Alex Lynch on Initial Public Offerings
Over the next several weeks, LEVICK Daily will share selected interviews from our recent NACD Directorship article entitled “What’s Next? The Top Issues of 2013 and Beyond.” Today, we feature a discussion on initial public offerings (IPOs) with Alex Lynch, a partner in Weil Gotshal’s Capital Markets Practice.
Mr. Lynch focuses on the representation of companies, particularly technology, healthcare, financial services, and other growth enterprises, as well as leading investment banks and private equity firms. He has extensive experience in equity capital markets transactions, with a particular focus on initial public offerings. He also advises boards on securities and corporate governance matters.
At the conclusion of the interview, you can find LEVICK’s own communications best practices appended.
What is to be learned from the less than stellar IPOs issued by Groupon and Facebook in recent months? What are the lessons for companies outside the technology sector?
Alexander Lynch: The primary lessons from the Groupon and Facebook IPOs are not only applicable to technology companies but are applicable to all companies looking to complete an IPO.
First, listen to your advisors. IPO companies should retain advisors who are experienced in the IPO process and can help it avoid the many pitfalls. One of the most common pitfalls is gun-jumping or marketing the IPO outside of the typical registration process. Gun-jumping can delay your offering, result in liability, and produce bad press during the roadshow. Many of the gun-jumping issues in the Groupon IPO could have been avoided if the standard advice regarding publicity had been followed.
Second, when setting the valuation of the IPO, leave some room for the stock to appreciate and be mindful of who is being allocated stock. Facebook priced its IPO at a rich valuation and increased the number of shares sold in the offering. IPO companies need to balance between trying to maximize the price and the size of the offering and selecting the right type of IPO investors and letting those new investors enjoy some success. A rich valuation and large deal size can reduce the demand for the stock in the market after an IPO. In addition, allocating IPO shares to hedge funds and individual investors rather than long-only mutual funds can result in increased selling pressure if things don’t go well. Remember, an IPO is not the last time to the market.
What are the responsibilities of boards of directors in the IPO process?
Alexander Lynch: Directors have a number of unique responsibilities in the IPO process. First and foremost, directors have personal liability for material misstatements and omissions in the registration statement and prospectus. Directors also personally sign the registration statement. As a result, it is critical for directors to give themselves the time necessary to read and review the registration statement carefully in advance of the initial filing and throughout the process. They should then compare the disclosure to what they know about the business and alert the IPO company’s advisors of any disclosure issues.
Second, focus on accounting issues. Is the IPO company ready to report on a quarterly basis? Can it produce financial statements on a timely basis? Are there any accounting policies that need to be reconsidered? Do you have any material weaknesses or significant deficiencies? If so, how are they being remediated and will they be remediated in advance of the IPO?
And third, make sure the IPO company is ready to be public by asking the tough questions. Do you have the right management team in place? Why is the IPO company going public? Is the business model mature enough to withstand investor scrutiny? If you don’t have the right answers to these questions, the IPO company is likely not ready to be public.
How can boards of directors best prepare themselves for the transition from private to public ownership?
Alexander Lynch: Remember, IPOs are the beginning; not the end. An IPO will not be the last time the IPO company accesses the market. Preparation for life as a public company is critical for success. Also, a well-executed IPO provides a substantial amount of goodwill and positive publicity, while a poorly executed IPO can damage an IPO company’s reputation for a long time. Accordingly, preparation by the board is critical.
Be honest in your assessment of the IPO company’s readiness to be a public company. Make sure you have the right management team in place. Confirm that you have the right accountants and attorneys. Assess the challenges faced by the IPO company and ensure that they are manageable. Make any necessary changes to the business, management or advisors before the IPO process to avoid having to make these changes during the IPO when public scrutiny is most intense.
In connection with considering an IPO, I advise boards and management teams to act like they run a public company before being public.
BEST COMMUNICATIONS PRACTICES:
1. The price at which you set your IPO communicates a lot about your value proposition. What happens to that price after the offering communicates even more. Boards need to maintain investor confidence by allowing room for the share price to grow.
2. The IPO is the beginning, not the end. It is not only a financial event, but a corporate branding opportunity. Boards need to ensure that newly-public companies communicate their value just as aggressively post-IPO as they do in the critical months leading up to it.
3. Boards need to be ready for circumstances in which high IPO trading volume creates glitches in the system that cost investors’ money and has a negative impact on trust in the system. Companies need to be ready with statements that can forestall chaos and confusion under all anticipated contingencies.
This post is excerpted from Richard Levick’s recent NACD Directorship feature “What’s Next? The Top Issues of 2013 and Beyond.” To read the full article and learn more about the most significant issues impacting boardrooms today, click here.