assessment are: has a formal, comprehensive written plan and time-line been developed? Are resources in place to support the IPO process and project management? Building the right IPO team: recruit and retain an experienced team Company s top managers must have the experience and skills to undertake the IPO transaction and operate a public company leading up to the roadshow and long after it is over. According to recent studies, investors expect capital market experience from the CFO, and from the CEO deep industry knowledge. Likewise, external advisers should be highly skilled professionals with extensive IPO credentials, contacts and industry expertise. They are the voices of experience. Areas of the assessment include: are the eligibility and qualifications of current board members to serve on the board of a publicly traded company evaluated? Does the management team have experience and a going-public track record? Have the right advisers with IPO and public company experience been selected? Designing a compelling equity story and minimum issuing volume Be able to articulate a compelling equity story backed up by a strong track record of growth which sets the company apart from their peers while increasing value for owners. According to a study of Ernst & Young, institutional investors base an average of 60% of their IPO investment decisions on financial performance measures in particular, growth in earnings per share (EPS), earnings before taxes, depreciation and amortisation (EBITDA) and profitability and attribute an average of 40% of their IPO investment decisions to non-financial measures, attaching the most importance to management credibility, corporate strategy and brand strength: a compelling equity story covering all these aspects is key to market an IPO. A recent study of the Investment und Asset Management Association in Germany (BVI) identified the importance of a compelling equity story as one of the top tier criteria to invest alongside a minimum market cap of 150m and a free float of around 40%. Reviewing business processes and infrastructure: construct a strong infrastructure for accurate financial reporting and forecasting A strong infrastructure which enables accurate financial forecasting and regulatory compliance needs to be in place before the IPO launch. Readiness is established, in part, by managerial diligence and endurance and organisational discipline. The company needs to define and implement adequate business policies and procedures, systems, security and controls well in advance to ensure they will withstand the rigors and scrutiny of public company status. Questions are: has the needed/desired transparency been established within the organisation? Are the financial, accounting, tax, operational and IT processes systems and controls needed to support the transformation into a public company already in place?

9 Evaluate alternative exit strategies: keeping options open Before settling on the IPO route to growth capital, most IPO candidates and private equity firms explore alternative strategies. Taking a dual-track approach expands a company s strategic options, improves negotiating leverage and reduces execution risk. The M&A market, private equity-backed deals and dual-track approaches (such as a concurrent pursuit of both an IPO and an M&A transaction) are viable alternatives to raise capital and each offer their own unique strategic advantages. The main questions are: have other possible transactions that could be attractive alternatives to an IPO been considered? Has the company s potential M&A valuation versus its public company valuation been determined? Establishing corporate governance and investor relations: create the corporate governance policies that inspire shareholder confidence Companies should take time to build a team with compliance and governance specialists, experienced investor relations (IR) officers and financial executives. Similarly, they should adopt best practice corporate governance and reporting policies that protect shareholder interests. The infrastructure-building process should include the development of a strategic investor-relations programme for marketing the company prior to the IPO so key IR professionals are on hand to guide planning for and performance during the IPO roadshow. Questions include: what kind of board system (two or one tier) fits best? Is the board in compliance with local corporate governance requirements including for example the stipulation for a financial expert? Are appropriate corporate governance oversight, policies and procedures, internal controls, bylaws and infrastructure in place? Based on the feedback from many successful IPOs, Exhibit 3 displays the main lessons learnt that IPO candidates should keep in mind and on the radar screen when preparing an IPO. Post-IPO is pre-ipo, meaning that readiness includes the phase after the first flotation and the ability of the company to serve the capital market on an ongoing basis. Because once the company goes public, the real work begins keeping the promises made during the IPO and roadshow, managing the expectations of shareholders and analysts and delivering growth and value. Managing investor relations and communications: keep investors informed by best practice communications High-performing companies delegate key communication responsibilities to their investor relations team, focus on creating a high-quality roadshow and keep investors informed through regular communications before, during, and after the IPO. Market outperformers deliver shareholder value by demonstrating effective investor relations and finance function and, most importantly, operational excellence. Strong investor relations function will help sustain the Lessons learnt pre-ipo Exhibit 3 External IPO team not really committed Plan B not evaluated and prepared No incentives agreed upon underwriting fees Source: Ernst & Young No substantial resources in place to support process Pre-IPO radar screen Limited flexibility with regards to timing Time involved underestimated Too focussed on a high price Complexity of process underestimated 11 CHAPTER XX I EUROMONEY HANDBOOKS

