The IPO process - lessons learned January 2001
Unlike other major projects that a company undertakes, an IPO (Initial Public Offering) is very likely to be the first where the drivers of the deadlines, requirements and management commitments are subject to advisers and forces substantially outside the organisation’s control. The CEO’s catchphrase "I've got a business to run" gets severely strained by tasks that put great strains on senior and middle management. The gathering, preparation and checking of information for an IPO — long–form, legal due diligence and prospectus and so on — is, put simply, a huge exercise and one that the company will generally not have experienced previously.
The purpose of this article is to give some hints as to how, during an IPO (or any major financial transaction for that matter), a company might be able to improve the time available and ability of management to focus on the day–to–day business and protect ongoing performance. It is based on intensive experience gained over the past 18 months by David Stewart, a partner in Aviation Economics.
By way of background, here is a brief outline of the typical players and steps in an IPO process. (It should be noted that this article refers generally to a UK–based IPO.) What this article omits — and maybe this will be a future topic — is a critique of an accepted traditional IPO process that is ripe for re–invention. It’s a potential quagmire of duplication, paperwork and unnecessary cost. The problem would be getting buy–in from the regulatory authorities and/or those that make their daily bread from the unnecessary hours burnt up by the existing process — the lawyers and the accountants. The process needs:
- Lead bank(s), variously called offer coordinator, book–runner, co–lead managers, global coordinators etc. whose ultimate and most value–added roles are as the "IPO sponsor", consultants on the sales pitch, organisers of the roadshow and builder of the investor book. They should also be the guardian and adviser on the financial regulatory process, acting as the interface with the appropriate authorities.
- Company legal advisers, whose primary role is to conduct the legal due diligence, take ownership of the prospectus preparation and verification, give corporate advice and ensure that the huge "bible" of legal documentation is properly completed and managed.
- Accountants, whose primary roles are to audit and present the financials, prepare the short- and long–forms, and the working capital review. Their work culminates in a series of "comfort" letters about the company that are effectively provide just that.
- Bank’s legal advisers, whose primary role is to conduct legal due diligence of the company and verification of the prospectus on the bank’s behalf. Additionally, they will negotiate and help prepare the various agreements and engagement letters that exist between the players.
In addition, a Financial PR adviser might be appointed. For a floating company new to the demands of a public financial profile, such an adviser can help establish the links into the financial press and editorial community. If the company has a small or inactive public relations function, then this support will be critical. The first task is player selection. This is a significant activity within itself, in terms of both scale and importance to success. As in so many such exercises, the selection criteria should include cost, previous and relevant experience (credibility), resources/size and the fit of the personal/corporate personalities involved. Other factors come into play for particular selections (e.g., bank’s distribution strengths).
The one selection that is out of the company’s control is that of the bank’s legal advisers. Somewhat curiously, the selection is down to the bank(s) and the bill has to be paid by the company floating. Some duty of due care and attention to costs in this selection process should be emphasised as part of selecting the bank(s). A fee cap is well advised.
The biggest load on a company is the time required to help generate the necessary legal documentation, even if these are mostly prepared by external advisers. The underlying information is after all invariably sourced from the company. With lots of advisers, lots of documents and information and only one management team, the potential pressures are obvious!
For even a relatively small IPO, upwards of sixty legal documents will require completion and signature. Many of these are procedural.
However, a few drive significant effort and cost, and as such are critical to the process. These include:
- Long form (the financial report written by accountants detailing all aspects of the business accounts, and which also describes how the company’s key systems — reservations, IT, etc. — work);
- Legal due diligence (the report written by the lawyers as a requirement of the stock exchange to satisfy all parties concerned of the legal standing of the company);
- Prospectus/listing particulars (the sales document prepared on behalf of the company, the information in which is subject to legal and stock–market regulations);
- Verification notes (documentary evidence supporting claims made in the prospectus);
- Accounts/short–form (abbreviated version of the company’s accounts); and
- Working capital memorandum (review of working capital requirements by the accountants, which has the function of ensuring that the business is sustainable in the medium term).
The nature of the beast means that all information has to be up–to–date and current as at flotation day. That is, however early one plans and effectively completes core documents, then they all need last minute updates and the last month inevitably becomes a feat of information coordination.
