INITIAL PUBLIC OFFERING (IPO)

Initial Public Offering (IPO)



Initial Public Offering (IPO)

Introduction

Despite turbulent equity markets, many companies are considering the initial public offering market to obtain liquidity for their shareholders. The key to a successful IPO is hitting the market at the right time, with the right story and the right financial information. However, companies often fail to plan sufficiently in advance to be prepared to launch when favorable market conditions arise. Though companies commonly believe that they can prepare an IPO offering document in several months, preparation should begin at least a year before the targeted going-public date in order to avoid a number of possible pitfalls.

This report focuses on long-term planning measures that can position the company for a smooth and successful IPO.

Strategies to Follow

Conduct a thorough IPO readiness assessment (Timing)

Timing is key, and the best way to minimize surprises and ensure a smooth IPO is to conduct a thorough IPO readiness assessment that focuses on the going-public process and the being-public processes.

The assessment would identify critical issues as well as develop a detailed IPO plan and realistic timeline to the IPO launch and beyond (Levis, 1996).

Financial statements and internal controls

When the company decides on an IPO, it should contact its external auditors and consider engaging a second accounting adviser to begin a review of the company's current financial statements and to enhance its documentation of accounting policies in light of the offering. Auditors may need to take a fresh look at segment reporting and determine if pro forma financial statements or any separate financials for significant subsidiaries will be required. It may take a significant amount of time to prepare public company financials, and typically private companies do not have resources or technical depth in public company reporting to perform these tasks without outside assistance (Jenkinson and Ljungqvist, 2001).

The company and its auditors must review the company's system of internal controls to ensure compliance with the Securities and Exchange Commission and other applicable rules, as developing, documenting and testing its system of internal controls could take six to 12 months.

Limit 'cheap stock' charges

The SEC focuses on a company's equity compensation programs and grants to employees, making it important that the company has adequate support for its option valuations or, if necessary, that it begins performing those valuations. The company should pay particular attention to "cheap stock" problems that arise in the months before the IPO. Such issues typically occur in the context of employee option grants, where options are issued during the 12 months preceding an IPO with an exercise price below the anticipated IPO price. If the company cannot produce reliable valuations of those options, it may be subject to a "cheap stock" charge and potentially even a restatement of its financials.

Price Discovery (Pricing)

The most important, yet most difficult, part of the initial public offering (IPO) process is setting the offer price. In an IPO, the issuer, aided by an intermediating investment bank, plans to sell a relatively large number of shares of common ...