EY’s guide to

going public
Are you ready? We are.
 Foreword

For fast-growing private companies seeking to raise capital, an IPO can be a superior route
to funding growth. While challenging markets will come and go, it’s the companies that are
fully prepared that will best be able to leverage the windows of IPO opportunity whenever
they open.

For over two decades, EY has worked with top companies considering their options for funding
for growth, including a public listing. We also frequently undertake extensive research to
identify critical IPO success factors. Year after year, we have found that companies with
successful IPOs:

• Approach the IPO as a transformational process rather than just a financing event or as
the endgame
• Begin to act and operate as public companies at least one year in advance of the IPO
• Outperform the competition on key performance measures before, during and after the IPO

We surveyed over 300 institutional investors around the world to determine how uncertain
markets in 2009 might have affected their IPO portfolio decision-making. This report
incorporates these investor insights, while examining in-depth the 10 steps toward IPO
readiness, alternative capital raising options, and current public listing challenges.

We hope this report will help you to begin what we call the IPO value journey, well prepared
to transform your private company into a successful public company that continually delivers
value to its shareholders.

Maria Pinelli
Global IPO Leader, EY

2 | EY’s guide to going public

Contents

Part one: IPO planning phase, 12 to 24 months before IPO

Step 1: Preparing for the IPO journey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Step 2: Keeping your options open . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Step 3: Timing the market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Part two: IPO execution phase, 1 to 12 months before IPO

Step 4: Building the right management and advisory team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Step 5: Building your business and financial processes and infrastructure . . . . . . . . . . . . . 21

Step 6: Establishing corporate structure and governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Step 7: Managing investor relations and communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Step 8: Delivering an effective road show . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Part three: IPO realization phase, 1 to 24 months post-IPO

Step 9: Attracting the right investors and analysts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Step 10: Delivering on your promises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Life as a public company: renew and recreate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

EY’s guide to going public | 1

Key findings
Here’s what companies with highly successful IPOs do
Prepare early Evaluate capital-raising options
• Begin the IPO readiness process early enough so • Consider a “multi-track approach” and the expanding
that your pre-listed company acts and operates like number of capital-raising strategies — including a
a public company at least a year before the IPO strategic sale to a trade or financial buyer, joint
venture, private placement or a foreign listing
• Commit substantial resources to the IPO process
and build the quality management team, robust • Pursue pre-IPO transactions to achieve maximum
financial and business infrastructure, corporate value — especially debt financing and refinancing,
governance and investor relations strategy that corporate reorganization, private placements or
will attract the right investors business alliances
• Don’t underestimate the amount of time the IPO
journey will take, or the level of scrutiny and
accountability faced by a public company
Address investors’ current concerns
• Recognize the need for enhanced corporate
governance — especially recruiting qualified
Outperform competitors on key non-executive board members, improved internal
benchmarks controls, and forming a qualified audit committee

• Investors base an average of 60% of their IPO • Fine-tune your internal business operations —
investment decisions on financial factors especially: especially working capital management, regulatory
debt to equity ratios, EPS growth, sales growth, risk and rationalizing the business structure
ROE, profitability and EBITDA growth • Deal with current accounting challenges —
• Investors base an average of 40% of their IPO especially asset valuation impairment, consolidated
investment decisions on non-financial factors subsidiary financial statement issues and revenue
especially: quality of management, corporate recognition
strategy and execution, brand strength and
operational effectiveness, and corporate governance
Focus on being a public company
• Be able to articulate a compelling equity story (not just on going public)
backed up by a strong track record of growth which
sets you apart from your peers while maximizing
value for owners

2 | EY’s guide to going public

When the IPO window of opportunity
opens, winning companies are ready
While not all businesses are suited to life in the public eye, The IPO process should be a structured and managed
for many fast-growing private companies, an IPO can raise transformation of the people, processes and culture of
the capital needed to accelerate growth and achieve market an organization. At EY, we refer to this process as the IPO
leadership. An IPO is the first sale of a company’s shares to value journey. Although the IPO event itself generally lasts
the public and the listing of the shares on a stock exchange. It 90 to 120 days, the value journey begins at least a year
allows a company to raise capital in order to build its business or two before the IPO and continues well beyond it. Thus,
by creating and selling new shares. while an IPO should be a key turning point in the life of your
company, market leaders don’t treat an IPO as simply a
How a successful listing can help your company:
one-time financial transaction. Rather, they recognize the
• Unlock access to financing to complete a strategic IPO event itself as just one defining milestone in a complex
acquisition transformation from a private to a public company.
• Create opportunities to expand your business into new
Even when the financial climate is not ideal for raising
markets
funding, it could be a good time to be planning for an IPO or
• Provide an exit opportunity for your private equity or any other deal. While waiting for markets to settle, executives
other investors may embark upon the IPO value journey. Those companies
• Improve perceptions of your business and brand with that undergo an effective IPO readiness transformation during
customers, suppliers and employees uncertain times will be best-positioned to take advantage of
improved equity market conditions.
This executive summary describes the top 10 IPO readiness
steps for a pre-listed company. It also discusses the results Are you and your company prepared to deliver? In the
of our 2009 survey of institutional investors regarding the life-changing journey from the private realm to the public
impact of the uncertain markets on their evaluations of new markets, you will face numerous leadership challenges. It is up
offerings. to the CEO and senior executives to strike the right balance
between executing the IPO transaction and managing the
Our decades of experience and research show that
day-to-day operations of the company. Rather than just asking
companies with successful IPOs consistently:
if the markets are ready for you, the key question that you
• Approach the IPO as a transformational process rather than will need to ask when entering the public markets is, “Are we
the endgame or just a financing event prepared to deliver?”
• Begin to act and operate as public companies at least one
year in advance of the IPO
• Outperform the competition on key performance measures,
before, during and after the IPO

Chart 1 | The IPO value journey

IPO — IPO — IPO —

Planning Execution Realization

1 2 3 4 5 6 7 8 9 10

1. Preparing for the 4. Building the right 7. Managing investor 9. Attracting the
IPO value journey management and relations and right investors
2. Keeping your options open advisory teams communications and analysts
5. Building your 8. Conducting an 10. Delivering on
3. Timing the market
business and financial effective road show your promises
processes and
infrastructure
6. Establishing corporate
structure and
governance

EY’s guide to going public | 3

 The EY Global IPO Center of Excellence
powerfully showcases the EY difference.
It is a virtual hub that pools our global IPO
knowledge, experience and resources in one
place for the first time.
These include our interactive online tool — IPO insights: facts
and figures; information on where to list and raising capital;
webcasts, videos and thought leadership on overcoming the
challenges throughout the IPO journey. The Center allows you
instant access to the strength of EY’s global IPO network.

Visit the Center at ey.com/ipocenter today and make sure

you are ready for the IPO journey.

4 | EY’s guide to going public

The IPO value journey

Part one

IPO planning phase

12 to 24 months before IPO
Market leaders make thorough planning an
important first step in their IPO value journey.