10 12 market s interest in the company, communicate with shareholders and the public, attract a pipeline of new investors and sell-side research coverage and manage regulatory and liability risk. Building this competency is a fundamental element in the IPO preparation process. Typical questions are, for example: does the company have a skilled investor relations expert to help build IR strategy and guide communications? Has an internal and external corporate communication strategy and plan been prepared? Maintain the pace of growth: planning pre-ipo for post-ipo requirements The preparations needed to take a business public can be arduous. With the transaction out of the way, it might be tempting to relax, but the company needs to keep moving forward. An aftermarket plan should include proactive measures to establish pricing stabilisation and active trading support, to target an optimal investor mix and long-term pipeline, to attract equity research analyst coverage and to establish an ongoing dialogue with the investment community and financial media. Market communication needs to address changes in the presentation of financial information, and the fundamental change towards fair value accounting and its impact on traditional ratios and key performance indicators. Key questions are: does the company have an IR calendar? What are the initiatives to keep the shares traded with high liquidity? Focus on the long term and keep refreshing and retelling the equity story The work companies put into getting the business ready for public life is invaluable, but the journey to long-term success requires rigorous planning matched by a commitment to operational excellence. The IPO may be the most important transaction in a company s life to date, but it s often just one more milestone along the road to market leadership. The listed company needs to continually re-evaluate and refresh the business and management team. During the IPO process, a compelling equity story was crafted about where the company is going and its fast track to market leadership. Reviewing and refreshing the equity story based on changes in corporate strategy is important to keep investors updated and interested. Cultivate effective IR, build investors confidence and facilitate liquidity IR needs to cultivate relationships with key analysts, helping them to understand the business. It takes strategic planning and proactive effort to build effective relationships. The IPO process will have created excitement about the company in the media and among investors, but over time that will fade unless IR maintains the market s interest. If the company fails to do this, the trading volume in the shares, and value of business, are likely to decline. To maintain that effort once the company is public is key to building investors confidence and establishing credibility. Sustainable and regular communication and recent news flow will provide trading liquidity, supporting investment activity in the market. Delivering the promises and managing expectations The public market is an unforgiving place. They insist on transparency and won t tolerate surprises. As a listed company, IR won t always enjoy plain sailing with respect to financial results or material news. CEOs and CFOs must deliver on promises as a fundamental preparedness factor. Furthermore, companies should meet or beat the expectations set, especially with regard to the use of proceeds. To thrive, the company needs to demonstrate to investors that they are successfully executing the business plan, while ensuring regulatory compliance. Areas to consider: companies should define the key metrics that will drive business forward. Monitor these indicators closely and use them to frame public analysis of the company, ensuring that discussion of its performance takes place on companies terms. Keep on top of emerging threats. A newly listed company has to deal with an entirely

11 Lessons learnt post-ipo Exhibit 4 No media training on C- level for IPO case With the IPO, things are done CEO/CFO busy on IR tour with negative impact on sales Source: Ernst & Young Internal structures not ready for new processes Post-IPO radar screen Promises on use of proceeds not delivered Not prepared for the requirements after the IPO Management not trained for being public phase Management of expectations not a priority new set of risks, any of which could derail the business plan. It s all about managing expectations and appropriate communication. According to the feedback from entrepreneurs with their first experience as a listed company, Exhibit 4 displays the main lessons learnt post-ipo. These are important aspects to keep in mind when preparing the company for the time after the IPO. 4. IPO readiness diagnostics: action plan and road map The results of the IPO readiness assessment will also enable the company to prioritise and focus resources on those areas expected to have the greatest impact on the efficient completion of the IPO. The report can also be used as the basis for a road map that can be developed to allow for resource and time constraints. An integrated action plan can have long-lasting implications, above meeting the minimum IPO requirements. Building a robust business infrastructure forms an important component of establishing a sound financial reputation; a key criterion by which the market will judge a company s business. IPO candidates may therefore choose to develop a level of infrastructure in excess of the minimum required for the IPO to ensure that the business is well-positioned to grow and succeed in its new environment. As investors decide about the success of an IPO at the end, their view on financial project-specific and non-financial aspects is essential to now preparing the company for an IPO. Therefore the road map and a clear action plan should keep the IPO success factors from an investor s perspective, displayed in Exhibit 5, in mind. 5. The right timing by navigating the window of opportunity Timing the market is a key success factor for an IPO. If scheduled perfectly, the price of the IPO not only offers the company an optimal valuation, but also provides IPO investors with the greatest upside in their investment in the months and years after the IPO. Companies preparing to go public within the next few years have much to consider: the strength and buoyancy of the capital markets, current economic indicators and the company s performance. Even in a challenging economy, companies which outperform the overall market prepare early for their transformational IPO journey, so that they are ready to launch quickly when markets recover. Companies must communicate realistic time-line expectations to the entire IPO team management, board members, external advisers and others. Especially in an uncertain market, outperforming companies explore alternative exit strategies to an IPO, although public offerings are generally seen as providing better valuations, access to capital, visibility and credibility. The window of IPO opportunity can be difficult to predict, as external shocks come suddenly without any announcement or pre-warning. Globalised and interlinked capital markets 13

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