With IPO being the buzzword in the industry sector, following the seven steps would ensure a smooth climb up the IPO ladder when an Initial Public Offering (IPO) comes in for funding ambitious, gigantic projects. .However, going for an IPO is definitely not easy. An industry expert cautions,
"The right recipe is to go step by step with each step dependent on the other. If you miss out one step the whole structure will crumble."
Making an IPO involves immense research, planning and strategising. One must bear in mind that here the ownership and management of the organisation is not just focused on a particular person(s), but instead distributed and diluted on a larger scale and hence the stakes are automatically higher. So, an error even on a miniscule level can have drastic repercussions.
1. Choosing the Perfect Time
Before even plunging into the intricacies of the pre-IPO arrangements, choosing the ideal time to go public is of core importance. The timing of going public is very crucial in the pre-IPO process. One should look into many aspects before the plunge—like looking into the prevailing market sentiment. In the 1980's and early 1990's when branding and marketing were non-existent, liquidity in the market, behaviour of the secondary market and merchant bankers' advice were instrumental in deciding the right time for the IPO.
2. Choosing the Right
TeamForming the right team is essential before going for an IPO. Apart from the Chief Executive Officer (CEO) or the Chairman, the main members are the Chief Financial Officer (CFO), Chief Operating Officer (COO), the Company Secretary, the auditors, professional merchant bankers, and the Chief Information Officer (CIO) in the current age of information and legal advisors. It is very important for the board of directors involved in the venture to have a progressive outlook. Only an intelligent team can contribute to the success of the venture. Zeroing in on the right CFO is crucial. Experts in the field opine that the CFO should be a veteran with not just a sound financial knowledge of the market and the trend of IPO. The CFO required when the company is at its growth stage is different from the CFO needed for an IPO, where he should have good networking and market contacts. A merchant banker works out the logistics of the company, but it is the CFO who actually markets the IPO. Team building and the professional team that you bring in is very important. You should be very careful not only about land and equipment but also while deploying money and manpower. Apart from the CFO and the Company Secretary, choosing appropriate auditors makes a world of difference. Unlike other members of the team, the auditor has the additional job of assessing whether the entire accounting system is in order, is transparent and analysing whether the numbers and projections as shown in the Excel sheet are realistic and practical. If you have a good auditor, half your battle is won. In fact, one should employ auditors at least one or two years before the IPO is launched.When the company goes public, it must make a note of disclosures about the company operations and past records. It can't afford to make any observations which are incorrect or not backed by strong evidence. You should have a team who can strategise and can plan the inflow and outflow of resources and money.
3. Definite Goals and Purposes
A company should be focused and clear about the purpose of the IPO. Usually, the purpose behind making an IPO is to accumulate funds and finances for expansion and investments and above all woo the investors and consolidate as a brand. This requires a purely corporate structure. Currently, there are stringent SEBI guidelines to be followed before any company goes public. Keeping this in mind, the valuations which the company wishes to command will depend on the future goals and projects of the company, and the management team. Unless the management is fully sure of the ultimate goals, the company will not be able to come up with a high valuation for the proposed issue of shares.
4. Choosing the Right Merchant Bankers
The primary role of a merchant banker should be to act as a bridge between the organisation and the investors. Firstly, the merchant banker should have a brand image in the market. A merchant banker should have the capability and the experience to handle a large-scale IPO. And they should be able to reach a larger mass of people because investors today are just not located in the metros but also in tier-II and tier-III cities." Simultaneously, they also chalk out the risk management strategies for the company since risks and ventures are two sides of the same coin. Hence a company should choose such a merchant banker who is just not professional but who understands the logistics and mechanics of the industry. Apart from being a link between the organisation and the investors, a banker also has to generate interest and build up the confidence of the investors.
5. Capital Restructuring
Companies should decide on the ways to deploy their capital, namely capital restructuring. Companies should be clear about the debt and equity ratio. This boils down to setting the ideal Debt-Equity Ratio (DER), which can vary from 1:1 to 2:2. "You have to work out your ratio according to the cash and the growth rate, so that they can accordingly structure their profits.In capital restructuring, you have to be sure of the DER maintained, what are the facilities you are planning to set up and what is the land value you are going to purchase. The way you are going to deploy your capital is also very important. You have to be very careful while deploying the resources and forecast the profit you will incur in three-four years' time."
6. Creating Investor Interest
Confidence building and generating investor interest should be on the priority list for a company.A Company must project an image of transparency and good governance to the investors. Infosys should be the role model for all companies going in for an IPO. Many of the experts agree that IT giant Infosys is a role model because their balance sheet is very clear, they value their managers as assets and year after year they expand rapidly. A company is accountable to its investors, which is why when they go public they have to disclose company projections—past, present and future prospects. This is where the team of advisors, consultants and legal experts comes into the picture. IPO is all about building investors' confidence so we overperform to hike up investor confidence. If you raise the expectations and do not meet them, then investors will not excuse you for the next two-three years. Infosys, for instance, follows this strategy and gets higher multiples because they understate their plans.The projections given to the public should be realistic. The excel sheet might project rosy details of growth, but if they do not live up to the expectations then public confidence is sure to plummet to the lowest level.
7. Media Campaigns
A few years ago, marketing and media campaigns were considered a luxury, but today they are absolutely necessary. They contribute to the relative success of an IPO venture. The campaigns can be in the form of road shows and extensive investor meetings. They are required because the investors need to be made aware of the company and its past performances and any important projects undertaken/completed. During the campaigns, various facets related to company performance, the need to raise money and future plans are disclosed, information that investors seek. A successful media campaign ensures complete participation in the IPO by one and all. In fact, recently when a bigwig real estate company went public, a few crores went in media campaigns alone! However, there is no short cut to success. A step-by-step approach always pays in the end