EY’s guide to going public | 5

IPO readiness step 1

Preparing for the IPO journey

Advance preparation and planning are critical. Lack of Your IPO proceeds should fund growth. Market leaders
adequate preparation and poor market timing can jeopardize usually go public to enable their growth potential and use
an IPO. proceeds to fund acquisitions or organic growth. In uncertain
times, investors will demand even greater detail and
Are you sure an IPO is the right strategy? explanation about your use of funds in your prospectus and
Going public is not for everyone. The potential pitfalls are road show. Investors typically prefer to invest in companies
numerous and the stakes are high. You must evaluate the using proceeds to grow the new company, who will put
benefits and disadvantages of an IPO in the context of the money back into the business to expand, funding R&D,
shareholder and corporate objectives. (See page 7 for pros marketing and capital expenditures.
and cons of an IPO.)
Have you benchmarked your company’s
Determine the feasibility of an IPO given your company’s
performance to ensure competitiveness?
fundamentals including:
Market leaders have usually been way ahead of their
• Business model and management capability
competitors and comparable companies in practically every
• Growth potential and market size aspect of their performance before the IPO. Your business
• Financial track record fundamentals need to be strong and sustainable. Thus, you
• Valuation and comparative value will need to benchmark your performance to demonstrate
• Shareholders’ objectives your competitiveness with your industry peer group.
• Current stage of development in company life cycle Successful IPOs tend to outperform their peers before going
• Prospects and position within industry public on:
• Investor base and analyst coverage • Growth rate
• Sales performance
Have you developed a long-term business plan • Profitability
and timeline? • Market share
With input from key stakeholders, your executives need to
However, the most successful IPOs often share similar
create a formal, comprehensive business plan and detailed
characteristics:
timeline regarding the operational, financial and strategic
initiatives necessary for the company to go public. The • Relatively large in size and well established
business strategy needs to be long-term, covering 24–36 • Focused on an outstanding product or service
months before the IPO and 24–36 months after the IPO. • Credible management team
Such a business plan should provide a clear road map for the • Sustainable outstanding business model
company which may then be communicated to stakeholders.
• Strong brand
It should be implemented early enough for the changes to
take root in the organization. • Streamlined cost structure
• Industry with high entry barriers
Do you have a strong equity growth story? • Innovative and with first-mover advantage
Especially in today’s uncertain markets, IPO candidates must
Has your organization begun acting like a public
tell a compelling story. Investors will scrutinize your company
and its bottom-line performance much more closely than
company?
before. Investors seek companies with business models Successful IPO companies need to prepare more thoroughly
that performed well in the downturn, a solid track record, now. Due to increased investor scrutiny, the level of
an actionable plan to sustain growth and that are well able preparation and execution required prior to IPO will be much
to service their interest and debt. You must also consider higher. As companies seek first-mover advantage to secure
whether there is an appetite within the investment community the limited funds available, you must balance your need for
for your equity story in your particular sector. The bottom-line capital with the lower valuations available. (Please see page 7
is: your IPO valuation will be driven by market conditions and for details on how to act like a public company.)
investor confidence in your company.

6 | EY’s guide to going public

Going public

Pros Cons

• Greater access to funds since company can return to public • Highly distracting and time consuming due to need for periodic
markets for additional capital and access alternative financing on reporting and investor relations
favorable terms from private investors as well
• High costs due to initial and ongoing expenses, including payments
• Provides a more liquid and diversified share capital base and a liquid to external advisors for regulatory compliance and maintaining a
currency for acquisitions listing
• Enhances prestige, brand image, public profile and credibility • Limits on management’s freedom to act including need for
approval of board or shareholders on many major matters
• Facilitates future acquisitions of other businesses, which may be
paid for at least partially in a public company’s shares • Potential loss of control and privacy since there is a need to reveal
highly sensitive information in public reports
• Achieves higher valuations than private enterprises since greater
disclosure of information reduces uncertainty around performance • Shareholders’ expectations can create pressure on management
and increases value to perform
• Provides a potential exit strategy and liquidity for investors, owners • Difficulty in recruiting good non-executive directors for board
and (or) shareholders
• Limited window of opportunity of access to IPO markets so
• Attracts, retains and rewards valued employees through share compromise on price may be necessary
option plans
• Corporate governance requirements include business process
• Enhances benchmarking operations against other public companies improvements and non-executive directors’ oversight
from same industry
• Retains future upside potential in business
• Opportunity for reducing debt or refinancing

How to act like a public company before an IPO

Accounts and
Financial information Internal Management Corporate Investor
Equity story results systems controls team governance relations
A compelling equity Strong operating Timely and reliable Accounting and In place for at least A strong An expert to
story aligned across performance, financial information financial control one year, with a independent board drive effective
organization, balance sheet available, team ensures proven track record formed early communications
sound business and positive cash appropriate IT and accurate financial and the experience on, with a clear strategy, manage
track record, flow over several budgetary system in results, puts controls and expertise to and transparent public spotlight
predictable growth quarters, and place with concise in place and provides undertake an IPO shareholder and and send effective
trajectory and clear several years of management certification event and operate a corporate structure messages to
understanding of strong, steady information readily public company investors and
how IPO proceeds growth and rising available on monthly analysts
will be used to fund profits and quarterly basis
growth

EY’s guide to going public | 7

 Chart 2 | Most important financial IPO success factors to investors*

Debt-to-equity ratio 63%

EPS growth 59%

Sales growth 55%

ROE 55%

Profitability growth 55%

EBITDA growth 50%

Cash and investments on hand 38%

Gross margins 35%

ROI 26%

ROA 12%

Note: % represents the percentage of institutional investors

that had the particular factor as one of their top five choices.

Our survey results show that investors are wary of highly leveraged Return on Equity (ROE) shows potential investors what they might
companies with high debt-to-equity ratios. During the period of hope to receive as a return. It usually indicates the company’s
market uncertainty in which they were surveyed, investors ranked efficiency or how much profit it generates in comparison to its
debt-to-equity ratio as the most important financial factor. (In book value (the amount invested by business owners or total
striking contrast, the debt-to-equity ratio was only the ninth- stockholders’ equity). The higher the perceived risk by an investor,
most important financial factor in our 2008 institutional investor the higher the return they will require to invest and hence the lower
survey.) All of this is particularly relevant for private equity-backed the equity valuation.
companies, which tend to be highly leveraged. Given current While it would be preferable for a company to have a strong track
investor scrutiny, the resolution of debt financing and leverage record of profitability growth, our survey shows that it is not
levels must now be addressed at the same time as the equity necessarily a prerequisite. Many institutional investors say they will
funding proposition for IPOs. participate in an IPO provided there is a visible path to profitability
Earnings per share (EPS) growth drives share prices and has with strong growth and positive cash flow.
historically been the key measure for investors, though as noted EBITDA measures earnings before financing and tax costs and
above, the financial crisis in 2009 has caused investors to also non-cash charges. Where there is a divergence between reported
focus on debt-to-equity ratios. EBITDA and cash generated, investors will want to understand the
Sales growth includes the growth that comes from a company’s reasons. For companies that require significant investment (such
existing businesses (organic growth) and from acquiring new as many technology companies), the cash burn rate is an
businesses (takeovers, acquisitions or mergers). Investors are important ratio.
focusing on the potential for significant growth, which translates
into bottom-line performance.

*Source: Global IPO Institutional Investor survey, 2009

8 | EY’s guide to going public

 Chart 3 | Most important non-financial IPO success factors to investors*

Management credibility and experience 90%

Quality of corporate strategy and its execution 73%

Brand strength and market position 59%

Operational effectiveness 54%

Corporate governance practices 44%

Research and innovation 35%

Financial reporting and accounting control environment 30%

CEO leadership style 25%

Ability to recruit and retain talented people 14%

IFRS/US GAAP accounting tracking record 13%

Quality of investor relations 8%

Note: % represents the percentage of institutional investors

that had the particular factor as one of their top five choices.

