The London Stock Exchange is on track to raise a post-recession record from flotations this year, more than doubling last year’s sales. Initial Public Offerings (IPOs) are set to raise £18.5bn in 2014, the highest since 2007 according to figures compiled by Capita Asset Services. Leading flotations include Just Eat, which was valued at £1.47bn, more than 100 times its underlying earnings, Saga, Pets at Home, Poundland and Zoopla.
It was therefore timely that last week I was invited to a forum entitled How to Prepare and Execute an IPO and Thrive as a Public Company. The forum was organised by Renovata Partners, an executive search boutique specialising in high growth and technology companies. In light of intense corporate finance and particularly IPO activity in the technology sector over the past year or so, many companies are growing with a future IPO in mind, or are thinking about how to best manage their business under the scrutiny of public markets. This event was designed to provide valuable insights from senior figures who have experienced the process of going through an IPO.
The moderator was Marcus Le Grice who is a Founding Partner and Head of Equity Advisory for STJ – a leading capital markets advisory firm. Prior to joining STJ, he held a number of senior positions in investment banking including at Deutsche Bank from 1990 to 2005 (where he was Co-Head of Equity Capital Markets (ECM) Origination) and Nomura from 2006 to 2009 (where he was Head of Emerging Markets and Japan-related Financing in Global Finance and previously Head of ECM). Before taking up banking Marcus was a lawyer for Corporate and Commercial law at Freshfields.
Marcus has been instrumental in the origination and execution of a wide range of international equity and equity-linked capital transactions for global corporates, private equity and governments. In the last five years at STJ, Marcus has, amongst others, advised on the IPO offerings of XXL, Card Factory, Sanitec, Stock Spirits, Matas, bpost, Deutsche Annington, Ziggo, Brenntag, TDC and Chr. Hansen.
Marcus said an IPO must always be seen as just one of a range of alternatives. A trade sale may deliver more value. Nor can it ever be seen as independent of the market. You can choose your market but you cannot control it. Across the European Union in 2014 there have been 120 IPO processes started but a quarter of these were pulled before pricing had been set, despite the relative bullish nature of the markets. Of those that had been priced fully 40% are trading below the initial price.
Brian McBride is the Chairman of ASOS PLC, Senior Non-Executive Director at AO.com PLC and is Senior Adviser with Scottish Equity Partners. He is a member of the Court of the University of Glasgow and a member of the Government’s Digital Advisory Board. Brian was CEO of Amazon.co.uk from 2006 to 2011. He began his career with Xerox and subsequently worked in senior roles at IBM, Dell Computers and as the CEO of T-Mobile (UK). Brian played an active role in the IPOs of AO.com during 2014 and SThree Plc on both occasions as a Non-Executive Director.
Brian addressed the issue of the entrepreneurial founder who remains on the board as CEO. The IPO process usually takes six months and the CEO will be needed for 30-40% of that time. The entrepreneurial founder may find that process difficult to handle and the business may suffer. A second issue in the so-called technology space is the lack of suitably qualified technical analysts.
Stephen Morana is Chief Financial Officer of Zoopla Property Group (since March 2013), where he has played a key role in the IPO of the business onto the LSE in 2014, where it now sits in the FTSE 250. He is also Non-Executive Director of leading online retailer boohoo.com, where he was also involved in the IPO of the group onto AIM in 2014. Previously he spent a decade at Belfair, one of the UK’s most disruptive internet businesses, where he was appointed Chief Financial Officer in 2006 and played a fundamental role in the IPO of the Group onto LSE in 2010. He also briefly served as the Interim CEO of Betfair in 2012.
Right Move paved the way for Zoopla but some of the analysts covering it were specialists in media or house builders and did not really ‘get it’. Another to suffer was Betfair which was a technology led gaming business but the analysts were mainstream gaming and within three months 70% of them had posted ‘sell’ notes.
A key element is to build a management team that can survive without the founder. You need to separate the management of shareholders from that of customers. If you do the right things the share price will sort itself out.
David Buttress has been the Group Chief Executive of Just Eat since 2013. He played a key role in leading the group through its successful IPO in 2014, having joined in March 2006 to help launch its UK business. David started his career with Coca-Cola Enterprises in 1998. During his time at Coca-Cola he held a variety of senior sales roles before moving into the digital arena with Just Eat.
David thought it advisable to bring in an independent director early in the process. Just Eat brought in an Independent Chairman over two years before the IPO. This had been invaluable for management as well as investors. There was no real difference between old and new investors, and so independence in dealing with them is vital, not allowing any one interest to become dominant.
He also talked about the need to educate journalists if your business model was disruptive, especially in the UK. The old days of nobody knowing anything except what you’ve told them have gone. Now we have Google Alert and there is always someone who thinks he’s got a story ahead of the game. For that reason Brian McBride advocated getting one of the big, famous PR companies around you. Normally he was pretty mean in his business dealings but he would not short-change on Communications and Public Relations.
Eric Eichmann has been the President of Criteo since August 2014, having joined the business in 2013 as the Chief Operating Officer, just ahead of the group’s IPO onto NASDAQ. He was previously the President of International at LivingSocial responsible for all its operations outside of North America. From 2006 to 2010, Eric was Chief Operating Officer of Rosetta Stone Inc. He also worked as the SVP for Advertising Operations, Systems and Promotions for AOL, where he led the turn round of the business.
Eric advised that you are selling your own business so you have to let the market value you. Further, you can’t worry about the share price every day; you have to worry about delivering what you promised.
No doubt most of this was valuable advice and I appreciated the openness of the panellists in describing some of the challenges they faced. But I felt there might be something missing in answering the question: How do you prepare a Company for an IPO? I have never actually been through an IPO but I have been involved in pre-IPO situations, raised money in the City and been in several post-IPO situations where we had to answer the second part of the question: How to thrive as a Public Company.
In preparing for an IPO there will be no shortage of advisers. Some of these are legally required as with a broker for the LSE or a NOMAD for AIM. Some are obvious such as lawyers, accountants and as, Brian McBride insisted, Comms & PR specialists. But in my experience none of these will prepare management for what is required. Instead they will all concentrate on technical aspects of the deal or market-facing issues. Non-Executive Directors can help here and I fully agree with the panellists who advocated bringing those in early, particularly if there was an entrepreneurial founder still in post whose style of management might not be appropriate for dealing with institutional shareholders.
But I think there is more to it than that. The management team as a whole needs to be coached and counselled through the process. Advice may be needed on structures, communications, dealing with the extra demands of the fiduciary process and a whole lot more. There may be a gap in the market for such a service. I discussed this at length with Marcus Le Grice and he fully agreed with my thoughts.
Copyright David C Pearson 2014 All rights reserved