Tuesday 17 March 2009

Going public - considerations in a downturn

For all the glamour associated with launching an IPO, the fact remains that the decision to do so should be based on hard business realities

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Going public - considerations in a downturn

For all the glamour associated with launching an IPO, the fact remains that the decision to do so should be based on hard business realities

By ERNEST KAN
17 March 2009

Just how well the local initial public offer (IPO) sector will navigate the liquidity crunch that has hit regional markets is not yet clear. But we continue to see promising companies that are not deterred from going for a listing or rolling out expansion plans amid the current financial turmoil. In the first two months of 2009, the Singapore Exchange (SGX) added two new counters to its Catalist board launched in late 2007.

Going public is a big decision - and definitely not something that should be taken lightly. There are advantages and disadvantages to being a public company and these should be carefully considered, especially in the current economic downturn.

This article will discuss briefly the pros and cons of conducting an IPO, the preparatory work required and the parties involved in the process.

For all the glamour associated with going public, the fact remains that the decision to do so should be based on hard business realities. The owner or shareholder of a private corporation must weigh the advantages and disadvantages of going public in light of the goals that they have set for their company.

The advantages of going public are:

• Increased capital
• Improved financial position
• Reduced personal funding and guarantees
• Public company status
• Marketability of shares
• Business succession
• Better employee morale and productivity.

The pitfalls, on the other hand, are:

• More pressure to improve growth and profit
• Greater disclosure requirements
• Dilution of control
• Listing costs.

Companies that are ready to go public generally share several characteristics. Most have progressed beyond the start-up phase, are profitable and have significant growth prospects.

For a main board listing, a potential applicant meet certain quantitative requirements. For a fast-growing company, a Catalist listing does not involve any quantitative requirements, though certain other requirements must be met.

In general, the public market readily accepts companies that have a track record of revenue growth, capable leadership, credible management, a strong network of loyal customers and suppliers, and operations in a strong industry. We encourage IPO aspirants to make use of opportunities thrown up by the current downturn to better prepare themselves for a successful IPO by doing the following early:

• Strengthen accounting and administrative systems, and investing in a strong pool of reliable and loyal employees who will support the company into the future.

• Have in place a strong management team that can set goals and map out a thorough business plan.

• Cultivate contacts in your industry to build a high-profile and capable board, with executive and independent directors who can give strategic guidance.

• Retain a reputable accounting firm that fully understands your business, can encourage investor confidence and assist during the IPO process.

• Compare the financial ratios that your company generally uses to make investment decisions with those of your industry in general, to ensure that these numbers appeal to investors.

The time required to prepare for a listing varies from company to company, depending on, among other things, the complexity of operations, and restructuring undertaken prior to listing.

Fees will have to be paid to lead-managers, auditors, lawyers and public relations firms involved in the IPO process, all of whom play an important role.

As going public requires careful planning and consulting professional advisers, we recommend that such advice be sought early. The following are the key players involved:

• Underwriters/lead-managers: The underwriters’ commission is the largest single cost of going public. It depends on the size of the IPO, the type of underwriting, the going rate for offerings of similar size and complexity, and the perceived effort required to sell the stock.

A company seeking to list also needs to appoint a lead-manager to manage the process. The lead-manager must be a member of SGX, a bank, a merchant bank or similar institution acceptable to SGX. The lead-manager will manage the launch and liaise with SGX on all matters connected with the listing application.

• Reporting auditors: Certified public accountants with experience in IPOs can provide an initial evaluation of a company’s readiness to go public and assist with upgrading management capabilities.

• Lawyers: Lawyers experienced in security offerings are needed to look after the legal aspects of an IPO.

• Public relations firms: PR firms experienced in working with the business media and securities analysts can be engaged to enhance the appeal of the listing candidate to the investing public and convey key corporate messages.

This article aims to provide a thumbnail sketch of the advantages and disadvantages of going public, pre-IPO preparation work and parties involved in the process. It should be understood that the process can be time consuming, costly and takes a substantial amount of key management focus away from day-to-day operations.

The writer is chief of operations (clients and markets) of Deloitte Singapore and heads its Global IFRS & Offerings Services Group. He can be contacted at ekan@deloitte.com