*Source: Global Institutional Investor survey, 2009

Do you know the critical IPO success factors for company’s valuation and how the IPO is priced (which
institutional investors? is typically at a 10% to 15% discount relative to its peer
group of comparable companies). At the same time,
You need to view your IPO from your institutional investor’s
investors say they give non-financial measures a weighting
perspective. Institutional investors drive stock prices, with
of approximately 40% — even in their evaluations of the
the highly sophisticated institutional investor market typically
largest, mature companies. (See Charts 2 and 3 for the key
receiving 70–80% of IPO stock allocations. It includes mutual
IPO success factors, both financial and non-financial, from
funds, hedge funds, banks, insurance companies, pension
the perspective of institutional investors.)
funds, money management funds, larger corporate issuers
and other corporate finance intermediaries.
Investors give about a 60/40% weighting to financial/
non-financial metrics. When making buy or sell decisions
for their portfolios, investors weight financial metrics
about 60% in determining the attractiveness of the

EY’s guide to going public | 9

IPO readiness step 2

Keeping your options open

While an IPO may be your favored approach to raising capital, Thus, pre-IPO companies may need to reduce debt levels
it’s important to evaluate all possible transactions that could or refinance their debt prior to going public. Indeed, debt
serve as stepping stones or attractive alternatives to a financing or refinancing was chosen by 70% of institutional
public listing. investors as the type of pre-IPO activity that creates the most
value for pre‑listed companies. (Please see Chart 4 on page
Have you evaluated other attractive alternatives 15 for pre-IPO transactions which most enhance IPO value.)
to an IPO?
Many companies that pursue IPOs do not go public, at least Have you considered a strategic sale to a trade
not initially. or financial buyer?
The relative attractions of a strategic sale will vary, especially
Your alternatives may include any combination of
depending on whether it is a trade or financial buyer. A
the following:
sale to a trade acquirer or financial buyer (e.g. PE) is often
• Sale to a strategic buyer through the M&A market considered as an alternative to an IPO — depending on the
• Sale to a private equity firm objectives of existing stakeholders and management and
• Private placement, often as a pre-IPO step the attributes of the business. For instance, a PE buyer can
• Joint ventures and strategic alliances provide an alternative for growth companies that may not be
operationally ready to access the public capital markets. Not
• Refinancing to release funds for partial exit
all companies will be attractive to financial buyers and the
Given the range of potential alternative transactions, you population of potential trade acquirers may be restricted for
need to have a clear idea of what’s involved, how long the some. A detailed evaluation of the suitability and viability of
process will take, what it’s likely to cost and whether two or M&A, as an alternative to IPO, should always form part of the
more routes need to be run in parallel. process of determining whether to pursue an IPO.

Keep your options open through a multi-track approach. What do buyers/investors focus on in a prospect?
Increasingly, businesses are taking a “dual — or triple-track” • Sales and revenue trending
approach where they pursue a trade sale or other funding • Underlying cost base
source and prepare for a possible IPO at the same time. The
• Working capital management
multi-track approach allows you to keep your options open
during the preparation process. This can be especially beneficial • Business plan strength
in case the IPO window shuts on you during this often lengthy
Who is likely to buy the business? Understanding the needs
process. Thus, successful companies typically have a Plan B and
of the buyer is crucial for a successful divestment process.
often a Plan C (for example, simultaneously pursuing an IPO, a
While all buyers are concerned about key value drivers such
trade sale and debt refinancing).
as market share, competition, growth potential, the stability
Since there is considerable overlap in the preparation required of cash flows, the cost base and the quality of underlying
for the various routes, a dual — or triple-track can be executed assets — different purchasers have different strategic
without doubling or tripling your costs. By diversifying concerns.
your approach, your company can significantly increase its
strategic options and negotiating leverage while reducing Type of investor Key strategic sale concern
execution risk.
PE • Whether the investment will meet their financial
Investors expect companies to be properly funded, which criteria in terms of internal rate of return and other
measures of asset quality
can mean reducing or refinancing debt:
Trade • The fit between the assets and existing operations,
• Decreasing future funding costs by getting better and how quickly and easily the business will be
borrowing terms integrated
• Arranging extra debt to fund new projects Funding bank • The security of the investment
• Negotiating more advantageous covenants
• Restructuring debt
The appropriate exit strategy will differ significantly based on
the likely buyer, yet should contain contingency plans should a
different type of buyer emerge during the divestment process.

10 | EY’s guide to going public

Private placement

Pros Cons

• Maintain control without the constraints of taking company public • Restricted access to public market resources
• Quicker and easier method for capital-raising than an IPO, with no • Lack of market visibility
registration statements and simpler documentation and disclosure
• Possibly conflicting business cultures of shareholders and investors
required
• Potential investor participation in the day-to-day management
• Lower cost than raising money through an IPO
• Issuer determines conditions of the placement
• A marker for the future value of the company at time of an IPO
• Cash flow reserved for investment in the business
• Builds investor base
• More flexibility in amount and type of financing with choices among
equity and debt capital

Consider your M&A valuation versus likely IPO stock price. Have you considered a private placement?
You will need to evaluate what your company would be worth A private placement is money invested, usually by institutional
if you were to sell it to a strategic or financial buyer and what investors (in the form of stocks and sometimes bonds). It is
your stock price would be worth in an IPO. You will also need called a private placement because the stock is offered to a
to research comparable transactions and public company few private investors instead of the public at large. Typically, a
valuations in the sector in which your company operates. private placement is appropriate for a small company looking
In uncertain times, market leaders seek acquisitions. M&A to fund growth and expansion. It often involves commitment
activity is gradually returning to healthier levels, and multi- to an IPO or liquidity event within a specific time frame. It
nationals are expected to make a greater number of strategic can be an excellent prelude or alternative to going public. It
acquisitions. Investors who have cash but have not yet is an especially effective tool for raising second — and third-
deployed it are picking through their choices of possible round capital.
targets. Top companies are considering smaller acquisitions A private placement can be a quick and low-cost source of
and looking to integrate past acquisitions while divesting capital. In most cases, the purpose of a private placement
any non-core businesses. Although the ranks of potential is to raise a limited amount of capital in a relatively short
acquirers were thinned by economic instability, M&A is time at a relatively low cost. Often an IPO may not be a
expected to increasingly be used as a vehicle for accessing good option for a young company without the financial
innovation, in addition to growth. track record or reputation to attract the general investing
Preparing for an IPO can help the strategic sale process. public to its stock. Furthermore, as a privately negotiated
Gearing up for an IPO and preparing for a successful exit transaction, private placements can be designed to meet
to a trade or financial buyer involve many of the same the specific needs of your company. (Please refer to the
preparation activities. There is very high correlation in table above of private placement pros and cons.)
relation to the value drivers for both. A company that is
properly prepared for IPO should be better placed in relation
to other transaction alternatives. Your business will have been
taken through a similar process with all the rigors of a public
offering such as the right management structures and strong
corporate governance.

