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Should you be thinking about an IPO? – City Comment

Thu, 12 Jun 2014 | By Philip Ellis, Optima Corporate Finance
Philip Ellis
After many years of relative silence on the subject, IPOs – initial public offerings, also known as a flotation – are seemingly back on the agenda and are becoming a regular topic of conversation. So, should you be considering it?

The first thing to say is that there has not been a recent recruitment IPO – it has, in fact, been many years since a recruitment company carried out an IPO in London. We do, however, hear that there are some flotations in the pipeline, so this may soon change.

At a recent event on the subject of mergers & acquisitions (M&As) on AIM, statistics were presented which illustrated increases in both volumes and value of deals done as well as funds raised on AIM, all of which are seemingly positive indicators for businesses considering life on a public market.

However, following a spate of IPOs there have been a number of large flotations recently which have not been as successful as hoped, indicating a softening of appetite. Notable examples are Saga and Game Digital being priced at the bottom end of their respective suggested price ranges and TSB being priced at a discount to book value. Less high profile was FatFace, the casual fashion retailer, which pulled its IPO at the last minute due to lack of interest.

Many of the listed recruitment companies would be regarded as too small to list today and I don’t expect to see businesses valued at less than £50m make successful debuts on AIM this year. Those micro cap recruitment businesses on AIM suffer from an acute lack of liquidity, meaning that the shares cannot be readily traded, which surely defeats one of the primary objectives of taking a company public. Scale is crucial and many institutional investors simply won’t consider investing in small cap businesses.

If you are considering an IPO, you will need a story and plan that will attract investors to take part in the IPO and will retain their interest. A classic way of achieving this is through a series of acquisitions, which can have multiple benefits:

  • Growing in size and scale can bring a company onto the radar of additional investors
  • Building the business with earnings enhancing acquisitions (ie. buying at a lesser multiple than the company’s own rating)
  • Using shares to help fund acquisitions rather than cash
  • News flow, keeping the company in the minds of investors

This all pre-supposes that the acquisitions are successful and it must be recognised that a poor acquisition, or indeed any bad news including missing profit targets, is likely to damage the company’s share price and it can be a lengthy process to recover investors’ confidence.

Other key factors to consider are:

  1. The costs of an IPO should not be underestimated. They will be determined by the size and complexity of the business as well as the level of funds being raised as part of the IPO, but it is never a cheap exercise
  2. An IPO requires a significant amount of management time
  3. There are ongoing costs of being a public company in terms of compliance and shareholder obligations which should be considered
  4. A public company has to announce its trading performance at least every six months, which means the business is always under scrutiny and pressure to deliver, which can lead to short-term decisions being made

Finally, bear in mind that not all business owners are suited to being public company directors, working for the benefit of shareholders and having their business under public scrutiny. If you are considering this route, it is advisable to speak to people with first-hand experience of an IPO and life as a public company director before making any serious plans.
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