When (and How) To Work On IR When An IPO Beckons

Every year, hundreds of companies globally prepare for an IPO and dozens are readied to be spun out as public companies from their parent firms. Although 2016 was a down year for such activity in Canada, EY Global IPO Trends reports a 550% year-over-year increase in Canadian IPOs in 2017 with names such as Canada Goose, Kinder Morgan Canada and Freshii leading the way.

For IROs and IR consultants alike, successful public offerings represent hope for more employment/business. Moreover, newly minted public companies offer a chance for experts to get in on the ground floor in establishing the IR function. In this issue of IR focus, we review when and how to start working on IR when an IPO is planned and the investment community’s expectations of a new listing.

No Room for False Starts

Ten years ago, it was relatively common for an IPO-bound company to enter the capital markets without first thinking through its IR resource needs. The reasons were twofold. One, because of the risk that the offering would not succeed, the company avoided an early investment in IR. Two, the IPO process concerned itself only with the act of selling shares. Executives had precious little time between 24/7 meetings with lawyers, accountants and bankers to consider what would happen after the goal line was crossed. Consequently, more than a few executives watched their share price and their credibility shrink in the weeks following their IPOs because they failed to adopt even basic practices such as message/expectation management.

Investment bankers, urged on by institutional shareholders, sought to flip the script to avoid these costly false starts. Now ongoing IR is a common topic of discussion between corporate executives and investment bankers during the run up to the IPO. This has resulted in smoother transitions for most companies.

That said, how these executives choose to respond is a matter of personal choice. From our research, however, many successful IPO graduates follow a similar path.

Six Months Before Launch

As it becomes clear that an IPO is a distinct possibility, legwork should begin on the formation of an IR function. This does not involve hiring a full-time IRO (yet); it means educating the management team on the purpose of IR, assessing the IR resources that will be needed to fulfill the planned mandate and discussing the placement of the function within the organization’s structure.

Whose job is it to take on the role of IR educator? There can be various answers. If the entity is being spun out, the parent will have the resources to guide the management team toward an appropriate IR solution. This creates a new opportunity (and responsibility) for the parent company’s IR team. If the company is private, the educational process may involve tapping into the knowledge of the company’s shareholders, which could include a private equity owner.

Irrespective of where the knowledge comes from, the company’s Chief Financial Officer is typically the point person for managing the needed information. It is not unusual for a private company CFO and/or communications executive to attend CIRI’s Essentials of IR program as part of a fact-finding mission.

During this formative period, a private company should begin to understand the purpose of IR, the skill sets needed to perform the IR function and the interdependencies inherent in the role. A private company’s advisors, if they are knowledgeable, will recommend a CIRI membership at this stage; this comes with access to CIRI’s Guide to Developing an Investor Relations Program. While the Guide is packed with useful information, the sections entitled ‘Defining the IR Mandate’ and ‘Identifying Resources’ are of particular relevance.

Armed with this information, a notional IR budget should be developed that includes projected staffing costs. A role (job) description for the future IRO position should be crafted, along with an articulation of the skill sets necessary to perform the function. Proposed reporting lines within the organizational structure should be added (in pencil). An IRO is not the only new hire the company will have to make. Consideration must be given to adding a corporate secretary and additional resources in the finance department to enable external financing reporting.

The need to amass this level of insight is why private companies are well advised to put together a small taskforce consisting of members of their finance, legal, communications and human resources departments to develop appropriate plans.

One Month Before Launch

At this stage, a private company’s executive team is working full-time with the company’s lawyers and investment bankers to finalize the preliminary prospectus. This is an exceedingly trying time because the operations of the company must be effectively managed while the C-suite is fully engaged in IPO prep.

More concrete steps should be taken to ready the company to meet investor needs after the IPO. These steps include: initiating the search process for an IRO; opening accounts with service providers such as wire services; and developing content for investor pages on the company’s website so that these can be launched precisely when the listing takes place. One note from those who have been through this process: a private company’s investment story is still in development at this stage, so it is important that any content created prospectively for an investor website be tested against the final version of the offering prospectus and IPO sales deck. There can be no discrepancies.

Some private companies host employee informational sessions to familiarize the workforce with the IPO process, the value of share ownership (since one advantage of an IPO is the creation of employee share ownership plans) and the coming prohibitions on insider trading and sharing material information. Such sessions are strongly recommended, as is adopting – pre-IPO – a disclosure policy that applies to all employees and extends to Directors of the company as well as anyone who speaks on behalf of the company. This policy should cover disclosures of material information in any forum or medium, including social media.

Speaking of media, there are strict prohibitions on conducting media interviews at this stage so it is necessary to forewarn a company’s communications department of these restrictions. In particular, a company must avoid commenting publicly, in any forum – including social media – about the offering, financial performance or outlook. If a company has, in its ordinary course of activity, previously engaged in media relations, this may continue, assuming the restrictions noted above are observed, but it is best to have all communications reviewed by legal counsel first.

Who should take the lead in organizing and fulfilling IR-related tasks? Typically, an IRO has not been hired yet because the company cannot be certain that its IPO will succeed. Consequently, these jobs will fall to existing employees, perhaps including human resources and communications departments (if the latter entity exists), with possible support from an IR consultant. The IR staff of a parent company, in the case of a spin-off, should also be asked to contribute to the process. Having an IRO or IRO designate contribute to the formation of the disclosure policy is invaluable.

What New Shareholders Expect From Day One

New investors will start to request information immediately. In fact, investor traffic, particularly of the retail variety, can be surprisingly heavy even in the early weeks following listing, which is why the immediate launch of the investor website is crucial. Without it, inbound call volumes can be overwhelming.

Having a designated investor point person for the company is also a must. Until an IRO is hired, this task will fall to the company’s CFO.

For that reason, hiring an IRO is strongly advised. Among responsibilities tackled immediately by an IRO should be the implementation of an IR plan for year one, ensuring a disclosure committee of management is established, developing Board reports on investor relations activities and amassing contact lists of key institutional buyers of the initial offering and the sell-side analysts assigned to cover the company.

Investment bankers are much more willing to lend a helping hand to a fledgling public company than they were a decade ago because they understand the importance of a successful transition to the retention of corporate value and wish to maintain positive relationships with both ends of their client spectrum (investors and corporate executives).

However, it is not enough to simply rely on investment bankers: the onus is on the IPO bound company itself to prepare early and thoroughly for the demands of capital market participation.

Where To Get More Information