Looking for the secret of IPO success
Halfway through 2002, the IPO market hovers perilously close to collapse. The investment banking community is pulling deal after deal in despair. But why?
There is still plenty of money out there waiting eagerly for new, exciting growth stories after the shocking markets of the last two years. And make no mistake, there are some great businesses with great stories queuing to get to the market to fund future expansion.
Falling global markets and the disastrous financial scandals in the US clearly haven't helped. Investors are still licking their wounds after the dot-com debacle and caution is king. The name of the game now is real continuity of real earnings and real value. Fancy growth numbers and multiples are not enough. Investors want to see a business plan and a story of substance - assets and value are the new fundamentals.
So they wait for valuations to reflect real assets and multiples to reflect real earnings.
The investment banks, desperate to get a share of the current paltry IPO market, woo potential issuers with the promise of illusory and stellar valuations. But delivering those valuations is proving to be increasingly difficult. Investors are happy to sit on their hands if any new issue is priced too aggressively. If the stats don't stack, forget it.
But it is more complicated than that. The stats are only part of the story. The other part is the story itself, and the ability of the management team to tell it.
Great stories deserve, and normally get, higher multiples. Maybe the investment bank's valuation is right after all. For that reason, it is critical that the story is compellingly presented to ensure it is clearly understood. That is more of a problem.
Marketing an IPO is very process driven. An integral part is the management roadshow which puts senior management in front of potential investors. Traditionally, roadshows have been prepared by production companies whose genesis was in theater. They are motivated by the 'show'. Effective communication of the message is deemed to be the quality of the corporate video, the number of laser lights or the 200 slides. The spoken message becomes almost incidental. This approach is totally flawed.
The flaw is the total failure to recognize the fundamental objective of the roadshow itself - to sell the management. A company is only a bit of paper at the end of the day and that's not what you buy. Sure it has an intrinsic asset value. But what you are really buying is the management and the management's ability to grow the company and add shareholder value. So, any visual distraction away from what the management is actually saying can be highly destructive to the prime objective of selling management credibility.
And that is today's problem - poor communication.
Too many great growth stories are being obfuscated by over elaborate visuals, numbing complexity and ultimately death by boredom from bewildering detail. The bankers and lawyers, who are trained to work within the legal constraints of the prospectus, make a great mistake when putting together the 'sales story'. They fail to differentiate between 'key messages' and 'the evidence' of the investment case.
The average fund manager finds the bulk of roadshow presentations dull. But if the story was good enough to attract a first-class bulge bracket sponsor, why don't investors buy it? Answer: because they do not fully understand the story or the opportunity. Consider this. In 2001, a Spanish clothing manufacturer and retailer floated into one of the most hostile IPO markets in decades. It was called Inditex. When the book closed it was around 50 times over-subscribed. The reason for this phenomenal investor interest was simple: it was a great growth story and, more importantly, the company and bankers went to extraordinary lengths to ensure the market both knew about it and understood it. The management team started working on the presentation a full six months prior to the roadshow, cooperating with the global coordinators to guarantee simplicity and understanding of the growth story. A stunning success, which validated the credibility of both the story and the management team.
So is it the story or the stats? Of course it must be the effective combination of both. It must be the combination of a great story and a credible management team, supported by great numbers and, most importantly of all, it must be effectively communicated.
Antony Finley is a senior consultant at the Kingstree Group, an international spoken communications consultancy