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IPO Roundtable: Navigating the New IPO Marketplace

IPO Roundtable: Navigating the New  IPO Marketplace

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TI Consulting recently convened a panel of IPO experts at the Dow Jones Private Equity Analyst Conference to talk about the current market and discuss how companies can best prepare for an IPO, take advantage of new regulations that provide additional opportunities and avoid pitfalls that can erode enterprise value.

ELLIOT FUHR: Doug, what’s your view on the current state of the IPO market? Is it open or closed? How do you see this playing out?

DOUG BAIRD: I’m happy to report that the IPO market is open. We’ve had 90 IPOs already priced in the United States this year. Seven are going on right now. The 47 filed deals have been worth $11 billion, and this number does not include confidential filings under the JOBS [Jumpstart Our Business Startups] Act, which we expect will add another 25 percent to 40 percent. Consider also that more IPO proceeds were raised in 2011 than in any year in the 1990s except 1999. Yet many people think today’s IPO market is not reliable or that it’s nonexistent. It’s a different market from the way it was in the ’90s — the golden era for equity capital markets bankers — when we saw 300 to 400 IPOs a year. Now we see 85 to 100.

Today, the market is much more subdued, and investors are increasingly careful, but the outlook still is good for companies with strong financials, governance and reputation.

There was a time at the height of the Internet boom when five companies would go public in the United States on a given day. And it didn’t matter what kind of company it was. Today, you can’t take an organization public at a ridiculous valuation and expect a tremendous outcome. The current IPO market is very rational and mature. Great companies get a great outcome; good companies get a good outcome; bad companies get no outcome. And that is encouraging because a market such as this is sustainable.

This IPO market extends across a range of industries — it’s not dominated by technology companies. Tech companies will make up about a third of the IPOs this year. Of the 10 top-performing IPOs, only four are in the tech business. If you combine broadly defined industrial and consumer companies, they are more active in the IPO market than the tech industry. We’ve also seen varying activity by healthcare companies. So a lot of organizations have been able to participate and raise capital at reasonably attractive valuations. Even after the puppet show surrounding the Facebook IPO, its stock continues to trade at 50 times forward earnings and 30 times three-year forward earnings. Thus, the market still will pay handsomely for companies that investors feel will make them rich.

ELLIOT FUHR: Joe, how are companies using the JOBS Act as a way to raise funding?

JOSEPH HALL: I don’t think it’s an understatement to say that, from a strictly legal perspective, this is the best time to go public since the Sarbanes-Oxley [SOX] Act was introduced in 2002. In 2012, Congress produced something historic: For the first time, legislators actually ratcheted back the requirements associated with being a public company. We have had some SEC [U.S. Securities and Exchange Commission] initiatives over the years that have smoothed the process, but Congress, over the past year, has provided some real dollars-and-cents savings.

The JOBS Act is a grab bag of different provisions, and we’re now seeing smart companies take advantage of some of these options. One is the ability to do some premarketing with institutional investors before starting the road show. Not every company can do this, but those that do can gain a wealth of information. The JOBS Act also permits companies to submit a confidential filing. This is very useful for companies that don’t have a high degree of certainty about where the path to an IPO will end. Organizations may be wary about customers finding out certain information or employees knowing all the details of executive compensation. Before the JOBS Act, these confidential filings were available only to foreign companies. Now it seems that the only time it makes sense to make a public filing is when you’re trying to play off your M&A [merger and acquisition] opportunities against your IPO possibilities, and you want to show the M&A buyer you’re serious about going public. The only drawback of confidential filings has been that the market and the bankers no longer have a complete picture of the forward IPO calendar so it might be harder for a CEO or a CFO to see how many other people in that company’s space are going to be out there at the same time. We’ve raised this issue with the SEC. The biggest change deals with SOX 404 — the auditors’ assessment of whether a company has the right financial controls. Every CFO I’ve dealt with since Sarbanes-Oxley was enacted has worried about this because, depending on the size of the company, it costs between $1 million and $4 million to become SOX 404 compliant. This comes out of earnings the first year after going public. With the JOBS provisions, companies now have five years after the IPO to become SOX 404 compliant. While some companies wonder if the market will react adversely to a deferred SOX 404, most take advantage of it if they can — and they will continue to do so until the bankers tell them it’s a real marketing no-no. Companies feel the same way about reduced executive compensation disclosure.

Companies continue to be skittish about one new option in the JOBS Act — the ability to maintain private company accounting in the event that FASB [Financial Accounting Standards Board] regulations change. If FASB changes a standard but applies it to public companies only, an emerging growth company [EGC] under the JOBS Act has to comply with it only when the standard applies to private companies as well. And you have to elect whether or not you’ll be taking advantage of the ruling in your first SEC filing. We think most companies won’t because they want to maintain comparability with their peers and not have to take a catch-up adjustment when an organization exits EGC status.

The JOBS Act also has made it easier for banks to conduct and publish research around the time of an IPO, but we are not seeing a lot of activity there. While pre-deal research by syndicate banks is common in Europe and Latin America, U.S.-based banks are too concerned about lawsuits (in response to unfavorable analysis) to move in that direction.

