How to successfully raise an IPO

High oil prices, high liquidity, a constant flow of wealth and a hunger for instant growth has meant that this year’s rate of Initial Public Offerings is threatening to outstrip all previous records. CEO Middle East guides you through how to match your peers and successfully raise an IPO

  • E-Mail
By  James Bennett Published  May 11, 2006

|~||~||~|If there were three words to sum up the financial landscape of the Middle East so far this year, you would have to choose Initial, Public, and Offering (IPO). Not a day has gone by this year without news of a company’s share issue breaking the world-record over-subscription record or a business announcing plans to raise an IPO to fund “further growth and acquisitions” later in the year. The surge in interest, due mainly to the initial excitement and immaturity of the region’s multiple markets compared to others, has been unprecedented with interested parties lapping up the millions of stocks on offer and pouring billions of dollars of fresh cash into Middle Eastern businesses. Of course, this is good news for us all, with regional companies experiencing never-before-seen growth levels, so why is your business not following suit and how can you match their success? Read on to find out. Why do you want to take your company public? There are two main reasons why companies decide to take the plunge and go public. The first is to gain access to additional capital and to seek a broader base of investors if a business’s main intention is to seek to raise a large amount of cash. The second is to “monetise”, says Mustafa Abdel Wadood, CEO of EFG-Hermes in the UAE, the Arab world’s largest investment bank and one of the main players in the Middle East’s largest ever IPOs (the UAEs second telecoms operator ‘Du’) at over AED400 billion (US $109 billion). “The founders of the company may need to have to reward the shareholders or they are perhaps seeking financial freedom and need to release a slice of extra capital to shareholders.” Examine your requirements Ask yourself the following: Is this the right time to take the company public? What are the likely capital requirements? How strong is your competitive advantage and how can it be maintained and strengthened? What is the level of quality within the management team, and is it ready to dedicate time to investor relations? What will attract investors to the company? Is the business committed to growth and are you ready for a transparent and efficient communication process? If your decision to go public is to raise capital, plan how you want your company to grow. As Wadood says, decide on your “equity story”. “Investors are out there looking at companies that are looking to raise serious capital – they want buy into growth,” he adds. George Nasra, CEO of NBK Capital, the investment arm of the National Bank of Kuwait, agrees: “Investors buy the future. They invest in companies that have a solid track record of success with a sound and attractive business model.” Shirish Saraf, executive director at asset management firm Abraaj Capital, one of the first players to raise an IPO (on behalf of construction company Arabtec) in the Middle East in August 2004, adds: “Arabtec successfully raised an IPO because it had good growth prospects, our advice and input gave them a good level of corporate governance and they had a strong management team.” Assess the benefits Going public and raising an IPO can bring your business significant benefits, both by increasing the visibility of the company among the investment community, and also by providing a public market on which it can raise capital to fund both current and future growth. Companies can raise funds both at the time of their IPOs and by issuing secondary securities on the market. Access to equity finance gives companies greater flexibility to finance expansion and development programmes such as mergers and acquisitions. It can also be used to reduce current and future borrowings, which allows a company to negotiate more favourable terms with suppliers, customers and financiers. Raising an IPO can enhance the marketability of a company’s business and generate greater public awareness of its products and services; give you and your shareholders a better valuation and greater liquidity; incentivise your employees and give you an advantage in the recruitment market and give you access to a wider range of investors. Assess the costs Fees and expenses vary and are influenced by factors including the complexity and size of the share issue, the number of advisors and the extent to which you market the IPO. Other fees can be widespread so ensure you have a solid checklist of what you will need to pay for before making any rash decisions. Fees include those for: initial filing, annual maintenance, underwriting, investment banking, accounting and auditing, lawyers, public relations consultants, registrars and marketing. Assess the legal requirements Legal rules vary from country to country in the region. In the UAE, for example, a minimum of 51% of a locally established limited liability company’s capital must be held by UAE nationals and initial capital investment must not be less than AED10 million (US $ 2.72 million). Instill an IPO culture “Companies planning to go public should allow themselves sufficient lead time of around one to two years to prepare and start acting as public companies well in advance of the actual public floatation date,” says Nasra. The CEO and senior management should instill a ‘public company’ culture across the organisation with serious time and effort committed to improving the quality of financial reporting and information systems. Introduce performance-linked executive compensation plans, revamp internal controls, enforce corporate governance, and create a strong corporate communications programme to build awareness for the company and its attributes leading up to the IPO. Appoint the right advisors This is one of the most crucial areas of the process to get right. Get it wrong and both the short and the long-term consequences can be costly. Wadood, whose team worked solidly with Du for 12 months, says it is crucial to “buy-in” the right investment bank early on. “The right advisor should have a successful track record of taking companies public. “If you get the right one they will automatically be able to address any issues ahead of the IPO.” Wadood adds that by working closely with Du for such a long period of time, assessing and then making the right pre-IPO acquisitions, engaging it with the right banks and preparing the company fully was the key to its share issuing success. “You can’t take a short-term approach. Only work with an advisor you feel comfortable with.” The right management team The right board, working in conjunction with hired-in advisors, is equally vital to the smooth pre and post-IPO process. If you go public and haven’t got someone in the boardroom with a track record of IPOs, bring one in. As a CEO you must know the IPO process back to front, work closely with existing customers, shareholders, employees and advisors, ensure the right levels of corporate governance and transparency and be confident that you can successfully take the company forward when it goes public. “It should not be a one-man show. The second and third tier of management must also be strong in the same knowledge areas,” says Saraf. “Succession management should also be considered at an early stage. The board must think ahead to the next generation and ensure the success continues.” Nasra says that while it takes an integrated team of third parties to take a company public, the right investment bank, lead manager and coordinator, is undoubtedly the most critical partner. “The investment bank advises the company on the fair value of the shares, the optimal capital structure and percentage to be floated, and the timing of when to go public taking into consideration capital market conditions,” he says. “In addition the lead managing investment bank, a group of other co-managers, participants, and placement agents (‘syndicate’) is also responsible for the execution of the IPO transaction. They will also organise a roadshow that markets the offering to a select group of potential investors, as well as manage subscription, allocation, and after-market support activities.” The CEO’s responsibility By choosing to go public the CEO is accountable to the entire shareholder base and his or her role is one of the most important in the entire process. He or she must be able to communicate the IPO issue in an accurate, reliable and transparent manner and put in place the right corporate governance structure. At the same time, he or she must do this in a way that does not compromise any confidentiality agreements. “The chief executive’s role in successfully raising and communicating an IPO is pivotal,” says Wadood. “As the face of the company, he or she needs to be involved right from the start. The success of the equity story is dependent on the strategy developed by the CEO,” he says. “You have to have the ability to report fairly, honestly, transparently and accurately to the market as well as predict the disasters that could and will lie ahead.” Tell the truth Match your market expectations with your marketing and publicity – raising an IPO is not a showcase but an effective means of accessing additional capital in a responsible and mature manner while laying the foundations for future growth prospects. Do not hype the IPO to an undeliverable scale. Respect it.||**||

Add a Comment

Your display name This field is mandatory

Your e-mail address This field is mandatory (Your e-mail address won't be published)

Security code