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Prepare, prepare, prepare The European IPO market sentiment is, not surprisingly, dominated by unpredictable events from the government debt crisis. With volatility reaching new levels, it is not only Europe that is affected. Dr. Martin Steinbach, IPO Leader for EMEIA at Ernst & Young, discusses investor confidence, cross-border listings, dual listings, the current IPO outlook, and how being prepared is still the key to a successful IPO. Investor confidence

Volatility and uncertainty are the watchwords in European IPOs currently. With lack of confidence impacting the volume of IPO deals, Steinbach believes a proactive investor relations officer is becoming a “must-have” for companies and is integral to generating trust and investor confidence before and beyond the IPO: “You need to build trust with investors; it’s an ongoing process not a one-off event.”

Gaining this investor confidence and trust is all about transparency and an open information culture of the kind embraced by private equity-backed IPO companies, which are consistently outperforming other IPO companies. Steinbach explains: “They are more trained in how to serve investors with regards to transparency, quarterly reporting and corporate governance issues, so they are well perceived in the capital market.”

IPO readiness

IPO readiness is a critical success factor given the current Eurozone market conditions. As Steinbach explains: “If we have this volatility, the opening and closing of IPO windows can be narrow. Companies need to have the ability to kick-start the IPO execution phase swiftly, for example delivering the quarter reports for the F pages in the prospectus, or an update in the due diligence and so on, so that you are able to enter these narrower windows of opportunity.”

In addition to preparing early, Steinbach recommends that companies seeking an IPO “speak to other entrepreneurs or management teams that have already gone public and listen to their experiences”. He also stresses the importance of having the right IPO team in place, which includes not just the internal IPO team, but also the law firms, investment banks and audit, tax and advisory firms.

Cross-border listings

The uneven impact of the financial crisis across the Eurozone means companies are much more open to cross-border opportunities, which today account for roughly 25 to 30% of IPO candidates, according to Steinbach. Companies looking at this form of listing need to ensure that in what may be a less familiar market there are, “enough investors and sector-specific analysts and that investors understand your business case, your vision and your perspectives.”

Dual listings

Companies that consider listing abroad are typically international in terms of brand or operation. Building and leveraging an international presence is a key strategic reason why companies consider a listing abroad; however, this move is not without risk. Steinbach warns that dual listings can be complex: “If you dual list as a

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December 2012

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2 A variety of terms is used to describe this idea: e.g.

“dynamic provisioning”, “loan loss reserves”, “hidden

reserves”, etc. The fundamental principle is that

provisions would be set against asset positions in

each accounting period in line with an estimate of

long-run, expected losses over the entire economic

cycle. This should mean that loan losses, for

example, would impact on a bank’s profit and loss

accounts and balance sheets more smoothly than is

currently the case because of the primacy of long-

term losses rather than actual losses.

2 A variety of terms is used to describe this idea: e.g.

“dynamic provisioning”, “loan loss reserves”, “hidden

reserves”, etc. The fundamental principle is that

provisions would be set against asset positions in

each accounting period in line with an estimate of

long-run, expected losses over the entire economic

cycle. This should mean that loan losses, for

example, would impact on a bank’s profit and loss

accounts and balance sheets more smoothly than is

currently the case because of the primacy of long-

term losses rather than actual losses.

s Under both U.S. GAAP and IFRS, fair value is most

commonly used to measure financial instruments as

opposed to non-financial ones like property or

intangible assets. Financial instruments include, but

are not limited to, investment securities, derivative

instruments, loans and other receivables, notes and

other payables, and debt instruments issued. Not all

of these financial instruments are required to be

measured using fair value (most notably loans and

receivables which are recorded at amortized cost)

and not all gains and losses on instruments

measured at fair value are required to be reported in

profit or loss.

ses.

You need to build trust with investors; it’s an ongoing process not a one-off event.

Prepare, prepare, prepare

Inside IPO — December 2012

company, you need to analyse the different rules and regulations that are present in two different capital markets.”

International listings

Many European and US brands are considering a listing in Asia, to increase their brand’s reputation and take advantage of a local consumer market that is strongly predisposed in favor of global brands.

Alongside the brand strategy rationale, Steinbach suggests that valuation, cost and shareholder preferences also need to be weighed in the balance when considering an international listing.

“In order to secure a good IPO valuation, management teams need to select the market that delivers the best understanding of the business plan, the best understanding of the sector, but companies also need to be wary of increasing costs. We still have different regulations all over the world, and some regulations are tougher so there might be some costs differences initially, but also some ongoing cost implications as well.”

Finally, the views of shareholders are paramount when weighing decisions about listing locations. “Perception is reality — some only back companies in their own markets, others following a particular sector may support a geographic choice that goes with the sector — for example tech stocks in the US.”

Outlook

Steinbach believes that although the economic outlook for the Eurozone is uncertain, appetite for IPOs is still buoyant. “The pipeline is full. There are many IPO candidates still in the waiting lines for the right window. I think the most prepared ones are the winners if and when the IPO windows open up again,” says Steinbach.

Companies need to have the ability to kick-start the IPO execution phase swiftly.

In order to secure good IPO valuation, management teams need to select the market that delivers the best understanding of the business plan and sector.

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