ELLIOT FUHR: So there’s a respectable amount of visible activity in the market, and there clearly is a lot going on behind the scenes, too. Beth, how should these companies be managing their internal and external communications as they prepare for an IPO?

ELIZABETH SAUNDERS: Shortly following an IPO, a downturn in corporate reputation can have a most devastating effect on the value of an enterprise. We saw what happened short term with Facebook. While many companies devote plenty of resources and thought to promoting themselves to potential investors, they often do not think enough about protecting the organization’s reputation.

I see three critical areas that can damage companies. The first is when they mis-forecast their expected revenues or earnings, as Facebook did. Maybe the internal process for figuring earnings wasn’t robust enough or management was not careful to depict a realistic range for the market. What always causes the greatest displacement in stock price for new IPOs is the mismatch between what a company says it’s going to do and what it actually does. Companies have the toughest time recovering if this mismatch is evident within one or two quarters of the IPO. Companies need to understand where they will make money and decide during the IPO process how transparent they’re going to be and how broad and aggressive the guidance range will be.

The second threat to corporate reputation is misconduct on the part of the CEO or others. It’s incredibly hard for a company to recover from this type of problem. Companies can guard against this by protecting their CEO in the public markets. In an IPO scenario, the CEO will be under fire and will have lots of opportunities to make mistakes in public with the media and with investors. The CEO should be ready to address the top one to five issues that could cause immediate erosion of enterprise value. The CEO must thoroughly understand the issues, be prepared to tell the right story and have appropriate media presence. He or she will be the poster child for the company.

The third area that pre-IPO companies must consider is increased scrutiny. Once they go public, any catastrophe or fractious problem quickly becomes public knowledge. If you operate a mine in Chile and seven Chilean miners are killed, what should you do? If you have an environmental problem or an SEC investigation, what happens? When companies are private, problems like these are easier to resolve out of the public eye. But in a public company, enterprise value erodes very, very quickly. News about a crisis can spread swiftly through social media and other channels to employees, investors, customers and regulatory agencies. A catastrophic event instantly can decrease value and force out a CEO or members of the board. Companies must have a process to mitigate the risk of such events during the IPO and after.

ELLIOT FUHR: Let’s think about what we should be looking for in the marketplace and what might trigger more companies to make their S1 filings happen. Doug, what do you tell your clients?

DOUG BAIRD: First and foremost, it’s about the fundamental performance of the business, particularly the quarter that leads up to the launch. But remember that IPO markets are part of the equity market so we’re always looking at how aggressive investors are behaving in the secondary markets. Are multiples holding up? Are valuations solid? Is this the right landing area to get a deal done? I think the most astute issuers now understand that the market is volatile and that they need to move quickly at the proper time. If you look at the market since this past Labor Day, you can see we still are in a volatile, trendless phase. As sure as night follows day, we could see a 15 percent bump in the Standard & Poor’s Index and then be one headline away from a 15 percent selloff. So what we’re finding, particularly among our private equity clients, is they’re becoming very savvy about hitting financing windows quickly.

JOSEPH HALL: Management should understand that a lot of homework must be done before it takes advantage of that open window. The best time to do so is when the window is shut. That is the time to plan for the IPO, make sure you’ve got SEC-compliant financials and think through your governance issues. I have found there’s been some reluctance on the part of management to devote that kind of time to these important tasks. But unless it does, the company will not be in a position to catch an opportunity when one is available.

ELLIOT FUHR: Beth, what other advice would you give executives in the communications realm before they move forward with an IPO?

ELIZABETH SAUNDERS: Companies don’t always go to market with their story as well-formulated as they could. I think that when the market isn’t right to launch, it’s a wonderful time to craft and hone that story and to prepare to tell it concisely and confidently. Don’t wait until four days before you go on the road and practice the talking points with your bankers on the plane.

ELLIOT FUHR: Thank you all for your perspectives.

The views expressed in this article are those of the roundtable participants and not necessarily those of FTI Consulting, Inc., or its other professionals.

Published February 2013

© Copyright 2013. The views expressed herein are those of the author and do not necessarily represent the views of FTI Consulting, Inc. or its other professionals.

Moderator


Elliot Fuhr
elliot.fuhr@fticonsulting.com
Senior Managing Director
Corporate Finance
Office of the CFO Solutions Leader
FTI Consulting

Participants


Doug Baird
Chairman, Equity Capital Markets
Citigroup Global Markets

Joseph Hall
Partner
Davis, Polk & Wardwell LLP

Elizabeth Saunders
elizabeth.saunders@fticonsulting.com
Senior Managing Director
Americas Chairman
Strategic Communications
FTI Consulting

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With more than 25 years of experience advising management teams in critical situations, the Strategic Communications practice of FTI Consulting has a broad network of relationships with key influencers, and provides communications counsel based on in-depth industry knowledge and experience.
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The Corporate Finance & Restructuring segment at FTI Consulting focuses on strategic, operational, financial and capital needs of businesses. We address the full spectrum of financial and transactional challenges faced by companies, boards, private equity sponsors, creditor constituencies and other stakeholders.
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