Final Thinking of an IPO - Web

8/2/2019 Final Thinking of an IPO - Web

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ADVISORY

Thinking of an IPO?Understanding the challenges of listing via anInitial Public Offering


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Introduction 2

Key findings 3

Look before you leap 4

Getting in shape 5

Understanding the key challenges 6

Resourcing the IPO 7

How long does it take? 9

Life after listing 10

Lessons learned 11

Contrasting IPO experiences: the UK

and Australia 12

Contributors to this paper 14

Related KPMG publications 14

Contact us 15

Notes 16

Contents

2005 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG.


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2 Thinking of an IPO?

The road ahead.

Going public. It is the ultimate ambition of many growing businesses. It can vindicate past success and become a launching pad

for further growth.

Yet anecdotal evidence suggests that an Initial Public Offering (IPO) can also be a traumatic experience for the companies concerned.

Moreover, businesses that successfully negotiate the IPO process often find that life as a public, listed company demands big changes

in both mindsets and board and management practices.

This document seeks to capture the experiences and views of companies that have recently listed on the Australian Stock

Exchange (ASX). It looks at the costs and benefits of listing, unexpected outcomes, the demands on management and the lessons

of hindsight. Its findings are based on the responses to an online survey of 197 companies that had listed on the ASX in the two

years to 30 June 20051. Thirty-five companies responded to our survey.

KPMG thanks the organisations and individuals that responded. Their honest and insightful answers yield a rich commentary

on the listing experience and some sound words of advice for companies contemplating the IPO road.

To encourage a frank expression of views, survey participants were guaranteed absolute confidentiality. Thus no company or

individual is identified by name in this report.

KPMG in the UK recently conducted a similar survey. OurThinking of an IPO? report also examines the similarities and

differences in the IPO experience between the two countries.

Introduction

1 In this period 330 companies listed o n the ASX. To comply with privacy legislation, our questionnaire was sent only to those companies with which KPMG had an existing or prior relationship,

or where we had gained permission of the CFO to submit a questionnaire.



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Thinking of an IPO? 3

Every IPO is a unique event.

No two companies will ever experience it in exactly the same way. Nevertheless we believe our survey reveals common themes

of value and interest to companies considering an IPO.

If you want to list, make sure the business finances and operations are sound. At the very least the process will be good for your

business, even if you do not proceed to the IPO itself.

Consider the alternatives properly. Becoming a listed company brings with it new responsibilities and obligations. Allow

yourself a cooling off period and do your homework before taking the IPO plunge.

Consider the management time and resources that an IPO will absorb. Who will mind the shop when the IPO is in full swing?

The success of an IPO is a function of the commitment to it of a companys key people: chairman of the board, chief executive

officer (CEO)/managing director (MD), chief financial officer (CFO)/financial director (FD), company secretary and

in-house lawyer.

Take time to plan the process thoroughly, understand the work involved and set realistic timetables.

Obtain appropriate professional advice from the outset and ensure your advisers are well experienced in the IPO process.

Going public can be a culture shock for a private company, involving elevated levels of directors and managersliability, increased

scrutiny, tougher reporting, compliance and governance obligations.

Key findings



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The motivations for an IPO vary.

For the founders of a business it can be a big step in realising and leveraging the wealth accumulated in the enterprise. For private

equity investors it can be a preferred exit strategy. For rapidly expanding companies it can be a source of new capital for further growth.

A clear majority of our survey respondents (56 percent) went down the IPO road to access capital for future acquisitions or

organic expansion, or to raise start up capital. Twenty-four percent of the companies in our survey were using the IPO as an exit

route for private equity investments.

It is important to consider if an IPO is the best way to take your business forward. Perhaps it is not yet really ready to float the

market can be unforgiving of companies that fail to live up to initial expectations. Perhaps its internal systems and governance

structures are not up to the rigours of an IPO and subsequent life as a listed entity. Perhaps there are better ways to fund growth

(such as acquiring private equity capital) or realise the value in a business (such as a trade sale).

Consider your options. Take appropriate advice. Avoid committing yourself to a course of action until you are comfortable with it.

Allow yourself a cooling off period before taking the final decision.

Even where an IPO appears the preferred course, understand what you are letting yourself in for. It is easy to underestimate the

complexity of the process, the resources it will absorb, the rigour of due diligence, the commitment required of chairman of the

board, CEO/MD, CFO/FD, company secretary and in-house lawyer and the time it will take. Many newly floated companiesadmitted to us that they underestimated these factors, which unnecessarily complicated their IPOs and nearly all respondents had

identified a range of things they would have done differently.