Despite this, the process also requires that the long form, working capital and legal due diligence reports all need to be available relatively early in the process. This provides the bank(s) with the information to assess the company, its strategy, financial performance and weaknesses, to:
- Help determine the offer structure;
- Help plan and prepare IPO marketing strategy; and
- Ensure early identification of potential barriers to fund–raising success (to enable rectification or pre–planning of how to handle the issue).
IPO management - success factors
In addition, there are areas of activity that do not result in a legal document but absorb management resource and tend to require continuous attention throughout the process. The most important are: publicity, share option schemes, project management, governance compliance and IPO marketing presentations. The extent, scope and dynamic nature of the task requires an effective and centralised project management structure. There is little chance otherwise of staying in control of deadlines, resource allocation and information integrity across documents. Experience has indicated that there are many steps that senior management can take to manage an IPO effectively. It is assumed here that the goals are to:
- Minimise the impact of the IPO on the company management, enabling a continuing focus on the business and its performance;
- Reduce duplication of adviser and management effort and therefore cost;
- Ensure necessary decisions get addressed in a timely and effective manner; and
- Procedural elements of the process get done on time.
The goal of "successful marketing and raising of the funds" belongs to the bank(s) and the roadshow team.
To achieve these stated goals, major success factors include (in no particular order of importance):
- Avoid duplication of effort. For example, the long–form and prospectus will include very similar pieces of information on items such as the market, competition, fleet, the network or the regulatory framework. Don’t let separate (expensive) advisers gather and write the necessary information independently
— do it once. Be assured, there are many further examples.
- Establish an effective project governance structure. Such a dynamic process raises a host of issues that need to resolved. Some need immediate attention, some need company and adviser buy–in. A project governance process consisting of a core project management team plus a small yet representative steering group (meeting approximately once every two weeks), has been shown to work very effectively.
- Commit dedicated internal resource and interface. The bank(s), lawyers and accountants will all want to get information and responses from the company throughout the process. If a single interface point ("IPO Project Manager") is created within the company, then it is possible to:
— Minimise duplication of information requests and streamline/ensure consistency of responses
— Simplify communications
— Help advisers get to the right source of information first time
— Centralise the planning and coordination of internal effort
Note that this Project Management role can be fulfilled internally or by using an external "interim" project manager appointed specifically and temporarily for the IPO
- Create early and clear accountability for the "difficult to resolve" or high intensity items. Certain tasks are invariably difficult, are important to the company and the process, need specific skills and continue throughout. The two most significant are share options and public relations. The company and the advisers should establish a mini–team or project manager that will focus and take accountability for such aspects.
- Clarify the external communications rules and processes early. Publicity guidelines and the processes for controlling external communications need to be clearly understood, to avoid mistakes and potential friction among the players. Get the advisers to sit with the company’s public interfaces, discuss the potential questions/situations and agree the right tactics for answers
- Get the players on the same side early on.
There are important agreements to negotiate and agree between the players, who ultimately need all to be on the same side and working together well. The most important are the bank(s) and Accountant’s engagement letter, and the underwriting agreement.
The earlier these are signed and out of the way, the better and earlier the players can focus on the task of marketing and supporting the IPO process.
- Think early about the building blocks. Before a company sets out on the road of an IPO, there are critical items — that may have long lead times — that need to be thought through and work potentially initiated. In particular: — Ensuring some level of experience at Board level of the IPO process
— Completeness, organisation and accessibility of corporate documents (company secretarial records, contracts, Board papers and minutes et al)
— Corporate governance and the potential need to recruit additional non–executives or company secretarial resources to satisfy code requirements
— Risk management process adequacy
— Size, expertise and experience of the Finance team (see point below)
- Ensure adequate financial team resourcing.
The one function that will invariably suffer the most (in terms of workload) in an IPO is the Finance team. Their expertise and knowledge is critical to generating many of the key documents — and the team has to continue to do month–end reporting. Make sure this group is large enough, has the right skills, and ideally consists of players with IPO experience.
An IPO is an intensive and new experience for most companies and their management teams. Cost and the pain of the experience can be reduced, and the probability of success increased, by careful advance planning and effective project management. The lessons above were learned the hard way.