Why IPO and How to make it a success – Series 1

By many accounts, 2021 has been a good start for companies that launched an IPO and for many investors who bought stock in these newly public companies. There were a total of 23 IPOs in the first half of calendar 2021 with nearly Rs.32,000 crore collected by way of IPO proceeds. But, the month of July alone could almost match that figure, going by the IPO filings expected to hit the market in July. There are a total of 12 IPOs lined up for Jul-21, and there could be more depending in the pace of approvals. Most IPOs are expected to hit by fourth week of July, although some listings could spill over to Aug-21.

But what makes an IPO successful? There are definitely many degrees of success. Here are some of the ways to measure the success of an IPO:

  • Capital raised:  Every company going public has a goal for how much capital it needs to raise with its IPO to achieve its goals. Each company will know if it was successful in meeting its own metrics.
  • Share price appreciation/return: A common indicator of success is the appreciation in share price on both the first day of trading and from the IPO to the current trading price. The buy-side and IPO companies tend to focus on the returns from the IPO offer price to the current trading price. Many of the retail investors look at the returns from the opening trading price on IPO day to the current trading price.
  • Valuation: Robust demand for an IPO stock typically results in a higher valuation for the company as IPO investors place indications of interest for the IPO stock which results in an “oversubscribed” book. Rapidly growing companies which are able to create a competitive “moat” around themselves have the potential to reduce the “IPO Discount” and price the IPO near their comps’ valuation.
  • Recruiting new customers and talent: Going public creates awareness of the company with potential customers and can also help recruit top talent. It is a mark of success when an IPO generates both of these highly valued assets.
  • Supplier Confidence: Suppliers generally see the going public process as a net positive for the IPO Company in terms of stability and long term growth prospects.

Ways to make success more likely

There are many ways for a company going public to attract investors to its IPO. Generally, a company that has higher growth than the industry average will attract investors from the buy-side. Investment bankers seek out companies that can fulfill several criteria to boost the chances for a successful offering and solid performance in the aftermarket. Here are some elements that can make the IPO more likely for success:

  • A large, growing addressable market
  • A unique and differentiated business model
  • An attractive product or service, preferably one with a competitive advantage or first-mover status that creates a “moat”
  • Strong topline revenue growth with significant, sustainable and visible projected revenue growth
  • Strong margins and cash flow generation
  • An established track record
  • An experienced, “public company-ready” management team
  • Robust financial, operational and compliance controls
  • Robust IPO project management timeline from an experienced advisor
  • Understanding different investment banks’ sector-specific recent IPO track records and equity research analyst interest

Preparation is Key to success

Planning, executing and managing an IPO is a complex task for any organization. The better prepared a company is, the more efficient and less costly the process can be. While the planning process for an IPO can start the day a company is incorporated or as late as months before a public offering, we recommend that an orderly plan be executed over a one- to two-year period. This window gives a private company time to build the capabilities to think, act and perform as a public company.

The preparation process can often be lengthy, depending on the maturity of a company’s existing processes. It is vital that the company understand and address any gaps and secure the success elements listed above before going public.

Three stages of IPO preparation

In our experience, a successful IPO has three equally important elements:

  1. A thorough IPO readiness assessment in which big picture issues are identified early and realistic timetables are established based on the offering’s strategic objectives, the company’s specific business issues, the time needed to prepare registration information and the time required to prepare for operating as a public company
  2. A working group focused on the immediate process of going public
  3. A working group focused on the tasks needed to prepare the business for being public

In our upcoming Blogs we shall discuss about the above stages in more detail. Stay Tuned…

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