How do you actually judge the success of an IPO? What makes a successful IPO? There could be a variety of parameters. For example, the extent of oversubscription can be one gauge of the success of an IPO. Secondly, the listing premium can be one more method of judging whether the IPO was successful or not. Lastly, there is the sustainable price after listing that also makes a difference to the long term success of an IPO. How have companies like D-Mart and Sankara Building Products not only got oversubscription and good listing but are also continuing to quote at premium valuations for more than a year. What are the IPO success factors and more importantly, what the requirements for a successful IPO. While there could be many points that contribute to the success of an IPO, the following 7 points hold the key to your IPO success.
Factors that contribute to the success of an IPO
1. You will be surprised to know but the CFO of the company, who normally coordinates all the business aspects of the IPO, is a key factor in contributing to the success of the IPO. The CFO plays a central and pivotal role in marketing your IPO and should have several quarters to learn the business and ensure necessary visibility. Ensure that your CFO perfectly understands both sides of the IPO; the business side of the company and the stock market perspective of the company. Quite often, this aspect is ignored but you must remember that the CFO has a key role right from the selection of the investment bankers (BRLMs), which is our next point anyways.
2. Selection of an investment banker makes a big difference. While even the best of investment bankers will not be able to sell a sub-standard issue, their role is very important where a compelling story has to be told to retail and to institutional investors. Normally, investment banks are invited to present their qualifications and views on IPO positioning to the board. Make sure that the banks compete for your business; your leverage to ensure you get their best people and flexibility on how they’ll split the economics on your deal is at its peak before you make your selections. You need investment bankers who can line up institutions, coordinate road shows globally, understand the pulse of retail market, handle the wealth clients smartly, manage the process with the back-end and ensure exchange and SEBI compliances without hitches.
3. Pad up your manpower and your capital base before the IPO. You must not look like a company that is desperate to raise money in the market. Investors are interested in companies that want to share ownership not companies that are desperate to hive off ownership. The best way you can do this is to show that the company has top notch talent and also top notch access to capital. That is the key to building investor trust and makes investment bankers also a lot more comfortable.
4. Gauge investor opinion and assess the appetite for the stock well in advance by meeting with public investors and sell-side research analysts in the 6-12 months prior to filing for the IPO. The planning process has to start well in advance. Use these meetings to hone your story and practice responding to the types of questions public investors will ask. Remember, however, you’ll begin to build a reputation during these encounters. It’s critical to establish a track record of meeting or exceeding the objectives you lay out during these meetings. This is the precursor or the rehearsal before the actual pitch.
5. Try to be as transparent as possible. There is always a premium in the stock market for higher levels of transparency and disclosure practices. Don’t invent any metrics as you market your IPO. Don’t get up into shibboleths like Adjusted Cash Flows, EV/EBITDA etc. Investors tend to assume the worst when they see new metrics and will only buy your stock if they understand how to forecast your performance. Also make sure that your financial projections are sufficiently haircut. To be successful as a public company and create value over the long term, you’ll need to continually meet or exceed expectations. Set yourself up to beat numbers and raise guidance for several quarters after your IPO by keeping a lid on expectations.
6. If there is one factor that determines the success of your IPO, it is pricing! If your stock price closes its first day of trading up 25-50% from its IPO price, you clearly left some money on the table. If you squeeze too much out of the price potential in the IPO itself, then you are going to get a weak listing as well as mad publicity. Seek to attract serious, long-term investors who have done their homework and understand your business.
7. This is the Holy Grail of managing an IPO. If you think that your IPO activity ends with the listing and the ceremonial bell, you are grossly mistaken. Be prepared to devote lots of time to investor relations. Typically, CEOs and CFOs spend 20-30% of their time during the first year as a public company on investor relations. How the company performs post listing in the first 1 year is what is critical. After that, it is the sheer momentum that drives the price of the stock.
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