EY’s guide to going public | 11

Joint venture/strategic alliance

Pros Cons

• Relatively low cost with less capital committed than in a full • Potentially incompatible corporate cultures between partners
acquisition
• Risk of unrealistic expectations or ill-defined objectives
• Maintains some control
• Consistent oversight of other partner needed
• Shared risks and rewards
• Potential risk — legal, financial and reputational — due to joint and
• A bridge to a sale or IPO several liability with partner
• Integrates products and customers • More sophistication demanded from partners
• Builds credibility and knowledge to expand into key markets, • Slower decision-making
develop new products and improve productivity
• Special considerations for licensing, distribution and supply,
• Can help expand business, access new technology or cut costs manufacturing, employee and other relationship agreements
• Entry to strategic markets and geographies in a risk-managed way
while establishing strong local partnerships and new sales channels
• Greater transparency of operations
• May offer transition toward divestiture or facilitate streamlining of
corporate portfolios

Have you considered a joint venture (and other Have you chosen the right stock exchange and
strategic alliances)? listing option?
Market leaders often look to forge new partnerships during The best stock exchange will be the one that most effectively
an uncertain economy, to drive innovation and knowledge enhances the attractiveness of the company’s stock to
acquisition. Partnerships and joint ventures are expected to investors. After a company goes public, the exchange should
increase, providing companies with operational efficiencies, also continue to meet a business’ needs.
access to knowledge and minimal costs. In our recent survey,
Factors to consider when choosing an exchange:
29% of businesses stated that they were likely to enter into a
JV or strategic partnership in the next 12 months. • Access to institutional investors
• Stock market liquidity
JVs and partnerships are expected to increase in number.
In the JV, businesses create a partnership (to share profits, • Brand building in local market
markets, assets, intellectual property, etc.) and form a • Valuation
separate legal entity. In contrast to a merger, there is • Listing requirements
no ownership transfer in the JV. On the other hand, in a • Future financing options
strategic partnership or alliance, typically a smaller company • Cost
collaborates with a larger, financially stronger company.
JVs can be a low-cost way to penetrate new markets. More than 90% list on their domestic stock exchanges,
JVs and strategic alliances can provide an ideal vehicle for although they may sell shares abroad simultaneously. Smaller,
establishing strong local business partnerships and entering younger companies tend to list on their home countries’
strategic markets and geographies. A JV or alliance can junior stock exchanges, while the larger, more established
help companies to expand business, access technology companies will prefer a main market listing. An issuer may
or cut costs. At the same time, less capital is usually sell its shares just to domestic investors (usually the route for
committed than in a full acquisition. A successful JV also smaller offerings) or else choose an international offering.
may be a transitional step toward divestiture or facilitate A larger company may seek foreign listing for a higher
the streamlining of corporate portfolios. Be sure your JV is valuation, to maximize IPO proceeds or to broaden its investor
supported by quantifiable milestones and compatible goals base. This is especially true for larger companies with small
between the partners in order to foster realistic expectations. domestic markets which seek more than US$1 billion in
In our experience, alliances that fail usually lack these vital funding. However, a major deterrent to a foreign listing is that
ingredients. (Please refer to the table above of joint venture/ a company must comply with the policies of the foreign stock
strategic alliance pros and cons.) exchange, which may be more stringent than those at home.

12 | EY’s guide to going public

Typically, an issuer who contemplates accessing international GDRs are negotiable certificates, issued by depositary banks,
investors must consider the following advantages and which represent ownership of a given number of a company’s
disadvantages to a foreign listing. (See page 14 for foreign shares. GDRs can be listed and traded independently from the
exchange listings pros and cons.) underlying shares but are essentially a claim to a predefined
number of shares of that company.
Many leading companies in the world list on foreign stock
exchanges indirectly, through Global Depositary Receipts GDRs trade like ordinary stocks, with prices that fluctuate
(GDRs) which facilitate foreign exchange listings. A GDR depending on supply and demand. As a result, issuers enjoy
enables the issuing company to issue and trade shares and the advantage of being able to access a broader shareholder
to raise capital in many markets abroad (as opposed to just base, increased liquidity outside the home market and greater
its home market). A company deposits a large number of its ability to raise capital abroad. The benefit for local investors is
shares with a bank located in the foreign country where it that they do not have to go through the expense and difficulty
seeks an indirect listing. The bank then issues receipts or a of buying shares through the issuer’s home stock exchange.
GDR against these shares, which are sold to the citizens of the Furthermore, all share prices and dividends are denominated
foreign country. in the investor’s local currency. (Please see the table below
describing GDRs and ordinary shares.)

EY’s guide to going public | 13

Foreign exchange listings Public listing vs. GDR

Pros Cons Public listing GDR

• Greater liquidity of some foreign • Higher cost and complexity • Shares are offered to private • Gains access to large pools of
markets of preparing an IPO for and (or) institutional investors capital abroad
multiple markets and are usually underwritten
• Access to a broader shareholder • Allows exposure to new group
base (which may increase • Possibly more stringent • Shares can be listed on main of investors which potentially
demand and maximize value of regulations and increased exchanges or junior markets increases demand for its
IPO) disclosure requirements shares and raises share price
• Greater liquidity
• Improve proceeds of the IPO • Flowback or return of • Increases issuer’s visibility by
• Listing process is usually
shares to domestic market increased analyst and press
• Potentially higher valuation, more onerous and expensive
since institutional investors coverage
since international investors than GDRs
may not hold offshore
may value shares higher than • Cheaper than a full listing
shares for the long term • Can be used as acquisition
domestic investors
currency or in staff incentive • Excluded from major indices
• Shares are useful in M&A activity schemes
• Less rigorous corporate
(high-profile companies can
• Companies need to apply governance requirements
use the shares as currency for
the exchange’s corporate than a public listing
acquisitions)
governance standards
• Inability to participate in
• Specialization in particular
• Accounts need to be in IFRS rights issues
sectors (e.g. NASDAQ for
or US GAAP equivalent
technology or London for mining
and energy)

Source: EY Top 10 IPO readiness challenges — a measures that matter global study, 2008

Have you evaluated which pre-IPO transactions The possible benefits of pre-IPO transactions:
could enhance an offering’s value? • Facilitate growth, such as expanding into new markets
Your company’s overall transaction strategy should be • Strengthen the business
made up of much more than the IPO itself. Most companies • Increase company revenues
undertake pre-IPO strategic transactions which are powerful • Offer scale to the listing
tools for accelerating the development of your business. In
• Provide a platform for operations, management and
challenging market conditions, it is more difficult to obtain
financial reporting
pre-IPO transactions and to close the deal. Nonetheless, most
successful companies typically do undertake transactions • Increase credibility with market analysts and investors
in advance of the IPO. In a recent executive survey, 90% of
During uncertain times, market leaders re-evaluate their
global executives stated that their pre-IPO (and post-IPO)
business models and try to optimize their market reach. They
transactions contributed to their shareholder values. (Please
prioritize seizing transaction opportunities — particularly
see page 15 for pre-IPO transactions which could enhance
targeting weakened competitors. They seek transactions that
offering value.)
will expand their geographic reach and help to secure new
customers and service lines. At the same time, winning
companies do not pursue growth for its own sake, but
maintain a focus on strategic value.

14 | EY’s guide to going public

 Chart 4 | Pre-IPO transactions which investors believe could most enhance offering value*

Debt financing 70%

Corporate re-organization 68%

Equity financing 66%

Business alliances and partnerships 63%

M&A 58%

Overseas expansion 46%

JVs 41%

Other activities 5%

Note: % represents the percentage of investors that

had the particular factor as one of their top five choices.