In fact, there were a number of matters raised by our respondents that they would change in the IPO if they had their time over

again. Most of the respondents (43 percent), would have spent more time planning, undertaking a pre-float review or consulting

more widely with other executives/companies that have completed the same process. It is sobering to learn that planning the

process more thoroughly is the key message that comes out of our survey results.

Figure 1: what respondents wish they had understood better before undertaking an IPO

Establish clearly realistic objectives and plan very carefully.- Recently listed company.

Look before you leap

6%

9%

9%

12%

14%

15%

14%

21%

How much marketing is involved

How to establish optimal cap ital structure

Change required in business attitudes, behaviours andactivities compared to private ownership

Increased requirements of corporate governance

How detailed the due diligence process is

How long the process takes

How much in house resource is required

Degree of commitment required from board/CEO/CFO Resource

demands

Timeline

demands

Business

changes

required

Marketing

and capital

structure

Consider your options and take

appropriate advice.



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Whatever the motivating factors behind an IPO, listing a business on

the stock exchange involves a lot more than appointing advisers and

taking the business in its current state to market.

Indeed, many companies will find they have to put in a considerable amount of work to get themselves into shape for an IPO.

This is particularly the case if outside professional investors have not been previously involved in the business.

Take a positive view about this process. Even if the IPO does not eventuate, the time, money and resources devoted to the

exercise will not be wasted. You will know a lot more about your business, its strengths and weaknesses, its real profitability

(or lack thereof) and its opportunities for growth. The knowledge gained can be used to prepare the company for listing at a better

time in its development.

In this context, we asked respondents about the extent to which they had to adapt their companies financial, legal or business

processes and structures to meet the requirements of flotation. For 55 percent of respondents their IPOs involved a fair amount

or a great deal of adjustment.

Figure 2: extent to which respondents had to adapt processes and structures for an IPO

Interestingly, those with the biggest task on their hands were the largest companies that floated (i.e. those with a market capitalisationof over $100 million). Seventy percent of these companies said they had to undertake at least a fair amount of preparatory work

prior to listing.

All of the companies that were part of a larger business prior to floating had to change to meet listing requirements which would

impact the work required to prepare them for facing the world on a stand-alonebasis for the first time. In comparison 52 percent

of privately owned companies and 40 percent of those with private equity backing experienced the same pre-float issues.

Accept that the process is complex and that it is important to have sufficient resources and

advisers to undertake the exercise effectively and efficiently.

- Recently listed company.

Getting in shape

21%

24%

26%

29%

Not at all

Just a little

A fair amount

A great deal

If you want to list, make sure you

are in proper shape first.



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There are several distinct, but overlapping, stages in a typical IPO.

These present challenges of varying degrees of difficulty. Our respondents nominated four particular challenges that caused them

the most stress personally.

Preparing and verifying the prospectus.

Agreeing an appropriate capital structure.

Preparing a robust and credible business plan.

Improving standards of corporate governance.

The difficulty of the IPO process depends to some extent on the size of the company being floated. Thus whilst 55 percent of

companies with a market capitalisation of more than $100 million found the preparation and verification of the prospectus

difficult or very difficult (possibly due to size of prospectus), only 30 percent of smaller companies experienced the same

difficulties. By way of contrast, none of the large companies encountered any special difficulties in preparing a robust business

plan; 23 percent of companies with a market capitalisation below $100 million experienced significant problems with their

business plans. The most likely explanation for this difference is that larger companies will already have developed considerableexpertise in preparing business plans. For smaller private companies it is often the first time such documents are prepared for

scrutiny by sceptical outsiders.

Figure 3: estimating the ease or difficulty of key aspects of the IPO process

Get the right advisers. Dont rely solely on management. Plan strategy clearly.


Understanding the key challenges

42%

32%

25%

31%

26%

33%

34%

30%

17%

18%

19%

21%

40%

41%

44%

53%

Preparation of financial track record

Co-ordination of numerous advisers

Marketing road shows to instructions

Due diligence

Improving corporate governance

Preparation of robust business plan

Agreeing appropriate capital structure

Preparation and verification of prospectus

Easy Difficult

Agree the content of key company

documents required for IPO upfront.



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Companies typically underestimate the resources absorbed by an IPO.

This applies particularly to key management resources.

We asked companies to tell us which of their key people were most closely involved in the IPOs.

