The successes of the JOBS Act and a business-friendly Administration with anathema towards over-regulation (Dodd-Frank, etc.) has rekindled an entrepreneurial spirit that has buoyed America’s economy. The ensuing thirst for capital to support innovation and growth strategies leads one to thinking about initial public offerings and other capital formation initiatives, and raises some attendant thorny questions.
How prepared are you? Are you ready for the demands of the public marketplace…sensitive to the nuances of market valuation and transparency…aware of C-suite time demands, investor information needs and the requisites of good corporate governance…the costs of maintaining a public listing of securities, as well as the notion of building relationships with investors and market influentials?
I suggest that a good majority of boards and top managements of companies in this unique position are ill-prepared. And the consequence of such situations is value left on the table, and equally important, IPO aftermarkets that are unsettling at best…value degrading as a worst case scenario. The irony of the matter is that the specialized and well compensated banking and legal counsel hired to shepherd the issuer through this momentous occasion are very much indifferent to the lethargy of the aftermarket and are long gone…having moved on to the next pigeon, perhaps.
There are numerous helpful checklists available to guide management and the board through an IPO and other financings. Some are better than others, in terms of inclusiveness and issues management; but, in the main, most all address the basics well. This article attempts neither to differentiate among them nor define the most appropriate pathway to preparedness…this is the subject for another day.
The main point of our discussion is the importance, indeed the necessity of effective pre-positioning, proper presentation and tone. That’s right…communications is critical to setting initial market value, sustainability and growth in the aftermarket. It is important to keep in mind that most any financing can be accomplished (at a price); very few fail for lack of a receptive IPO investor audience, most of whom are value-agnostic. True, some few filings are pulled or shelved due to pricing considerations; but once the trigger is pulled, the vast majority of deals are done.
The real issue for boards and top managements is (or should be) the appropriateness of initial market valuation and sustained investor interest/awareness, once the IPO euphoria dies down. Just look at the empirical evidence of failure, especially among smaller/micro caps and arcane product categories or business models, where the economics of the business are not clearly understood or appreciated. Once the professional IPO investors have taken their underwriting discounts (and, in certain cases, artificial pricing run-ups), and are out of the market, interest more or less dries up, and the bell curve heads southward, or at least is weighted downward. Those who hopefully pick up the slack are mainly value investors, who are naturally risk-averse and must have a clear understanding the fundamentals and economic prospects of the business before getting involved. No mystery, here.
In light of this, pre-IPO companies need to create and articulate a body of knowledge about themselves, their business and competitive advantage, and oftentimes the markets they serve…well before taking steps towards an initial public financing, and certainly before entering into any special banking arrangement pursuant to a regulatory filing. No gun-jumping here…no future-oriented communications beyond the bounds of the eventual SEC filing. Just, I would suggest, creating a public persona for the company, a record for file that establishes an economic frame of reference for prospective investors and other constituents. Such transparency, of course, should be continuously maintained in the aftermarket, critical as it is to future financings, value sustainability and enhancement.
Building a body of knowledge is so important, that my guidance to companies seeking investor relations counsel pursuant to an expected IPO is to first ensure that a proactive media relations program is in place, the aim of which is to build a cadre of relationships and recognition for the special attributes of the company, its products/services, economic thesis and prospects among trade and business/financial media outlets. Critical as well, is the need to develop a compelling corporate/financial “story” and to learn to tell it convincingly (through media/presentation training) via appropriate venues as well as through a well-articulated, user-friendly corporate web site.
Such proactive communications measures are keys to success in IPO/ADR initial financings, are are equally important in the aftermarket, particularly recognizing the effective demise of sell-side research sponsorship, leaving issuers with a dearth of third party validation of investment merit.
Robert D. Ferris is an investor relations and crisis counselor and commentator, with more than four decades of experience with both domestic and foreign issuers. A former chairman of National Investor Relations Institute’s Senior Roundtable, his ideas on C-suite communications strategies in challenging corporate situations have been widely published.