Pre-IPO companies need to reduce debt levels and refinance Equity financing can help build critical mass before the IPO event.
expensive debt financing prior to the IPO event. Debt financing According to our survey results, 66% of institutional investors
or refinancing was chosen by 70% of institutional investors as the would have pursued an equity financing without a liquidity event
type of pre-IPO corporate activity that creates the most value (selling shares). With the limits in debt financing options post-
for pre-listed companies going forward. This is because investors downturn, many market leaders have stated they would have
are mostly avoiding companies with high leverage. Prior to the raised additional equity to finance the business and to provide
economic downturn, raising debt finance was relatively easy and some liquidity for shareholders in advance of the IPO. This means
inexpensive. Nowadays, debt financing has become costly and hard getting money into the shareholders’ pockets early on, before the
to obtain. Most debt is only available with much higher margins company goes public, so that IPO proceeds will be used mainly to
and fees, tighter covenants and more onerous due diligence grow the company. It can also allow some shareholders to exit the
requirements. business in advance of the IPO.
Be sure the corporate structure is focused on your core business. A successful business alliance or M&A can help you achieve
Our survey shows that 68% of institutional investors believe critical mass and also supports your growth story. If a company
corporate re-organization to segregate a business line would can demonstrate that a successful joint venture partnership or
create value before an IPO. A major motivation in pursuing a acquisition has already been completed and integrated, it adds
corporate re-organization seems to be to engineer a business credibility to a company’s growth plans. Investors may be more
that the market and investors can readily understand. Indeed, sceptical of IPO candidates that have not demonstrated successful
a streamlined, more simplistic company structure can allow pre-IPO transactions where an acquisition strategy forms part of
executives to present investors with a clearer, more focused the post-IPO growth story.
business model. Ever since the economic downturn, many
companies are facing some level of financial or operational stress.
Pre-IPO companies may need to financially or operationally
restructure their businesses to secure market position through a
disciplined divestiture process.

*Source: Global IPO Institutional Investor survey, 2009

EY’s guide to going public | 15

IPO readiness step 3

Timing the market

Have you started early and taken time to Thus, bad timing of an IPO can severely affect a company’s
prepare? stock price. Shares may have to be offered at a lower price
per share in order to attract investors. Even offerings that
Let’s suppose you have decided that the best way to raise
sell enthusiastically at the time of the IPO can fail in the
capital for the company is to go public. You must take the time
aftermarket, especially if subsequent operating results fall
you need to enter the IPO arena when you are truly ready. The
short of expectations. The most obvious risk is that the
well-prepared company that has addressed all the potential
offering will not be completed and the costs incurred will have
issues will be able to move swiftly when market conditions
been for nothing.
are right. (See Chart 5 on page 17 for suggested timing of
preparations as recommended by executives.)
Do you have an alternative financing strategy to
Timing is crucial. If timed correctly, you may price your IPO at execute without an IPO?
a time that not only provides your company with an optimal
It is difficult to guarantee that equity market conditions will be
valuation but will provide your IPO investors with the greatest
right once the preparation is complete. As discussed earlier,
upside in their investment in the months and years after
to help ensure that the right option is available at the crucial
the IPO. You will need to examine the specific markets you
moment, many businesses are now considering a triple-track
operate in, how comparable companies are doing and whether
process, which include PE, re-financing and IPO. You need to
investors are receptive to new issuances in your sector. Many
do what is right for you and your business.
factors influence the market — political developments, interest
rates, inflation, economic forecasts, etc. Underwriters can If needed capital is available from private sources at a
help to track these changes to anticipate when investors are reasonable cost, you may want to delay going public. If the
likely to be receptive to new offerings. capital markets are volatile with falling valuations and you can
afford to wait, you may elect to hold off until they improve.
Timing of an IPO can strongly impact stock performance.
It is imperative you have the flexibility to execute alternate
The most common mistake of newly public companies is to
financing strategies, in case the IPO does not happen or
hurry into their IPO value journeys just months before their
needs to be delayed. In the meantime, if funds raised from
IPOs, and before their companies are ready. The frequent
other sources can be used to increase the company’s growth
rush to go public is due to a pre-listed company’s immediate
potential, the value of the company may rise.
need for capital, pressure from its advisors or board, or
the desire to capitalize on a limited window of opportunity.
Unfortunately, such companies are often the same companies
whose stock prices decline soon after the IPO, if they even
successfully IPO at all.

16 | EY’s guide to going public

Chart 5 | When did your executives start implementing the following changes in preparation for the IPO?*

Strategic planning 17% 43% 36% More than 24 months prior

Building the right executive team 20% 33% 39%

12 to 24 months prior
Financial accounting and reporting systems 24% 33% 38%
Up to 6 months prior
Public company board composition 9% 20% 66%

Building investor relations function 6% 16% 74%

Note: % represents the percentage of executive respondents that chose this particular time frame

Detailed timeline for IPO value journey

12 months before IPO 6–12 months before IPO 6–24 weeks before IPO 1–6 weeks before IPO
• Develop a robust business plan • Finalize preparation of historical • Finalize timetable • Begin formal marketing
including the objectives of going financial information
• Begin financial and legal due • Price and allocate the offering
public, as well as a Plan B
• Commence initial due diligence diligence
• Register prospectus/admission
• Establish internal team that will
• Make necessary changes to • Consider adequacy of working document
manage the IPO process, and
the executive board and begin capital and use of proceeds
enhance if necessary • Have underwriter perform
recruiting additional board
• Produce draft prospectus and marketing of securities (“book
• Appoint external advisors members
other documents building”)
including financial, accounting
• Start building financial model and
and legal advisory team, and • Do initial review of pricing issues • Admission to stock exchange is
business plan
work with them to draw up granted and trading commences
• Review public relations
schedule and timetables • Meet with stock exchange
presentations
representatives
• Adopt leading-practice corporate • Begin initial marketing
governance and reporting • Consider investor relations
processes strategy and equity story • Commission expert reports if
required
• Make all efforts to help ensure • Implement financial reporting
compliance with laws and procedures • Appoint non-executive directors
regulations • Discuss transaction with the • Eliminate deal breakers and
• Complete strategic initiatives and relevant stock exchange resolve any potential litigation or
pre-IPO transactions due diligence issues
• Agree draft timetable
(e.g. acquisitions) • Comply with all reporting
• Begin preparation of historical requirements
financial information • Prepare road show presentations
• Establish financial reporting to targeted potential investors
procedures
• Review management information
systems and operational and
compliance controls
• Consider ownership and tax
issues
• Consider nationality of holding
company

*Source: EY’s Top 10 IPO readiness challenges — a measures that matter global study, 2008

EY’s guide to going public | 17

 The IPO value journey

Part two
IPO execution phase
1 to 12 months before IPO
IPO readiness involves the acceptance and
implementation of change — not just by
executive management, but throughout every
aspect of the business and corporate culture.

18 | EY’s guide to going public

 IPO readiness step 4

Building the right management

and advisory team
People are what make or break great companies. Investors The CEO will likely be focused on investor relations in a
often say they back the people not the plan. Your public company. The investment community will look to the
management team must be in place before the IPO. Your CEO to articulate and execute the company’s vision and
top managers must be able to work together well and have business strategy, and translate strategy into financial results
the experience, skills and incentives to undertake the IPO for the investor audience. Although both the CEO and CFO
transaction and effectively operate a public company. As your will need to co-navigate the pre-IPO process, the CEO often
voices of experience, your external advisors should be highly becomes the primary liaison with the aftermarket. Therefore,
skilled professionals with extensive IPO credentials, contacts your executive team and managers must be well equipped to
and industry experience. oversee the day-to-day operations of the company.

Is your management team experienced, with an Have you chosen the right external advisory
IPO track record ? team with IPO and public company experience?
Building a powerful team starts at the top. You need to On the journey of transformation into a public company,
have the right executive team with experience in IPOs and success depends a great deal on a coordinated team effort by
appropriate incentives functioning well before the IPO. For the internal management and the advisory team. Following
the vast majority (90%) of institutional investors in our survey, economic uncertainty, it is more important than ever to build
quality of management was the single most important non- a quality advisory team. Begin to assemble your advisory
financial factor when evaluating a new offering. (Please see team well in advance of your public launch. (See page 20 for
Chart on page 9.) roles and responsibilities of external advisory team.)
Provide good incentives for senior management. Market Professional, experienced advisors will be able to carefully
leaders look at innovative ways to recruit and reward their prime your business, introduce you to the right investors, help
key senior talent with compensation. Management incentives you sell your story and most significantly, put a value on your
include performance-based compensation structures, share business that reflects its position and potential. Get this right
options, greater transparency and employee involvement. and the IPO will still be hard work — but a cohesive team will
Such high-level incentives and shared ownership by yield optimal results.
management creates the motivation that often leads to
strong performance.
Remuneration is an area of increasing complexity and an
on-going regulatory challenge. Executive remuneration
attracts high-profile attention from executives, shareholders
and the media, creating significant business risk.
Remuneration cannot be considered once the deal is done.
At the same time, an IPO presents significant opportunities
to deliver remuneration in ways that are not generally
available to private companies. Equity can form a key
component of remuneration for executives and can be used
to promote the company’s brand among employees.

