Preparing for an IPO - current market conditions

Some 277 IPOs on the Australian Stock Exchange (“ASX”) were announced in 2007, representing a 42% increase over new floats in 2006. The capital sought from the 277 listings totaled $11.13 billion, making 2007 a record year for new listings. Grant Thornton Australia was the advising accountant for 23 of the listings, ranking us number 2 on the IPO tables for accounting firms and ahead of all the Big 4. 

Market conditions this year have however taken a turn for the worse with the United States on the brink of a recession and the slowing of the global economy. Although the Australian economy remains comparatively strong, the stock market has been badly affected by rising interest costs and the ongoing credit crunch. Since it peaked on 1 Nov 2007, the ASX indices have declined considerably over the past few months. IPOs in the pipeline have been affected as general market sentiments remain poor.

Companies that have been contemplating floating their shares will now need to reconsider their strategy in terms of timing, pricing and the likelihood of success. Given current market conditions, it is crucial that the preparation process be commenced early including the engagement of corporate/accounting advisors. This preparation or pre-IPO process depends very much on the objectives and expectations of the company seeking the IPO. Once the objectives are established, the initial areas to consider are:

• Intended timeline
• Corporate and capital structure
• Appointment of other advisors e.g. legal
• Accounting and reporting processes
• Historical financial statements and forecasts
• Board composition
• Key management & staff
• Dividend and employee incentive plans
• Appropriate debt levels & free float percentage

The company will also have to review its corporate governance policies and make the necessary enhancements to ensure it meets the listing requirements. This would involve setting up the relevant committees, codes and platforms. A desktop valuation of the business should be performed to assist management to understand value drivers and to formulate a preliminary pricing of the equity placement. Other considerations include monitoring and assessing market conditions and the likely appeal to potential investors of the intended IPO.

The above pre-IPO actions are to identify and address key issues early which will in turn maximise the chances of a successful IPO. If the company decides to proceed with the IPO, the next stage will involve preparing the prospectus and presentation materials, liaising with all the advisors and regulators, analysis of potential placees, marketing the IPO (including roadshows) and managing the process to completion.