Testing the temperature of this year's IPO pool
Some believe that in order for initial public offerings to flourish, investor relations officers must be brought on board early. They think that a good IRO with solid industry contacts can be instrumental in fielding early pitches from banks, early questions from analysts and early queries from company executives and board members. An IRO can also help prepare a solid disclosure policy, tighten the company's story, train management in public speaking skills, as well as prepare the roadshow presentation.
'You certainly don't want to bring in an IR officer late in the IPO game,' advises Andy Backman, IR director at Maryland-based Corvis Corporation, a fiber optics firm that went public in July 2000 and garnered a nomination for best IR for an IPO at the most recent Investor Relations Magazine US Awards. 'There's simply too much at stake not to have someone who knows the banks, the analysts and the investors.'
Backman knows firsthand. His first day of work coincided with Corvis' pitch from several banks wanting to handle the company's IPO. 'I'd say I hit the treadmill running, but it was at its steepest pitch and highest speed,' he jokes. Drawing on the skills he'd gained from six years as an IR officer at Lucent Technologies, Backman was able to wade into the process mid-stream and help select which bank the company would use for its IPO. 'And that was on the second day,' he adds.
With the IR officer's visibility steadily heightening after many years of indifference by senior managers, the thought of going ahead with an IPO without an investor relations strategy is unthinkable these days.
'The IRO's function in the new issue process is critically important,' declares Joe Muscat, a managing director at Palo Alto, California-based Ernst & Young Capital Advisors, which tracks the performance of IPOs. 'Especially in the sense where you are positioning the company to investors. You used to see the chief financial officer handle a lot of the things an IRO does now in the IPO process, but day-to-day, CFOs are just too busy and don't have the time to be courting investors.'
Muscat adds that hiring an IRO early can stem some of the growing pains experienced by so many newly public companies - and the current underperformance trend of newly public companies in the financial markets.
The earlier companies get started on an IPO, the better. 'The results of our studies on IPOs support the hypothesis that a successful IPO process depends on a mix of well-articulated objectives and carefully deployed financial and corporate strategies that span the pre- and post-offering periods,' he says. 'There is no magic formula for success, but the study demonstrates clearly that those companies that benefit the most from the IPO have three characteristics in common, and all involve starting early.'
Those attributes are preparation, sufficient lead time and competitive position, and they're virtually unattainable without the help of an IR officer, Muscat adds.
With preparation, firms systematically implement new programs, policies and systems common to a public company - in short, acting like a successful public company before they become one. 'With early lead times, the company has instituted these improvement initiatives months, if not years, before the offering. And with competitive positioning, companies with successful IPOs are far stronger than their competitors - financially and non-financially - at the time of their offerings. All these scenarios require the involvement of a good IRO,' he says.
Those words have merit, if the results of a recent Ernst & Young study on IPOs and company preparedness are anything to go by. A measures that matter study, by the Ernst & Young Center for Business Innovation, shows that almost half of executives (47 percent) consider they were, in retrospect, ill-prepared for their IPOs. When this response is broken down by self-reported IPO success categories, preparation turns out to be even more pivotal: 62 percent of the unsuccessful companies felt they were not adequately prepared for going public, compared with just 34 percent of those that were highly successful.
As a measure of preparedness, the survey inquired about the operating, strategic and financial improvements companies undertake in advance of an IPO. More than 90 percent of respondents made some changes to the company's policies, processes and systems. Approximately two thirds revised their financial accounting and reporting systems, executive compensation systems and board structures. Not surprisingly, fully 90 percent of survey respondents bolstered their investor relations programs.
Those numbers match up well with the companies that do bring on full-time IR officers well before going public. Taqua Systems, a Massachusetts-based telecommunications switch provider, is a good example. 'Even though we are a private company with no plans to go public in 2001, I work for a company that thinks of itself as a public company,' explains Mercy Bradley, Taqua's IRO. Hired in June 1998 as an assistant to the CEO and promoted to IR manager two years later, Bradley spends a lot of time meeting with investment banks, setting the stage for what the company hopes will one day be a successful IPO. Currently she is helping the company raise private financing. 'I'm also meeting with Goldman Sachs and Morgan Stanley, which have expressed interest in our company going public. We're taking our time to build relationships with the right firms. That's only going to help us down the road.'
But in an unforgiving IPO market, where investors are kicking tires but not buying, others say it doesn't matter when an IRO rolls into a pre-IPO company.
'In a perfect world you'd want all the help you could get in preparing for an IPO,' says Marc Baum, chief executive officer of New York City-based IPO.com, which tracks new issue trends. 'And certainly bringing an experienced IR officer in early can't hurt. But in this market, I don't know how much it helps, either.'
Others agree. 'Market conditions for launching an IPO are very poor right now, so I don't think it matters if you hire an investor relations person early on or not,' notes Dr Ivo Welch, professor of finance and economics at Yale University. If anything, Welch adds, it's a higher priority to bring in an investment bank first and an IRO second, instead of the other way around. 'If I were a company, I would first retain a good general advisor to help decide which other experts to hire,' he says. 'Then I'd find a good auditor and investment bank, and have the investment bank and general advisor help decide whether an IRO would be a good idea. Most of the time, an IRO is not a necessity. It is the job of the investment bank to make inroads with potential investors for the IPO.'
