While the prospect of floating a company may seem daunting, 
thorough preparation and planning will pay dividends in the long run. 
 
Story Melissa Wilkinson Illustration Nigel Buchanan  
 
Listing a company is probably the biggest investment in an organisation’s long-term growth that senior management can make. It’s a once-in-a-lifetime event that will permanently change the way an organisation looks, feels and operates. 
 
Most companies go down the initial public offering (IPO) route to gain greater access to equity capital to fund their future growth. Listing provides companies with exposure to a wider range of investors, creates more financing opportunities and usually increases the company’s prestige in the market. Companies need to have a market capitalisation of at least $100 million before considering listing publicly if they want to attract larger, long-term institutional investors. 
 
While the benefits are numerous, experienced chief executives know that floating a company is hard work. The super cynical will also add that listing creates a new platform for more hard work. 
 
There’s no doubt that floating a company is a rigorous, time consuming and exhausting process for the majority of players involved. Like any major campaign, if the preparation and planning have not been up to scratch, the results will speak for themselves. In the case of listing, though, the ramifications of poor planning can be even more serious, and can lead to potential criminal or civil prosecution if a company fails to meet its prospectus forecasts or breaches other regulatory rules. 
 
Thorough preparation is one of the best ways to reduce the chances of unexpected issues cropping up. These issues can consume valuable management resources at the wrong times and significantly delay the whole process. 
 
According to market veteran Rowan Johnston from independent advisory firm Caliburn Partnership, an absence of preparation will ultimately impact on a company’s value. 
 
“The company will end up spending much more time and money on the process than expected and in the end get a lower value when it floats. Management should allow four to five months at a minimum to get the company ready to list. 
 
“Floating a company can be very intensive and people don’t realise how much pressure they’re going to be under during the process. Most companies seriously underestimate the time and effort involved. However if they plan it properly, the work load can be heavy, but not prohibitive,” he says. 
 
Listing is a costly and disruptive process in the short term and a company needs to be clear about its long-term objectives beforehand. Because it adds an extra burden to management both before and after the float, the CEO needs to ensure that there are enough resources in place to support the senior team. 
 
Without the extra hands on deck, there is a real risk that the day-to-day operations of the business are negatively affected. Highly distracted and overstretched managers do not bode well for fulfilling prospectus growth forecasts. Plus, institutional investors have long memories and do not easily forgive a company that stumbles just after jumping out of the IPO gate. 
 
A company also needs to be prepared for the rigour of ongoing financial reporting and a demanding annual reporting calendar. Listing involves a much higher level of public disclosure than a private company ever faces. It means intense scrutiny from shareholders, analysts and competitors. 
 
This often requires a massive cultural shift inside a company and can be challenging for many individuals. The CEO must be able to balance commercial realities with the requirements of full and frank disclosure. 
 
THE REALITY OF FLOATING 
Rob Penney, executive director in the equity capital markets division of investment bank Goldman Sachs JBWere, says that smaller companies in particular often have the most trouble with the transition to public life. “Some companies have the mistaken view that life as a listed company is a breeze. 
 
The reality is that the continuous scrutiny from public shareholders and the broader market creates a whole new series of pressures for board and management, not the least of which is meeting their financial performance expectations. This begins with hitting prospectus forecasts. The CEO and CFO also often underestimate the amount of time they must spend communicating with their shareholders and research analysts as well as running the company,” he says. 
 
GETTING IPO READY 
One of the consistent pieces of advice in regard to listing successfully is for companies to start acting like a public company as early as possible in the lead up to the float. A company’s float will be dead in the water unless it can meet a number of criteria. A solid track record of earnings growth is desirable, but a clear plan to drive medium-term growth is essential. It needs a strong competitive position within its market segment in order to continue to grow. It must also have robust financial, operational and information systems which are capable o fmeeting the various reporting requirements required for listed companies. 
 
Penney believes that the number one thing that the market focuses on at listing time is the quality of a company’s management. “The CEO and CFO are the key people under the spotlight. Institutional investors want to know that they’re top quality and can deliver on what’s promised. Investors want to see that they have the capacity to really grow the company’s earnings organically or through sensible acquisitions. What they generally don’t like is investing in companies that operate in low growth, capital intensive industries,” he says. 
 
The board also plays an important role in an IPO. It needs to be able to help steer the company through the listing process and deliver the commercial performance required of a listed company. The market will look closely at its structure, composition and each director’s ability to meet their commitments. 
 
It’s common for institutional investors to find it difficult to get comfortable with an entire board of directors whom they don’t recognise. Independent directors are highly regarded, particularly if they have experience in the listing process. A it takes time to find the right directors, getting the search process under way early is recommended. Most Australian public company boards contain five to seven directors, two of whom are executives of the company and the remainder are non-executives. 
 
There are a number of other housekeeping issues which often need tobe addressed before a company can list. Effective corporate governance procedures need to be set in place so that the company can pass all the regulatory hurdles. Staff incentive programs may need to be revisited and material contracts often need to be renegotiated. Note that these steps can take longer than expected. 
 
