Brunswick Review Issue 2

Gimme Shelter? Or Pump Up The Volume?

Many executives are poised to leave the anonymity of private ownership – but will their IPO message be clear and convincing?

“A rude and brutal experience” is how one CEO summed up the Initial Public Offering (IPO) process after the successful float of his medium-sized engineering company. His bruised reaction was not untypical – few senior executives go through more than one IPO in their career and not surprisingly most are unprepared for the ordeal. Others mistakenly assume that little can be done to influence the outcome, aside from one-on-one meetings with a few dozen institutional investors.

On the contrary, media commentary and analysis is a key source of information among investors during an IPO – and clear communication really matters. 

Many CEOs equally start with a hesitant mindset. “The press is going to write about me anyway whether I like it or not” is a typical reaction. “They will highlight my personal wealth and for ever after the only account of the IPO available to staff, friends, trade partners and investors will be what was in the newspapers.”

While this may all be true, the magic dust of a good communications strategy during an IPO should in our view be anything but defensive. Based on our experience of working with companies over several recent cycles, we believe executives need to speak with conviction, maintaining an outward, proselytizing mindset while not losing sight of the occasional need to circle the wagons.

A company should start by asking itself how the story will be heard in a newsroom and on a trading floor? In the editor’s conference, when the sector correspondent has 45 seconds to pitch for space in that day’s paper, how will that correspondent sum up the story as “must-read”? Or, on the first day of trading in the stock, what are the dozen or so words that the sales team will scribble down at the analysts’ early morning briefing which will signal “buy now, don’t wait.” These are not simplistic questions. They get at the quintessence of an IPO investment story. Why is it unique? Where is the growth?

Paradoxically, the answer to the first question may not be specific to the company – it could be the appeal of the sector. The idea that their fortunes are inextricably linked to competitors and rivals occasionally comes as a surprise to management teams – especially founders. But a “cleantech” or renewable energy company contemplating an IPO in the current environment, for example, will need to demonstrate the wider attractions of its industry before focusing on its own story.

Self-evidently the business must have a history of success which it should relate in its own words. Cut away the dense undergrowth of business school jargon, “banker-speak” and legalese and return the narrative to the language of the management team. The story is at its most compelling when at its most natural – as if the Chief Executive were explaining it at the lunch table for the first time. Key facts must tumble compellingly out of a story that is too good to miss.

The message for which all the rest can be abandoned in moments of stress is around growth and the “upside.” Of course all members of an advisory team acknowledge this, but they often lose sight of its overwhelming strength when it is crowded out by other considerations. Ten years after listening to a Harvard finance professor outline the principles of corporate finance I have not forgotten his unambiguous declaration that “the function of equity is to be risk capital, and growth is its only justification.”

The management team may have an outstanding three hour pitch – but it also needs a two minute version; useful for investors, indispensable for hard-pressed correspondents. An IPO furnishes journalists with the justification to examine a company’s plans, so a robust articulation of what management will do with the proceeds should convince all hearers of the company’s ambition.

A trump card for the company must be the management’s track record, usually, but not always, the same as that of the company. Where these differ, it is vital that the individuals have their own proof of caliber. Beware, at this point, the codicil question directed artfully at the Chief Executive: “…and are you happy to be taking your business public?”  We have seen executives hesitate at this question – and it looks awkward. As a precaution someone should ask every member of the presenting team at a moment when their guard is down, “Are you quite sure you want to do this, and right now?”

Having set out its stall the floating company, whether a minerals business or financial conglomerate, will find itself, often to its surprise, parrying blows on an altogether more hostile agenda.

Journalists, analysts and investors will always look for a positive core story, but they will also be skeptical. Good IPO communication is as much about composing the ripostes to questions about vulnerabilities as it is about the overarching narrative. And the IPO without vulnerability has yet to reach the market.

Voices of doubt can come from an unexpected quarter. Prior to pricing, the role of the institutional investor, soon to be part-owner of the business, is ambiguous. It is axiomatic that if a fund thinks that a stake in a new company is good value at x pence per share, it will naturally be even more eager to get it at x minus y pence per share. And a principal mechanism for driving the price “south” is the media. In the frenzied atmosphere that surrounds a new float a journalist will often prize the views of a shareholder or potential shareholder above the opinions of the company or its advisors. So a quiet word that the selling party may have let its imagination run away on the valuation multiple will find space and a sympathetic headline. 

The emergence of the price range presents the greatest moment of risk. Surprising as it might seem, some companies really believe journalists can be persuaded to write about an IPO without estimating what the company will be worth. Disaster may therefore ensue if company and broker do not look each other in the eye the night before the announcement of intention to list, and agree a number that both are comfortable seeing appear on Reuters, Bloomberg and Dow Jones the following morning. 

Expect rigorous scrutiny of the sellers’ rationale, and for it to be linked (sometimes accusingly) to the rationale for the float and the total sum of the proceeds. This is always heightened at certain points in the cycle. For example, over the next few quarters, with private equity funds widely believed to be under pressure to sell down their portfolios and exit investments, the distress of the seller will be a legitimate issue for the media. Journalists will inevitably focus on the way in which potential investors may exploit the sellers’ circumstances – with the management team fighting it out in the middle. Remuneration arrangements are obviously highly sensitive. 

To any Chief Executive, leaving the shelter and anonymity of private ownership for the exposure of public ownership can be frightening. Establishing a positive communications message at the outset will not only enable a company to navigate the fast moving rapids of the IPO process but will pay off handsomely in future relations with media and investors.

Patrick Handley is a Partner in Brunswick's London office. He helps build the firm's presence in Natural Resources and Media and has advised on many IPOs in these and other sectors.