Sunday, August 24, 2008

Trial Run : IPO

The dream of many entrepreneurs is going public one day. I'll provide a look at the realities of an IPO. I'll start with a basic overview of an IPO, and then explain how to prepare for one, public relations do's and don'ts, and life as a public company. It's an enormous topic, but my plan is to provide you with general understanding.

Timing and responsibilities Your board of directors, together with the underwriters (investment bankers), will determine the timing of an IPO. Expect a 14- to 18-week process, but bear in mind that market conditions may expand or compress this range. To have the best shot at controlling timing and minimizing market risk, be both prepared and highly flexible. Your chief executive officer and chief financial officer won't get much work done outside of the time-consuming IPO process.

Choosing an underwriter The main issue here is to be sure your underwriter is committed to your offering. Here's what to ask: Is it already representing competitive offerings or offerings in the same time frame which may be a distraction? Has it had any "cratered" deals (deals that were not successfully marketed)? You'll pick at least two underwriters with expertise in your industry. And you'll want them to hold the stock after the offering. Look at the history of the underwriters. Do they often sell off their shares at the first opportunity? If so, be warned.

The organizational meeting The key company executives, attorneys, and accountants, plus the investment bankers from the underwriting firm and their attorneys, will attend the organizational meeting. They form what is known as the IPO working group. The timeline, number of shares to sell in the offering, legal and accounting issues, due diligence, publicity, and the road show will all be discussed in this meeting.

Determining the stock price and number of shares The underwriters will determine the valuation of your company, and you'll work with them to set the price of your stock from there. Setting the valuation is no trivial exercise. Market conditions, comparable companies, past and projected financial performance, market position of your products or services, new products in development, and management team will all be considered. The more data you provide to the underwriters, the more likely they'll set a valuation you're happy with. From the valuation, a range for the share price will be set, but it won't be solidified until shortly before the offering.

Prospectus The prospectus plus additional public information about the company that is considered material. It is filed with the SEBI. The prospectus is the IPO marketing document. It explains the offering, the business, the products, the risks involved, the use of proceeds, who the executives are, and their view of the financial condition and results of operations, the financials—in essence the most accurate and complete picture of the company. The summary section is the most important part of the prospectus, because it's the only section everyone reads. The summary will either boost or dash confidence, so you'll likely write it last, once the entire prospectus is done.

Caution: Above all, in spite taking all precautions two major IPOs, Emmar MGF and Wockhardt Hospitals withdrawn their IPOs, when they failed to manage the required amount of subscription from investors. After the poor performance of Reliance Power IPO (Initial Public Offering), investors have started avoiding IPOs.

Inputs also from: Christine Comaford CEO of business accelerator Mighty Ventures, is the author of the best-selling book Rules for Renegades.

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