BUILDING A SUCCESSFUL LISTING TEAM  
A small army of specialist advisers is involved in successfully getting a company to market. These include corporate advisers, brokers to the issue, underwriters, accountants, lawyers, industry experts, valuation specialists ,public relations consultants, share registry representatives and printers. The right mix of advisers should not be undervalued. Trust and open communication may sound light and fluffy, but in practice they are critical ingredients to a healthy IPO team. Heated arguments between different advisers at two in the morning do little to contribute to a smooth listing process. Jon Dobell, managing partner for strategic growth markets at Ernst & Young, recommends choosing advisers carefully. 
 
“The right adviser brings invaluable experience, leadership and resources to the process. They should help anticipate issues, identify the areas to focus on and help improve the efficiency of the process. Theycan also help mitigate any risks and minimize the disruption to the management team and business. Their role is to help deliver a successful IPO on time and on budget. 
 
“Your relationships with your advisers are crucial as you will be spending a lot of time with them over the IPO process. That’s why you need to trust them to provide you with accurate, candid and unbiased input,” he says. As very few companies have been created from the same cookie cutter it’s not necessary to appoint an adviser with experience in your particular sector. Experience in the actual listing process is far more important. 
 
KEEPING CONTROL OF THE IPO PROCESS 
A common area where things can go a bit off the rails in the IPO process is in the due diligence stage. This part of the preparation phase can be at risk of being taken over by brokers or lawyers and can lead to a blow out in costs or slippage in the timetable. Unless a company keeps a tight rein over the process, discussion can end up focusing on details which are immaterial to the float. A due diligence committee normally controls the due diligence process. It comprises those who may have liability under the Corporations Act for some or all of the prospectus contents and includes key advisers, company management and most importantly the directors (usually through one or two representative directors who will report back to all the others). The more professional and experienced the members in the committee, the more productive and cost effective the process. 
 
Sarah Dulhunty, practice head of Blake Dawson Waldron’s equity capital markets team, says that in the early days, due diligence was very checklist focused. 
 
“This meant that a lot of time was wasted on non-material matters. However, these days most people try to take a more issuesbased approach to the process. The right people from the senior management team need to buy into the due diligence process. It’s important they’re involved as they need to thoroughly brief the due diligence committee about the company’s strengths, challenges and potential risks. 
 
“If the senior people are engaged early on, it makes everything run much more smoothly. Due diligence is required so that the company’s prospectus is basically right, doesn’t omit material information and is not misleading or deceptive. 
 
“The greatest cost blowouts in the due diligence process happen when companies are not well organised. We try to take some time to educate the CEO and the management team about exactly what is involved. It definitely becomes harder when you have a thinly resourced client,” she says. 
 
People involved in the process also need to understand the interconnectedness of various decisions and make every effort to deliver on time. While there needs to be some fat and flexibility in the timetable, too many delays in finalising the due diligencereport can lead to a delay in lodging the 
company’s prospectus. 
 
MAXIMISING THE VALUE OF THE FLOAT 
One of the less technical parts of the IPO process involves marketing the offer and talking to investors about the company’s investment potential and growth prospects. Ronn Bechler, managing director of corporate advisory firm Capital Advice, says that some companies fall into the trap of thinking that the lead-up to the IPO is more of a sales process rather than an educational process. 
 
“Over-promising and selling the story too hard can have serious implications in terms of credibility. The market’s trust is very easy to lose and it takes a long time to win it back in the event that the company doesn’t meet its forecasts. 
 
“A company needs to be realistic about its outlook and any challenges that need to be faced. The CEO and senior management team need to appreciate that the people they meet through the investor roadshow and marketing process are likely to be shareholders in the long term. That’s why it’s important to focus on building strong relationships pre and post IPO. They need to be prepared for institutional investors and analysts to stare into the whites of their eyes in order to assess the overall credibility and capability of the team,” he says. 
 
Every company going through the listing process is likely to experience a steep and rapid learning curve. This means that it must be prepared to face a barrage of commentary once listed. Senior management need to be able to handle a diverse range of stakeholders including pushy journalists, pesky retail investors and opinionated fund managers. According to Bechler, the CEO and CFO shouldn’t take any market criticism too personally. 
 
“Brokers and analysts need to have their own opinions so you won’t always have people agreeing with you. It’s very useful to understand the market’s view of your business and what they perceive as the key issues. “Don’t be afraid to ask questions about what people think of your company. It’s important to accept that the company’s share price will fluctuate every day and management shouldn’t get too hung up on it. They shouldn’t try and react to every rumour,” Bechler says. 
 
Once a company is listed, it needs to dedicate some resources to an investor relations program to help it stay on the radar of institutional investors. Companies need to be proactive in targeting the right mix of investors on their registers and be smart about their post-IPO marketing. Smaller companies without much research coverage need to invest time in building relationships with a range of broking houses in order to drum up investor interest. 
 
While the IPO process involves considerable pain in the short term, members of the management team need to keep their eyes on the longer term goals of expansion and growth. They need to realise that once the company has been listed and all the fees have been paid, publicly listed life can be a lonely and unforgiving experience. The only remedy is for a company to work as hard as possible in the pre-IPO stage so that it’s in the best position to hit the boards running on the day of the float.