EY’s guide to going public | 19

Your IPO external advisory team and its key responsibilities

Underwriter Reporting accountant* Independent auditor*

• Develop the key “equity story” and selling • Produce a specific set of reports based on an audit • Fulfill regulators’ requirements for independent
messages for the IPO of a company’s financial statements and internal audit of historical financial statements — usually
controls three years’ worth, prepared according to local
• Structure the offer GAAP or IFRS
• Lend credibility to offering
• Conduct IPO due diligence process • Produce long-form report, the traditional due
• Help evaluate the advantages and disadvantages diligence document looking into various aspects of
• Devise and manage the IPO marketing campaign, of going public and if appropriate, explore
including the road show the business which provides reassurance that your
alternative routes to monetization company is fit to go public
• Manage the retail and institutional investor offers • Provide guidance in preparation of final disclosure
and pricing process • Produce short form report, which is published
package for the company prospectus as part of the prospectus and provides the
• Target and distribute shares to specific investors • Facilitate the registration process to help avoid accountant’s view on the business’ financial track
costly delays record
• Help to ensure a strong and stable market for
shares, to review share-trading performance and • Analyze the IPO’s tax implications, a step vital to • Produce working capital due diligence report,
assist with broader investor marketing clarifying the tax positions of both the business which provides the company’s projected working
and the individual shareholders and directors. capital position for the 12 months following IPO
• Help post-IPO with the secondary offerings and
beyond, for the long-term, which will make or • Evaluate financial forecasting to ensure that your
break share price performance forecasting is accurate and robust enough to
withstand increased scrutiny and help reassure
the market that you are in complete control of the
business

Public and investor

Legal counsel relations professional Other advisors
• Prepare, file and complete listing application • Build strategy and guide communications with • An insurance broker to assist in identifying,
stakeholders, including media calibrating and managing risk through prudent
• Provide guidance on the risks and regulation corporate governance
of the IPO transaction, including publicity and • Sustain the market’s interest in the company
disclosure • Advisors for internal audit, tax and compensation
• Communicate with shareholders and the public structuring and transaction management and
• Provide guidance on the roles of the key strategy
regulatory players, and exchange listing and • Attract a pipeline of new investors and sell-side
securities rules research coverage • Advisors in areas such as information systems,
• Manage regulatory and liability risk business process improvement, printing and
• Help ensure that everything is checked and personal financial planning
verified and no issues will expose the business to • Educate the public about the company’s position
claims after the IPO in the industry
• Address the key legal areas of: • Provide update of forecasts
• Material contracts (e.g. with suppliers and • Identify any key business issues that could impact
customers) the company
• Litigation (pending, threatened or existing) or • Maintain compliance with applicable disclosure
potential disputes regulators.
• Intellectual property and information systems
rights/ownership/control

• Regulatory issues (licenses/consents)

• Third-party consents (e.g. banks, shareholders)

* This describes the typical responsibilities of a reporting accountant and independent auditor in the UK.
Auditing requirements differ from market to market with the minimum requirement usually being
three years unqualified audit reports in accordance with recognized GAAP.

20 | EY’s guide to going public

 IPO readiness step 5

Building your business and financial

processes and infrastructure
The infrastructure and systems of a publicly traded company Extensive testing of internal control systems has become
are very different from those of a typical private company a way of life for public companies. This can be attributed to
and must be able to withstand the rigors and scrutiny of heightened regulatory compliance requirements in many
public status. (Please refer to Chart 6 on page 22 for current countries. An effective risk-taking culture can only thrive within
accounting and financial reporting issues.) a solid framework of cost-effective internal controls. Market
leaders are developing methodologies for preventing and
Have you constructed a strong infrastructure for detecting fraud. They are also anticipating the increased risks
accurate financial forecasting? created by increased regulation (e.g. tax or climate change) and
broadening the scope of their risk management practices to
You must define and implement, well in advance, the
include new areas, such as third-party and counterparty risk.
infrastructure of people, systems, policies and procedures that
will enable the production of quarterly and annual reports An IPO is a tax minefield for the unwary. It involves significant
in compliance with regulations. A robust infrastructure can restructuring of an organization’s legal, financial and commercial
facilitate regulatory compliance, protect against risk exposure activities. This, combined with a need to undertake extensive tax
and provide guidance to meet or beat market expectations. due diligence on listing to identify any exposure (both past and
future), means that the road to IPO can be a taxing challenge.
Currently, compliance of the infrastructure with local and foreign
The existing shareholders of an organization looking to go public
regulations is a significant task, as a company may need to
view the process as a natural expansion and growth in activities.
change from its local accounting standard to IFRS standards
They are therefore amazed by myriad taxation implications, risks
(depending on the listing exchange’s requirements). However,
and, in some cases, opportunities that can arise throughout the
as more countries around the world require IFRS for listed
process. Unfortunately, the tax implications can not only alter
companies, differences between local and foreign regulations
the structure of the IPO, but can often change the way in which
will diminish.
commercial transactions are approached.
How to improve your infrastructure:
Effective tax structures and reporting are key, especially with
• Improve budgeting and forecasting capabilities the rise in demand for transparency worldwide. You will need
• Put financial statements in order to establish or outsource a tax function and infrastructure
• Prepare to comply with local securities laws appropriate for public company status. Your corporate structure
• Address potential IPO accounting and financial reporting should:
issues • Minimize your company’s effective tax rate
• Develop appropriate corporate, capital and management • Establish a tax-efficient structure and assess local incentives
structures • Develop and improve your procedures to review tax issues
• Properly document transactions with owners and • Manage tax risk and controversies
management
Increased regulatory pressure, transparency requirements
and globalization are adding to the strain on already-tight
Have you assessed financial, accounting, tax,
resource pools. Typically, tax compliance requires approximately
operational and IT processes, systems and 50% of a tax department’s time. Historically, many reported
controls? material weaknesses have been tax related. As a result of these
Timely financial reporting and effective internal controls converging factors, corporate leaders are redefining the role of
become vital in a public company. These systems, processes the tax function.
and controls must be able to support your new life as a public Adaptable IT systems facilitate financial analysis and
company and help you establish the needed transparency reporting. IT will be critical to helping your public company
within your organization. capture, organize and assess relevant business information
The commitment begins once you’ve prepared and filed your quickly and easily thus enabling swift financial analysis and
initial listing application. On a continuing basis, you will be reporting. Your management should assess whether the
required to file quarterly and annual reports. The timeline for current IT environment and infrastructure are aligned with the
the financial statement close process is significantly condensed. company’s business objectives. Because high-growth companies
Your schedule must allow for internal analysis and increased are in constant flux, your information systems must support a
levels of communication with internal stakeholders and external work environment of adaptability, innovation and collaboration.
advisors prior to the filings.

