Ready, set, IPO!

SUITS THE C-SUITE By Dolmar C. Montañez

Business World (07/25/2016 – p.S1/2)

(Second of two parts)

In last week’s column, we talked about how companies see an initial public offering (IPO) as a crowning achievement for the organization, and yet the reality is that an IPO should be seen as a milestone and not an end in itself. We also discussed the challenges that family-owned businesses face when considering an IPO. In this column, we will look into eight key areas that a company has to consider in assessing their readiness for an IPO, as discussed in the publication, EY IPO leaders’ insights.

STRATEGY

This involves a thorough review of the IPO value journey and the destination, including the motivation and reasons behind the IPO, how the company plans to make use of the proceeds, selecting the right PSE board to list in, evaluate the strength of the equity story and the main elements of the offering concept in an IPO base case.

STRUCTURE

This involves identifying the potential issuer and the optimum group structure to bring to the market. Considering the extent of post-IPO regulation, this area will require significant thought and planning. For example, the use of a newly incorporated entity or an existing holding company, the articles of incorporation will need to be reexamined to cover such areas as the transition from a private to a publicly listed company, share capital and number of shares, timing of general meetings, and the composition of the board. It is also important to determine the owner structure, i.e. will the owners retain majority voting rights and will shares be issued to management.

TAXES

Tax planning also has to be a priority during the IPO process, particularly in the early stages where tax risks and exposures should be identified, assessed, managed and resolved. Any outstanding tax audits and work streams should be concluded as the company’s tax situation will be covered in the IPO due diligence and prospectus. Having outstanding tax risks and exposures will need to be discussed with analysts and investors, which may adversely impact valuation. Companies should implement leading best practices on taxation as part of its IPO readiness activities.

Key shareholders should also evaluate the company’s tax situation and the potential tax consequences of an IPO, especially since key shareholders will often have to remain shareholders for a “lock-up” period after the IPO. For example, the tax treatment of IPO costs and taxes on transfer of shares listed and traded at the PSE.

An IPO can require companies to undergo reorganization, which, unless handled properly, can possibly trigger huge taxes. Project managers should also note that tax assets are not lost during the transformation.

FINANCIALS

Part of the IPO process is to work to make the company more attractive to external investors, and this often requires comprehensive improvement of any existing closing-the-books processes to develop the ability to close fast to cope with the increased financial reporting requirements. This is a complex and time-consuming process on its own — from diagnostic assessment to developing and implementing changes to existing processes — but becomes more so, when this coincides with all the other activities and demands or preparing for the IPO. This is why companies should consider engaging external providers that are well-versed in improving the financial statement closing process in order to leverage on past knowledge, experience and best practices.

Companies will need to invest resources in performance forecasting, planning and controlling to guide analysts and investors. Reliable financial reports are also important in monitoring KPIs and treasury function post-IPO.

IPO requires the preparation of a prospectus which typically contains financial information that goes back three years. It also requires the latest available information before the transaction is launched to the investors. Auditors are involved in the review of the financial information and will issue comfort letters to underwriters as part of the latter’s due diligence. Only companies with fast and efficient closing-the-book processes perform well with these demanding requirements.

SYSTEMS

The project team needs to evaluate the company’s level of internal controls, its ability to manage enterprise risk and the capability to comply with regulatory requirements. Often, this may entail investment in new systems and infrastructure and in the development of new processes, which also includes the necessary training for the company’s people. Companies should also beef up their internal audit department, or create one if it does not yet exist, to monitor compliance with leading internal control practices which maintain investor confidence.

FUNCTIONS

Closely linked to the structure component of the assessment process, the organization will need to designate new functions such as corporate governance and investor relations, among others. Having established roles and responsibilities for investor relations is important since listed companies will face extensive disclosure requirements. The company will also need to establish protocols for internal communications that will mitigate any risks of insider trading. Finally, directors and management may also have to appoint committees to take on necessary roles and functions during and post-IPO.

LEADERSHIP

The business owners will need to define the leadership structure of the new organization, including selecting the C-level executives and the board of directors. This is a complex and often delicate process that will require much discussion and negotiation. It is also the time to look at remuneration packages and strategy.

The level of corporate governance must be assessed to see if they need to be strengthened post-IPO, particularly since corporate governance requirements for listed companies are more stringent. It is important to consider the background, experience and level of governance experience of board members. By understanding the capabilities of the planned board, the company can already consider the need for additional corporate governance training as mandated by regulators.

TIMING

At the end of the IPO readiness assessment, executives will need to choose the right IPO window and agree on the IPO schedule. With early planning and preparation, the company can already marshal the necessary internal resources to carry out the IPO. At the same time, project managers should look at plotting out a Plan B in case there are unexpected complications along the way.

Following this in-depth assessment, an IPO readiness exercise should provide the IPO project team with a clear picture to assist in decision making. The outcome will define the initial strategy and identify the gaps between the company’s current status and the target IPO-ready status. It can also help establish a road map that plots out the timeline to achieve readiness and the resources that will be needed. It can likewise help provide greater transparency on what organizational changes have to be implemented to successfully execute the IPO, which can reduce costs for the company.

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.