Figure 4: who drives the IPO process

Unsurprisingly, CEOs/MDs were considered key drivers of the IPO process. Company secretaries/internal lawyers were also

seen as important drivers of the process, as well as the CFOs/FDs of the companies.

It is also interesting to look at the amount of their time that key people devote to the IPO process.

Figure 5: percentage of time spent on the IPO by key executives of the company

On average, more than 65 percent of CEOs/MDs and company secretaries in-house lawyers and CFOs/FDs devoted more than

half of their time to the IPO with a medium to high level of involvement. Clearly, it is very important that senior management

can delegate their normal duties to a competent sub-tier of management during the IPO process, or can accommodate the

additional workload. Careful planning and the disciplined allocation of resources will help especially towards the closing stages of

the process which is the most demanding.

Resourcing the IPO

8%

10%

16%

16%

17%

33%

Business development

director/Strategy director

Others

Chairman

Chief financial officer/Finance director

Company secretary/in-house lawyer

MD/CEO

100%

High

51-99%

1-50%Low

Medium

100%

High

51-99%

1-50%Low

Medium

MD/CEO Company secretary/In-house lawyer and CFO/FD

Consider the management time and

resources that an IPO will absorb.

High

Medium

Low

Percentage oftime spent



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Significantly, in all cases where flotation was delayed by six months or longer, the CFO/FD was not identified as a key member

of the IPO team. It raises the question of whether more involvement by senior finance people would make the IPO process more

efficient.

In more than half the small companies, key executives contributed more than 75 percent of their time to IPO-related work.

Only 10 percent of large companies involved their key people in the IPO process to this extent. For small companies, an IPO

represents a major drain on management resources. It has to be asked, who is minding the shop while the IPO is taking up so

much management time and attention?

In hindsight, 34 percent of respondents believed it would have been helpful to have hired temporary staff to help with the IPO process.

Similarly, it is vital to enlist the help of appropriate external advisers from the outset of the exercise with 79 percent of survey

respondents saying that the investment bankers/brokers, lawyers and independent accounting advisers added a great deal of value

to their IPO.

Never underestimate the workload. Share the burden early before the complexity makes this

difficult. Avoid solutions that are too smart. Find time to reflect on the multitude of decisions

being made. Never allow your advisers to push you to timelines you are uncomfortable with -

say NO. Engage GREAT investor relations and corporate PR from the outset.




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Listing is not a fast process with almost all respondents saying that it

took longer than expected.

For around two-thirds of our respondent companies the entire IPO process took somewhat less than six months. Eighty-two percent

of companies began due diligence within three months of making the decision to float. This is often too short a timeframe to get

the house in order for an IPO and could often lead to stress during the due diligence process. The period from due diligence to

completion was also generally less than three months. We found that the larger companies used less time to prepare for the IPO as

more internal resources were available to assist the process.

Respondents were asked to nominate the main factors delaying their IPOs.

Figure 6: main reasons for delays in IPOs

Apart from changing market conditions, which are outside a companys control, most delays to IPOs can be eliminated or reduced

with good planning and preparation.

Lack of IPO experience is a likely factor in many delays - the same mistakes keep getting repeated.

Smaller and privately backed companies found the preparation of financials more of an issue than their larger counterparts.

It probably reflects lack of experience with external scrutiny of the business and a less formalised financial reporting process.

Ensure lead finance personnel have extensive listed company experience.


How long does it take?

3%

3%

4%

13%

16%

4%

8%

13%

17%

19%

Timing and finalisation of acquisitions pre-IPO

Regulatory reasons i.e. ASIC approvals

Deal competition i.e. market congestion

Finalising optimal capital structure

Changing market conditions

Poor planning leading to inefficiencies

Revisions to business or strategic plan

Issues uncovered during the due diligence that took time to resolve

Complexity of preparation of financial track record

Unrealistic timetable

Matters controllable

by company and

advisers

Matters outside

the control of the

company

Take time to plan the process

thoroughly, understand the work

involved and set realistic timetables.



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Now that they are listed, has it all been wine and roses for our

respondent companies?

Improved access to capital was cited as the main benefit of listing (46 percent of respondents), followed by increased business

profile and credibility (27 percent). Acquisitions had become easier for 38 percent of respondents, but considerably more complex

for nearly half of them. This diversity of responses reflects the background of the participating companies. If a shortage of capital

was an issue before listing, then this was overcome; whereas for other companies the governance and public exposure of doing

acquisitions in a listed public environment was seen as being more onerous than when deals were done as private entities. This issupported in our findings that it was those companies that had previously enjoyed private equity backing that were most likely to

find acquisitions more complex and difficult after listing.

