Let’s take an in-depth look at the steps necessary to implement an initial public offering. These actions can be divided into two phases pre-launch and execution.
Naturally, we’ll start by describing the pre-launch steps. Typically, the IPO process starts around six months before the intended date of the offering. The first task for ownership is to hire advisors. Besides investment bankers, they’ll need the help of legal financial assurance tax and commercial advisors who will carry out the firm’s due diligence. These workgroups aim to create documents describing the company’s as-is situation to investors seeking to answer the many questions that might come up at investor meetings.
In 90% of the cases, companies have a pre-existing relationship with the investment bank they hire. Ideally, bankers have been the firm’s trusted advisors for a long time and have helped the organization grow its business and go public. So once all advisors have been hired, they will define the key issues to be addressed by the firm.
Are there legal problems to consider before going public?
Is there a particular topic that’s likely to concern investors?
How solid is the company’s financial reporting system?
Are there IFRS or US GAAP-related adjustments that need to be reconciled?
These are topics that emerge when advisors carry out their due diligence. In the next step of the process, bankers publish a pre-IPO research report. This document comes with the announcement of the IPO to the public and contains a preliminary assessment of the company’s business. This is the last report The investment bank carrying out the IPO provides about the issuer until the closing of the offering.
The idea is to avoid boosting the company’s profile in the public’s eye in a period close to the actual IPO. Once the research report goes out, it’s circulated to retail and institutional investors and the investment bank responsible for the IPO starts its pre-marketing efforts. This typically means contacting institutional investors to learn more about their predisposition towards the company’s equity story to be listed. This allows bankers to determine an indicative price range, which, depending on the situation, can be 10 or 20% wide. The next step of IPO preparations is the issuance of an IPO prospectus. The prospectus is one of the critical documents in an IPO.
Typically, it’s cumbersome and exhaustive, describing almost all aspects of a company’s business. This is done to protect retail investors. They are less sophisticated than professional investors and need access to a descriptive document that enables them to make an informed decision. Investment bankers and Big Four advisors typically prepare the prospectus. The final version of the prospectus should be ready approximately three months before the company’s listing on the stock exchange. The subsequent processes are part of the execution phase of the IPO.
One or two months before the IPO, investment bankers and top management start their roadshow, meeting with investors, answering their questions, and trying to win the support of key investors. Industry experts, reputable funds such as BlackRock and Fidelity, and retail investors are some investment bankers who want to bring on board. At the end of each roadshow meeting, investment bankers ask investors for feedback regarding their interest and the price they’ll pay for the company’s shares. Once the roadshow and book-building processes have been completed, bankers gain an idea of how many shares and at what price they can sell to investors.
They advise the company’s ownership on how to allocate shares between the various types of investors. The main goal is to get quality investors on board and finally, the last stage of the process is the actual listing of the company on the stock exchange. Ringing the bell is the most exciting part of the journey, but the hours after the shares start trading on public markets are essential. The bank wants to ensure the company’s shares go slightly up. This is their definition of a successful IPO.
