Ready, set, IPO!

Business World (07/18/2016 – p.S1/4)

SUITS THE C-SUITE By Dolmar C. Montañez

(First of two parts)

Many companies consider doing an initial public offering (IPO) as the pinnacle of success, the achievement that not only affirms the company’s business model, but also quantifies the trust and faith of stakeholders and investors. A successful IPO is a great opportunity to fund growth and increase a company’s exposure to stakeholders and the public. It can enhance the company’s reputation and market standing, as well as attract new talent. It also helps raise capital for a company while allowing its owners to keep control of the company and continue executing strategic decisions without being absorbed by a larger entity, such as in a merger or acquisition.

Without a doubt, going public comes with greater exposure and increased responsibility, notably in the areas of financial reporting, governance and internal controls. The company also has to address increased regulatory requirements, risks and the need to communicate regularly with stakeholders to maintain investor confidence.

In recent years, various Philippine companies have undertaken their own IPOs, with varying levels of success. Historically, we would see an average of around seven to 10 companies do an IPO in a year. Last year, only four companies were able to complete their IPO due to volatile market conditions towards the end of 2015. A number of hopefuls have already submitted applications to the Securities and Exchange Commission and Philippine Stock Exchange but we have only seen the first IPO of 2016 weeks ago amid the uncertainties brought about by the recent elections. Given the long lull in IPOs, investors have positively accepted the first IPO of the year which is also the first death-care business listed in the PSE. The equity market in the Philippines has also opened its door to small players, kicked off by two successful IPOs in the SME Board in 2014.

GROWING THE FAMILY BUSINESS

Many of the emerging and successful companies in the country are still private family businesses. Raising growth capital, monetizing investment, succession and estate planning are among the reasons private family businesses typically consider in going public, even as they prepare to address critical pre-IPO strategic issues while managing the day-to-day operations of the business. Some of these critical pre-IPO strategic issues are highlighted in the publication, EY IPO leaders’ insights, such as:

· What is the optimal capital structure for the company? This is a key question if the goal of the IPO is to raise growth capital, since funds are allocated as capital to various business functions as needed.

· Is an IPO the right equity solution? IPOs come with significant public scrutiny and oversight. Family members need to weigh if an IPO is the right capital-raising option for them or depending on the circumstances, other options may be more appropriate — such as private placement, syndicated loans, etc.

· What is the transaction perimeter? It is vital to clearly define the exact scope of the business to be listed since this will determine the equity story and influence pricing. It is also important to identify business relationships between different affiliates that may need to be formalized prior to IPO.

· What will the board composition be? Listed companies are typically required by regulators to have a strong corporate governance framework, including independent directors. This means that before the IPO, the family business owners will not only have to decide on the board composition, they should also be familiar with their roles and responsibilities as directors before and after the IPO.

· What is the equity story and expected valuation? The family needs to craft and deliver a clear equity story — the key reasons why investors should buy into the IPO. Management and directors, who will likely be members of the family, need to be able to clearly articulate the equity story during investor road shows and presentation to regulators.

WHERE ARE YOU AT

Beyond raising capital, public listing can involve a complete transformation of business processes and corporate culture. Considering how much planning, coordination and teamwork are required to do a successful IPO, it is crucial for companies to undergo an IPO readiness assessment as early as possible.

The assessment can help senior managers and executives better understand how to win in the capital markets, and whether the organization has already established the necessary financial reputation to attract investors. EY IPO leaders’ insight discusses eight main areas for assessing readiness for the IPO, which should take place 12-24 months before the actual listing date. These include the overall strategy, the structure of the organizations, tax planning, financials to comply with regulatory requirements, determining internal control systems, identifying old and new functions, designating leadership and managing the timing for the IPO.

We will discuss these eight points in more detail in next week’s column.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Dolmar C. Montañez is a Partner of SGV & Co. and a member of SGV’s Capital Markets Group.