IPOs are an attractive financing option for companies seeking to raise large sums but their success depends on good preparation. Tobias Meyer, Partner, Head Transaction Accounting and IPO at EY Switzerland answers three questions.
Long version (2:38 min)
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Short version (1:41 min)
Are IPOs an attractive financing or exit option for growing companies?
The IPO markets have been relatively quiet recently – and especially in 2019. Unfavorable market conditions driven by geopolitical tensions and poor economic growth have dampened IPO activity. Nevertheless, IPOs are an attractive financing option for companies seeking to raise a large amount of money while retaining control over at least a portion of the voting rights. As issues resolve, market observers are anticipating a flood of IPOs in 2020, including for a number of unicorns.
What are some of the pros and cons of IPOs?
Listed companies enjoy efficient access to capital markets, enabling future capital-raising cycles. They can also incentivize key people and attract, retain and reward valued employees with equity-based compensation components. Many IPO candidates also benefit from a natural “marketing effect” as a result of media coverage, brand recognition and prestige with customers.
IPO challenges include new transparency, disclosure and corporate governance requirements, and pressure to deliver on publicly announced promises. IPO floatation costs can add up surprisingly quickly, and management may find themselves restricted by new approval requirements.
It’s also worth acknowledging that successful IPO execution is not always possible. A multitrack strategy may prove useful in this scenario, i.e., pursuing multiple financing options simultaneously.
Why is preparation key for a successful IPO?
The transformation process from privately held to publicly listed company requires change throughout the business, organization and corporate culture. This all takes time so it’s important to start early. A successful IPO is the culmination of a structured and managed process that starts with a holistic IPO readiness assessment. This involves analyzing the current state of the IPO candidate and comparing it with the desired state at the expected IPO date. Strategy, corporate governance, leadership, finance and functions are just some of the aspects that need to be covered. Based on the results, the IPO team can map out the organizational changes and actions required in readiness for an IPO. The better prepared a company, the smoother and more successful its IPO will be.