The current IPO marketplace isn't making those decisions any easier for companies looking to go public. With capital market woes, valuation headaches, skittish investors and a skeptical Wall Street analyst community, the time line for hiring an IRO is hardly at the top of the list for pre-IPO firms.
'The low volume of recent deals and the low volume in the pipeline indicate that this is the slowest IPO market since August to October 1998,' notes Jay Ritter, Cordell professor of finance at the University of Florida. 'There were 21 deals in the first quarter of 2001, by one count. The exact numbers depend upon whether one is including foreign firms with a US listing.'
If you're looking to point the finger at the technology sector for the current IPO market woes, go stand in that long line reaching around the block. Everyone is down on digitals, databases and dot-coms these days. 'Just as the 1999-2000 IPO market was dominated by technology stocks, that is where the biggest fall-off has been,' adds Ritter. 'Firms in other industries have not seen as dramatic a drop - or as dramatic a rise in 1999 and early 2000.'
Dot-com disasters notwithstanding, few are spared the executioner's axe these days. 'It's not just the web companies; it's seemingly anybody trying to go public this year,' offers Baum. 'Sure, you've got heavy hitters like Prudential and John Hancock having some good fortune in the IPO market, but we're mostly seeing a huge decline in issuance and an enormous increase in withdrawals.'
IPO.com's Baum places more blame on an investment culture that doesn't have the foggiest idea how to accurately value a company. 'People don't know the value of anything and, as a result, are unable to place valuations on new publicly traded companies,' he explains. 'Until that's done we will continue to have market uncertainty.' Baum says companies considering going public should know what their strengths are. 'I don't know if hiring an IRO early on in the process is a critical issue in the IPO process,' he adds. 'What's more important is to figure out specifically what your business does and spell that out for investors. You've also got to make clear to them where the money comes from. Then worry about bringing the people in to make your IPO run smoothly.'
Strength to strength
Still, for every dot-bomb that sinks like a stone in choppy IPO waters, there are several resilient survivors. Take Krispy Kreme Doughnuts, which went public in March 2000 and whose stock has hit as high as $54 before settling down to its current spring 2001 levels of around $36. On May 17, 2001, the company began trading on the New York Stock Exchange under the new ticker symbol KK, shedding its old moniker of KREM.
Krispy Kreme follows Baum's blueprint of doing one thing and doing it well. But there are other ways for IPO wannabes to succeed in trying market conditions as well. According to Nortel Networks' industry researcher, Stephanie Greer, who wrote a report on how telecom companies can succeed in the IPO market called The IPO gold rush and the telecom industry, the reasons for success or failure go beyond good fundamentals.
'There are clear reasons why some companies do very well in their IPOs,' she writes. 'Their technologies or products look to have strong growth potential; the company's management has proven itself previously; or the company may simply be entering a market space that is just generally hot.'
But Greer also emphasizes other strengths, like having a partner with a big name underwriter (much like Bradley's work at Taqua Systems). 'For example, Goldman Sachs is a big one; so are companies like Morgan Stanley Dean Witter, Merrill Lynch and CS First Boston. Last year, these four alone represented 35.8 percent of all IPO deals, 67.1 percent of the proceeds of those deals, and 59 percent of the moonshots - that is, IPOs that saw 100 percent gains in the first day of trading. Of course, there are many other first-tier investment banks to choose from, and joining forces with one of them is a good way to establish credibility.'
She also advocates defining a company in eye-catching terms and developing a strong presence in the marketplace via effective financial public and investor relations activities. 'Regardless of how impressive a company's technology or business plan, nobody will buy into it if they don't know about it. Consistent, appropriate communication with the marketplace will establish the company's main business messages to the right audiences,' she says.
These days, getting that message out in a crowded IPO market isn't a luxury, but a necessity. That's why IROs will play an even greater role in their companies' IPO plans no matter how volatile the markets.
IPOs by the numbers
US IPOs YTD 2001
|Total amount raised by all IPOs||$21.9 bn|
|Total amount raised by all IPOs, 2000||$105.2 bn|
|Average deal size, 2001||$548.3 mn|
|Percent of IPOs in first quarter 2001 that stated pricing terms and have since postponed or withdrawn||35%|
Source: IPO.com (As of June 8, 2001)
This past year saw one of the largest mailings in US postal history when MetLife delivered its business plan to 11.8 mn policyholders. 'We now have the largest shareholder base in the US with over 8.5 million shareholders,' notes Eric Steigerwalt, senior vice president of financial management and investor relations for MetLife, winner of best investor relations for an IPO at the 2001 Investor Relations Magazine US Awards. When MetLife went public on April 7, 2000, it made history as the seventh largest IPO ever to be launched in the US. 'It's a little different to win an IR award for an IPO because taking a company like this public requires a couple thousand people,' says Steigerwalt. 'There were just so many people who helped us through the IPO process and made it a success.'
Steigerwalt joined Metlife two years prior to the IPO and played a key role in the demutualization process while preparing the giant insurer for the responsibilities of a Wall Street listing. And now that MetLife has found its sea legs as a public company, Steigerwalt recalls the road to market. 'Pre-IPO investor relations was all about educating the company about how Wall Street and the investment community work. Post-IPO is all about educating the investment community about a company whose name they already know,' he explains.