The Advantages and Disadvantages of Going Public
by Gary L. Benton, Pillsbury Winthrop LLP
There are numerous benefits of going public through an Initial Public Offering, including creating currency that can be used to fund growth and generating liquidity for founders, investors and employees, among others. That said, corporate managements considering an IPO today face a greater challenge than ever before in history. The IPO market remains open only to very high caliber companies with solid fundamentals. In addition, companies contemplating IPOs must consider the corporate governance regulations and increased disclosure requirements associated with the Sarbanes-Oxley Act. It is indeed a new era for public companies. Putting in place the appropriate Investor Relations infrastructure and public company protocol in advance of going public is critical to completing an IPO and ensuring a smooth transition to public company life.
A common misperception is that Investor Relations counselors are only needed once a company begins trading in the after market. Waiting this long before engaging the services of seasoned Investor Relations counsel will place the newcomer at a decided disadvantage relative to better-positioned companies seeking an audience on Wall Street.
In the best of all worlds, a company should look and act like a public company well in advance of becoming one. An experienced Investor Relations coach who has been through the IPO grist mill many times can streamline the process, often handling many aspects of the pre-IPO program independently. Eliminating as much distraction as possible enables management to spend more time on its top priority—building the business to achieve a high valuation.
The field of Investor Relations, which was once dominated by a few key players, is now populated with hundreds of firms ranging from one-off consultancies to divisions of large global agencies. With the multitude of players now in the marketplace, it can be extremely confusing and challenging for any CEO or CFO to determine what to look for in choosing an agency for this very important task.
An effective Investor Relations program is not cheap. However, a well executed Investor Relations program can result in a substantial return on investment to the company in the form of a higher equity valuation and a strong corporate reputation. On the flip side, an unsuccessful agency choice can be frustrating and counterproductive. In an IPO scenario, the stakes are high and it is important to choose your advisors, including Investor Relations counsel, carefully.
The selection process requires thoughtful planning and should begin with (1) performing research to determine which firms to interview, (2) holding agency interviews with the proposed account team, and (3) conducting follow-up due diligence to reach a final decision.
Researching Potential Investor Relations Firms
Determining which Investor Relations agencies to consider is similar to searching for any other top-level company advisors. Prospective agencies can be identified through resource directories for public companies, web site search engines, and referral sources such as investment bankers, lawyers, or accountants. It also makes sense to ask public company CEOs or CFOs you know about the firm they use. Before taking the time to meet with an Investor Relations agency, review background information (agency background kit and web site) and schedule phone interviews with the agencies under consideration to determine if there is a fit. The following are key questions that should help pre-qualify agencies for in-person meetings.
· Does the agency have experience working with companies going through the IPO process? What did other pre-IPO programs entail and what were the outcomes? Can the agency share case studies for this work?
· Does the agency have relevant industry experience?
· What research tools does the agency have? For example, does the agency have investor contact databases, tools to develop peer group and valuation analyses, or access to 13F data, sell-side analyst reports, First Call data, or competitor conference call transcripts?
· How does the agency track client program results? What specific metrics do they use? For example, does the agency track volume, institutional ownership, sell-side coverage? What kind of program reporting does the agency provide to clients?
· How large is the agency’s executive staff and where are they located? How many are dedicated full-time to investor relations? How many accounts does the team handle? How much access will the company have to the agency’s senior staff?
· Does the agency bring to the table an established reputation and relationships in the investment community that will serve to open doors for your company?
· How can the agency best characterize the backgrounds and credentials of its staff? How many former investment analysts, bankers, portfolio managers or former IROs are on staff? How many CFAs and MBAs are on staff?
· Does the agency have expertise in dealing with the financial media?
· Does the agency have specialized expertise in areas such as corporate governance, proxy issues, annual meetings, and stock watch?
· Does the agency have experience in presentation training?
· Does the agency have access to additional resources such as high-level crisis communications, employee communications, public affairs and international outreach?
· What is the agency’s fee structure?
Keep track of the answers to these questions provided in your conversations or found in the materials you have acquired from target agency resources. Then cut the list to arrange interview meetings with the best candidates. Also, note how quickly an agency answers your phone calls to set up the meetings. It is typically a good indication of the level of service and responsiveness you can expect from the agency.
Hold Agency Interviews with the Proposed Account Team
Top management should find time to meet the individuals who will be handling the Investor Relations program on a day-to-day basis, not just the senior executive heading up the team. A successful Investor Relations relationship is built upon a partnership between management and the Investor Relations team. As such, it is important for management to be comfortable with the team. During the meeting, ask for specific numbers regarding the agency’s staff and client turnover, and gauge how the team interacts with one another at this meeting. Honest feedback is at the heart of a successful agency relationship. Ask the team for their take on the company’s opportunities and challenges. Find out if the team has what it takes to be direct and honest with management. Questions you should ask your potential account team are as follows:
· How long have you been with the agency and where did you work before?
· How many other accounts do you represent? What companies?
· How quickly will you call us back when we need something?
· In the event back-up is needed, how would this be handled?
· What specific relevant expertise can the account team bring to you?
· Who specifically would the agency target in the investment community to support the company’s stock?
· What media outlets are you likely to pursue for a story such as ours?
· What do you see as our key challenges and opportunities?
Conducting Follow-up Due Diligence and Making the Final Decision
Once you have completed these meetings, ask for written proposals and references from top contenders. In contacting references, it is best to get feedback on your specific account team rather than the agency at large. Also, using a uniform checklist in conducting reference checks will help in comparing agencies on an “apples to apples” basis, leading to a quick decision. The process of careful questioning and review most often leads to a clear preference and chemistry with the agency best suited for you. Here are some questions you may want to pose to references:
How would you characterize the agency’s expertise in:
· Company positioning and message development
· Writing press releases, profiles, annual reports, scripts and speeches
· Consulting on issues such as financial disclosure, guidance, mergers & acquisitions, creating shareholder value creation, etc.
· Wall Street contact and investor meetings
· Financial media
How responsive is the team? For example, how long does it take them to turn around a press release?
Is the team pro-active, flexible and results oriented?
As you can see, it takes some work to choose the right agency. As you go through the process, keep in mind that running a company and completing an IPO is challenging. Choosing the right advisors at this critical time can make all the difference the success of your IPO.
Top of page