EY’s guide to going public | 21

 Chart 6 | Accounting and financial reporting issues rated most important by investors*

Rank Last 12–18 months Rank Going forward

Adjusting historical financial statements to comply
1 1 Asset valuation impairment issues
with local regulatory listing requirements

2 Asset valuation impairment issues 2 Consolidated subsidiary financial statement issues

3 Revenue recognition issues 3 Revenue recognition issues

4 Consolidated subsidiary financial statement issues 4 Related-party transactions issues

5 Tax accounting and reporting issues 5 Tax accounting and reporting issues

Adjusting historical financial statements to comply

6 Related-party transactions issues 6
with local regulatory listing requirements

7 Going concern issues 7 Going concern issues

Note: Rankings are listed from (1) most important to (7) least important by Institutional investor respondents

According to our survey, asset valuation impairment is the biggest Revenue recognition can be highly subjective. When terms of
issue institutional investors are grappling with, particularly in payment become more complex, the decision of when revenue
certain industries. Valuing businesses and their underlying assets should be recognized becomes more complicated and subject to
has become much more difficult. Economic uncertainty has directly interpretation. When companies try to protect their results, they may
affected valuation assumptions such as growth and discount rates, be recognizing revenue earlier, taking advantage of the subjectivity
making accurate forecasting of cash flows challenging. In addition, of revenue recognition. The US in particular has a substantial body
the decline in transactions and the lack of comparable transactions of literature on revenue recognition that can, on occasion, prove
information has increased the complexity of performing valuations useful when there is no IFRS guidance available. Historically this was
and determining fair value. The past two years have seen an particularly relevant for IFRS-reporting companies registered with
increased level of impairments reported. Many companies have the US SEC, who wished to avoid as far as possible having IFRS/
seen their goodwill and assets fall in value and may need to take a US GAAP differences. This is now less significant as reconciliation
charge against earnings. to US GAAP is no longer required. However, such differences are
Users of financial statements will be more inquisitive, demanding sometimes unavoidable, and it is not always the case that a revenue
greater transparency in and explanation of the assumptions recognition policy under US GAAP is acceptable under IFRS, and
management makes about a company’s future. They will refer to vice versa.
multiple sources of information to validate the assumptions and Related-parties transactions, which are business deals between
sensitivity analysis behind asset valuations. Companies should be two related parties, become quite significant when a private
prepared for increased scrutiny and rigorously present realistic and company goes public. Regulations exist which must be followed,
consistent information. With prolonged uncertainty, impairments including that all companies report such related-party transactions.
will remain a focus for all participants in global capital markets. Most related-party transactions are perfectly legal. However,
Making sense of consolidated subsidiary financial statement due to the potential conflict of interest that may exist between
issues is also a challenge for investors. Business combinations two related parties (leading potentially to the parties benefitting
are growing in importance in capital markets, but investors to the detriment of shareholders), these transactions will bring
have experienced difficulty in accurately assessing business scrutiny and will require transparency. IFRS requires disclosure
combinations. Comparing financial statements is especially of all related party transactions and the terms under which they
difficult when acquirers are accounting for acquisitions in different have been conducted. Those entities that have considerable related
ways. The IASB and FASB have undertaken a joint project whose party transactions should re-evaluate the basis for the transactions
objective is to develop a single accounting standard. Thanks largely and the terms under which they are conducted. To the extent they
to changes made to US GAAP, such a unified approach would are not on arms’ length terms, the impact on the financial results
ensure that the accounting for business combinations is the same should be considered and the terms renegotiated ahead of any IPO
whether an entity is applying IFRS or US GAAP. taking place. Therefore, ensure that your related party transactions
are conducted on arm’s length terms since IFRS disclosures may
become more extensive.

*Source: Global IPO Institutional Investor survey, 2009

22 | EY’s guide to going public

 IPO readiness step 6

Establishing corporate
structure and governance
With greater scrutiny and liability for public company directors, How directors can improve board performance:
substantial time and effort is required to identify, appoint and • Have loyalty to shareholders, not management
groom a qualified board of independent directors. You will need
• Challenge management to simplify and explain the business
to adopt leading practice corporate governance principles and
reporting policies that protect your shareholders’ interests. • Serve as ambassadors and promoters of the business
• Carefully evaluate executive remuneration plans
Have you created the corporate governance • Improve audit committee oversight of risk management
policies that inspire shareholder confidence?
The media and general public placed partial blame for the Have you adopted leading practice corporate
2009 financial crisis on poor corporate governance. Many governance oversight, policies and procedures?
believe that boards failed to understand and manage risk Top companies adopt the appropriate corporate governance
and incentives appropriately. With the charges of fraud and practices that will protect shareholder interests. This will
market manipulation that arose out of the financial downturn, involve working with your legal counsel on all corporate
investors are placing a premium on corporate governance and governance matters, including efficient pre — and post-IPO legal
high stock exchange standards. structures and compliance with exchange-listing and other
Corporate governance reform is now at the top of agendas regulatory requirements.
for investors, regulators and boards. Boards are reflecting on
how to be more involved with governance and create greater Are you and your board focusing on risk
audit committee oversight of the risk management processes. management?
Now more than ever, a strong corporate governance function, Your newly-public company will need a full suite of board-
including attractive qualified independent board members and approved risk management and control policies.
the transparency of related-party transactions, is critical.
Investors are increasing their scrutiny of risk and will pay a
Have you recruited and assembled your entire premium for strong risk management, while companies are
focusing more on risk assessment and response. This is a result
board of directors?
of increased regulatory and investor scrutiny and increased
Investors expect that your board will have a balance of business activity in the emerging markets. In the downturn,
executive and non-executive directors (NEDs) with sufficient businesses of all sizes were hit by risks that were completely
knowledge of the business. Take time to build a public off their radars. Now, shareholders expect transparency, open
company board with a good mix of skills, including industry communication and effective global risk management.
contacts, technical knowledge, business development,
marketing, strategic planning, acquisition integration and Risk management oversight in many companies is inadequate
financial expertise. for identifying new risks. Companies need a comprehensive
process and structure to identify and manage risks. In its
Start recruiting your board early, especially NEDs. The oversight capacity, the board bears ultimate responsibility for
leading companies will usually have the right boards in place developing the risk management framework, which allows a
before the IPO. The typical board candidate search process company to manage risk prudently, yet allows for growth.
is quite similar to recruiting a CEO or other C-level executive.
However, for many companies, there are often last-minute, Key success factors in managing risk include:
frantic searches for independent board members. In some • Assignment of risk ownership
countries, there is a veritable war for boardroom talent since • Internal risk communications
the pool of good potential directors is often so limited.
• Understanding of enterprise-wide risk
Therefore, NEDs should be sought as much in advance as
possible — six months ahead of the IPO event is realistic Although enterprise risk management is still in its early
timing. A NED with experience of an IPO, who understands the stages for most pre-listed companies today, the larger public
process and who is able to challenge board debate (and not companies are looking beyond internal controls around
just rubber stamp management actions), can be a great asset financial reporting to address the broader enterprise and
in the lead-up to an IPO. external risks.

EY’s guide to going public | 23

 Chart 7 | Top three most challenging corporate governance issues that you addressed in the
IPO process?*

Recruiting qualified independent board members 48%

Enhancing internal controls 45%

Forming a qualified audit committee 31%

Implementing board meeting and reporting processes 30%

Creating management compensation structures 20%

Resolving related-party transaction issues 20%

Note: % represents the percentage of executive respondents.