We found that 85 percent of the respondents to the survey felt their respective IPOs had fulfilled all of the objectives set at the

outset of the process.

There are however burdens from being a listed company; more extensive and demanding reporting and increased exposure to

public scrutiny were nominated as the two more burdensome consequences of listed status. Corporate governance was also seen

as a significant challenge.

Figure 7: the burdens of listing

The message here is that companies should list for the right reasons and learn what life will be like as a listed entity. Plan for this

new world, and remember that an IPO is a step, not a solution. The more extensive and often demanding and timely reporting has

been identified as the most significant impact.

Consider what your life will be like afterwards. Dont think the IPO is an end in itself - when

you go public you are dealing with the press and investors and will face more public scrutiny.


Life after listing

17%

27%

43%

Increased emphasis on corporate governance

Greater public scrutiny

More extensive/demanding reporting

Note: Of the total respondents 87 percent noted there were burdens in listing.

Prepare for more public scrutiny to

new stakeholders.



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Asked what advice they would give to a company considering an IPO,

our respondents emphasised the need to choose advisers carefully.

Planning and preparation is the key. Most of the difficulties encountered in IPOs can be anticipated and prepared for.

Put together an IPO team and give it a realistic timetable. Prepare for life as a listed entity.

Figure 8: guidelines for a successful IPO

Analysing our survey results we identified several questions directors and CEOs/MDs could ask of themselves before

committing to an IPO.

Do you realise that you may need to spend over half your time for the next six months, or longer, focusing on the IPO?

How will the business cope during this period?

Do you understand the ongoing commitment required of board and management during the IPO process and afterwards?

Are your systems and procedures sufficiently robust to comply with corporate governance good practice?

Have you a credible business plan that will make sense to sceptical outsiders?

Have you collated and documented all of the information required for a thorough due diligence process?

Is the company ready for the increased scrutiny it will receive both during the listing process and afterwards?

Have you properly researched the selection of professional advisers for the IPO?

Consult widely, do lots of pre-marketing and listen to what the market is telling you.


Lessons learned

2%

2%

10%

13%

13%

20%

40%

Investigate market conditions

Prepare for the more strict public scrutiny

Speak to people who have experienced an IPO

Set clear objectives and be clear on plans

Have the right team before you start

Dont underestimate time and resources needed

Choose advisers/broker carefully

Obtain appropriate professional

advice from the outset.



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In late 2004 KPMG in the UK commissioned research into the experience of companies that had floated over the previous three years.

The questions asked of these companies were similar to those asked in our Australian IPO survey. Comparing the results of the two

surveys reveals some intriguing similarities and differences.

Key IPO drivers Raising capital for acquisitions was cited in both surveys as the most important reason for undertaking an IPO.

In the UK a higher business profile was the second most important reason for an IPO, while in Australia it was securing an

exit route for private owners. This difference reflects the recent trend in Australia for private equity funds to exit through anIPO which was motivated by the buoyant capital market.

Key challenges Preparing a prospectus and undertaking due diligence were the top two challenges associated with an IPO in both countries.

Marketing is more of an issue for UK respondents.

Agreeing on an appropriate capital structure is a significant issue for Australian companies.

The personal impact Due diligence generated considerable personal stress for respondents in both countries.

Marketing the IPO emerged as a key stress issue in the UK, particularly for CEOs.

In Australia preparation of the prospectus and business plan were notable stress points.

Getting in shape Only 29 percent of UK respondent companies had to make significant changes to satisfy listing requirements.

Over half the Australian respondents were forced to make structural changes to their companies to meet listing requirements.

Timetable In the UK, privately owned businesses tended to take longer to complete their IPOs than those backed by professional private

equity investors. Company size appeared to have no effect on the duration of the IPO process.

In Australia larger companies tended to complete their initial preparation for an IPO somewhat more quickly than their

smaller counterparts.

Only 39 percent of UK respondents experienced delays in their IPOs compared to 82 percent in Australia suffered delays.

Contrasting IPO experiences: the UK and Australia



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Reasons for delay Respondents in the UK attributed delays mainly to resolving issues uncovered in due diligence (27 percent), changing market

conditions (20 percent) and unrealistic timetables (20 percent).

Australian respondents attributed delays to unrealistic timetables (18 percent), preparation of financial track record (16 percent)

and changing market conditions (15 percent).

