Snap Inc. is aiming to raise $3bn at a $25bn valuation through an IPO. Whilst many IPOs "pop" on their first day of trading, Snap (the company behind Snapchat) may well be a "flop". Snap is being censured by institutional investors with respect to its corporate governance and analysts are expressing concerns over its financials and stagnant growth. This article looks at some of the challenges companies face going into an IPO.
Purpose of the IPO
The biggest mistake most CEOs make is that they misunderstand what an IPO is. An IPO is a financing event and a recapitalisation - it is not a liquidity event. Directors need to be clear on what the objectives of the IPO are (i.e. is the money to be used for future expansion, shareholder liquidity, enhance market standing, etc.). The purpose of the IPO will inform the deal structure, the likely identity of the investors in the IPO and the desired valuation.
The jurisdiction in which a company is incorporated or in which it does the bulk of its business may not always be the best jurisdiction in which to float. Different markets have different regulatory requirements, investor bases and liquidity levels. AIM is relatively light touch from a regulatory/compliance perspective and offers access to certain funds however it can suffer from a lack of liquidity. NASDAQ may offer greater liquidity and the possibility of achieving a better valuation, but is more burdensome from a compliance perspective and will be more costly (particularly for a UK company).
Essentially, an IPO is a sales pitch. Any company preparing for an IPO needs to set out what differentiates them from their peers, where the company is now and where it is going, where the company sits in the market and what the proceeds will be used for. Very few companies are suitable candidates for IPO - they either have to be mature companies with steady revenue streams or companies with high growth potential.
Going into an IPO process, many companies will need to seriously look at their finance function. This is important both going into the process as well as ensuring that the company has the resources to meet its compliance obligations post-IPO.
A company will need to provide audited financial for the last three years. Any unaudited accounts will need to be converted and updated to include all relevant public company disclosures. This exercise can divert a lot of management time and it is important that the finance function has sufficient resources in order to manage this.
An IPO can bring unwanted attention. If you look at the IPOs of Wolfson Microelectronics, Twitter and Facebook they were all subject to pre-IPO litigation. In each instance, this was litigation designed to frustrate or hamper the IPO. Not only is such litigation unwelcome PR, but it can also divert a lot of management time from both the IPO process and running the business.
Part of the equity story (as well as ensuring that the company meets certain corporate governance standards) is the management team. Public market investors want to ensure that the management team have the right technical, qualifications, skills and experience. Any company wishing to IPO should review their board composition to ensure that they have the right personnel. Finding the right candidates and properly integrating them can be time consuming.
Any company wanting to IPO has to act as a public company. Board meetings will need to be properly formalised and relevant board committees (i.e. audit, remuneration and nomination committees need to be put in place). The company will also need to ensure that it is in compliance with any relevant codes of practice.
Last of all, companies need to note that the IPO market is cyclical, it may not always be open, even for the most suitable prospects. Also, even when the IPO markets are open, there are still times during in a year when it will be impossible to get anything anyway - this is important as slippages in the timetable can disproportionately impact the timing of the IPO.
By Giles Hawkins, Partner at Ashfords
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