The IPO team CEOs and FDs were the key figures in IPO teams in the UK.

In Australia CEOs/MDs, together with CFOs/FDs and company secretaries tended to drive IPOs.

In both countries key figures tended to devote more than half their time to the IPO process.

What do people wish they had understood better Asked what they wish they had understood better prior to commencing their IPOs, UK respondents nominated the commitment

of in-house resources required (29 percent), increased governance requirements (23 percent), the detail of the due diligence

process (22 percent) and the degree of marketing involved (21 percent).

For Australian respondents the main concerns were the commitment required of boards, CEOs/MDs, CFOs/FDs, company

secretary/in-house lawyer (21 percent), the commitment of in-house resources (16 percent), duration of the IPO process (15

percent), and the detail of the due diligence process (14 percent).

What they would have done differently Sixty percent of UK respondents would have allowed more time for planning their IPOs and would have taken more care in

choosing their professional advisers and brokers.

Eighty-eight percent of Australian respondents would have allowed more time for planning and taken more time to appoint

advisers.

Consequences of listing In the UK 91 percent of respondents felt their IPOs had met all their objectives. Important consequences included increased

access to capital, closer relationships with investors and increased business profile and credibility.

Of Australian respondents, 85 percent said their IPOs had met all their objectives which included improved access to capital,

increased profile of business and allowed acquisitions to be made easier.

Post-float acquisitions Only 19 percent of UK respondents felt that listing had made the acquisition process more complex.

Forty-nine percent of Australian respondents believed listing had made the acquisition process more complex reflecting the

number of private equity backed IPOs in our sample who no doubt found acquisitions in a private environment easier.



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David Nott Transaction Services

Mathew Panopoulos Transaction Services

Chris Lester Transaction Services

Lisa Li Transaction Services

Andrew Leithhead Corporate Finance

Malcolm Kpedekpo Corporate Finance

Contributors to this paper

2004-05 Survey of the Australian Capital Markets, prepared by KPMG in Australia, kpmg.com.au/Services/Corporate Finance/

Publications

Alliances and Joint Ventures, prepared by KPMG in Australia, kpmg.com.au/Services/Transaction Services/Strategic and

Commercial Intelligence/Publications

Beating the Bears, prepared by KPMG International, kpmg.com.au/Services/Transaction Services/Publications

Extracting More Value From Disposals, prepared by KPMG in Australia, kpmg.com.au/Services/Corporate Finance/Publications

Thinking of an IPO?prepared by KPMG in the UK, kpmg.co.uk/Services/Advisory/Transaction Services/Publications

Related KPMG publications



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Contact us

David Nott

National Managing Partner

Transaction Services

+61 2 9335 8265

[email protected]

Mathew Panopoulos

Associate Director

Transaction Services

+61 3 9288 5148

[email protected]

Andrew Leithhead

Executive Director

Corporate Finance

+61 2 9335 [email protected]

For further information please contact:



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Notes



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kpmg.com.au

2005 KPMG, an Australian partnership, ispart of the KPMG International network. KPMGInternational is a Swiss cooperative. All rightsreserved. Printed in Australia. The KPMG logoand name are trademarks of KPMG. December

KPMG respects your privacy. We manage your personal information in accordance with the NationalPrivacy Principles and use this information for business related purposes or to contact you aboutKPMG services in the future. For details on KPMG's Privacy Policy, to enquire about any personalinformation we hold or to cease receiving information from us, please contact KPMG's NationalCompliance Manager at AUSTPrivacy@kpmg com au

KPMG Corporate Finance (Aust) Pty Ltd. Australian Financial Services Licence No. 246901. This document has been prepared to provide you withinformation only and does not take into account your objectives, financial situation or needs. It is not intended to take the place of professional advice andyou should not take action on specific issues in reliance on the information contained in this document. Before acting or relying on any information, youshould consider whether it is appropriate for your circumstances having regard to your objectives, financial situation or needs and also whether or not anyfinancial product is appropriate for you.

KPMG Transaction Services (Australia) Pty Limited. Australian Financial Services Licence No. 245402. This document has been prepared to provide you withinformation only and does not take into account your objectives, financial situation or needs. It is not intended to take the place of professional advice andyou should not take action on specific issues in reliance on the information contained in this document. Before acting or relying on any information, youshould consider whether it is appropriate for your circumstances having regard to your objectives, financial situation or needs and also whether or not anyfinancial product is appropriate for you.

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