Recruiting qualified independent board members is a huge Under public scrutiny, companies must create a sensible
challenge these days. In the past, corporate scandals have arisen management compensation structure. The compensation
when a board of directors became too friendly with the executive structure should maximize the company’s profitability while
team. Often, the bigger and more complex a company becomes, rewarding high-quality managers for reaching goals. To be fair to
the more difficult it becomes for a non-executive director (NED) shareholders, this may mean a compensation and bonus structure
to have a complete grasp of the business. It is often challenging to that is far less than the remuneration received when the company
find a NED who is independent, with the right skills and knowledge was private. At the same time, you want a remuneration structure
or background. that provides adequate incentive for management to drive the
business forward. Once the IPO is effective and the company has
Enhancing internal controls can help you meet changing
publically traded stock, an employee stock option plan can be a
accounting, tax, legal and procedural requirements. Historically,
highly attractive part of the company’s executive compensation
the top two reported internal-control deficiencies contributing to
package.
a material weakness were related to: competency and training of
accounting resources and inadequate accounting documentation, Implementing board meeting and reporting processes is a
policy or procedures. Dealing with such significant accounting necessary formality. Your company needs to set board meeting
issues (e.g. valuations and revenue recognition) early is a critical guidelines and establish a protocol. For instance, certain issues and
success factor to an IPO. decisions should be reserved as the domain only of the board and
not of any other part of the business. This needs to be circulated
Forming a qualified audit committee is challenging, since the
and agreed upon by both management and board members.
directors need to have financial literacy, with at least one of the
NEDs qualifying as a financial expert. As the audit committee
provides the financial oversight of the business, typically audit
committees examine the annual and quarterly financial reports
and review the financial reporting and budgeting process. They will
therefore be expected to understand complex accounting issues.

*Source: EY’s Top 10 IPO readiness challenges — a measures that matter global study, 2008

24 | EY’s guide to going public

 IPO readiness step 7

Managing investor relations

and communications
Frequent and transparent communications with stakeholders Your team will need an investor relations professional who
regarding your company’s performance will be key to success has the ability to work well with your bankers and is familiar
as a public company. A strong investor relations function with your industry sector and potential investors. He or she
will help you sustain the market’s interest in your company, will help to build your strategy and guide communications
communicate with your shareholders and the public, attract a to stakeholders and the media. (Please refer to the table
pipeline of new investors and manage risk. on page 20 for key responsibilities of investor relations
professionals.) Your underwriter, lead bank and investor
Have you prepared a corporate communication relations professionals will help you to market the IPO.
strategy and plan?
Communicating the right messages about your business is Do you keep investors informed with regular
always important, but it is particularly crucial when you are communications of your equity story?
moving into the public arena. You need to maintain close Overall, the company’s investment messaging should define
relationships with your financial backers. the core value proposition for investors and answer the
question, “Why invest now?” When your public company
Private companies are often unaware of the level of
acquires a group of shareholders, you need to keep them
accountability and scrutiny faced when going public. They
informed of corporate developments in a variety of disclosure
often underestimate the time and skill needed to court a
vehicles, including annual and quarterly reports, proxy
new pipeline of public investors and to maintain aftermarket
statements, press releases, direct mailings and shareholders’
support. When newly public, you acquire a new range of
meetings. Shareholders, analysts and the financial press will
stakeholders that will demand much greater transparency in
critically evaluate your management’s performance and focus
your business.
attention on the company’s share price.

The IPO marketing process:

1. Premarketing 2. Road show — formal marketing 3. Pricing

• Developing and fine-tuning the equity or • Publishing the preliminary prospectus • Setting the price
investment story
• Presenting management road show, including • Allocating shares to long-term investors
• Preparing and distributing research reports one-on-one meetings with prospective investors
about company (although regulations may limit • Stabilizing share prices during first days of trading
communications in the pre-filing period) • “Book-building” to determine investor interest in to facilitate distribution of shares (with most IPOs
company’s shares trending about 10% to 15% above the issue price)
• Targeting investors and educating them about
transaction prior to road show

• Preparing the management for road show

meetings

EY’s guide to going public | 25

IPO readiness step 8

Delivering an effective road show

You will need to deliver a persuasive message about Your slide presentation and “elevator pitch” needs to
your business’ compelling equity growth story and your convince investors to buy your IPO shares for their portfolios.
management team’s credibility. Your road show is your Your company must sell its investment merits during the
opportunity to convince potential investors to invest in your road show. You will need an organized, 25-minute slide
offering. You must be fully prepared to sell the investment presentation and comprehensive selling points.
merits of your company’s story.
When drafting the presentation, you must keep two audiences
in mind: the sales desk of your chosen broker and the
Do you convey a compelling equity story in your institutional investors you meet on your road show. You will
road show? also need three to five key messages for an elevator pitch
Overall, investors are looking for businesses with growth when you have only a few minutes to convey your
potential that translates into cash generation and bottom-line investment story.
performance. Investors will not be interested in businesses
that are going public for balance sheet repair, or to pay Is your business plan and messaging clear,
down debt. consistent, sustainable and supportable?
Completion of a high-quality road show is a critical event Understand and build strong rapport with your stakeholder
in the IPO process, and possibly the most exhausting for audience. Your underwriters and investor relations counsel
management. Every firm approaching an IPO is competing in should provide background information of your audience and
a crowded marketplace for institutional investors’ attention its investment criteria.
and money. In order to maximize the company’s selling
price, you need to stimulate interest in your company. As
our survey results demonstrate, the quality of the road show
is a vital non-financial measure. Institutional investors will
rarely visit the companies they invest in, preferring instead
to rely on information presented at the road show meetings
and other sources. The road show will likely be the only time
a company’s senior management actually communicates
directly with potential investors.
Underwriters take senior management on a whirlwind tour.
The road show consists of numerous intensive meetings
in many cities over a one — to two-week period. Your
management must introduce the company to key investment
audiences, including the underwriting sales forces and
prospective institutional investors.

26 | EY’s guide to going public

The IPO value journey

Part three

IPO realization
phase
1 to 24 months post-IPO
The last stage of the IPO value journey begins
after shares are priced and allocated to
institutional investors. Now, aftermarket
trading and the “real work” of being a public
company begins.

EY’s guide to going public | 27

IPO readiness step 9

Attracting the right

investors and analysts
As a newly public company, your management must now Do you have a plan to cultivate relationships with
be accountable to possibly hundreds or even thousands research and sell-side analysts?
of investors, after having been responsible to just a few
Market leaders try to attract equity research analyst coverage
investors when private. Through ongoing dialogue, conference
and to establish an ongoing dialogue through carefully crafted
attendance and non-deal marketing visits, you should be
messages to the targeted investors and analysts.
prepared to cultivate an open channel of outreach to potential
investors and for targeting sell-side analyst coverage from a Get to know your analysts. Assess their knowledge of your
broad universe of firms. company, your industry and the breadth of their coverage
and help them understand your business. Your underwriting
Do you have a strategic plan for managing your team will provide market-making and aftermarket trading
aftermarket ownership mix? support. Nowadays, investment firms’ banking and analysis
departments are separated and insulated from one another.
At first, many newly public companies enjoy high share prices
The decoupling of investment banking from sell-side
fuelled in part by investors’ interest in IPOs and by the press
research makes it even more of a challenge for smaller-cap
coverage for such companies. However, unless the market’s
companies seeking analyst coverage. Thus, the sell-side
interest in the company is carefully maintained after the IPO,
analysts employed by the firms in your underwriting syndicate
the initial euphoria will quickly fade. The trading volume and
will be instrumental in helping present your story to the
value of the company’s shares will also decline.
investment community.
You must have an aftermarket strategy. Once the IPO is over,
The public markets are an unforgiving place. Management
the process of retelling and fine-tuning the company’s equity
must strive for accuracy in projections and forecasts so that
story begins. You must develop a proactive investor relations
targets are hit — quarter after quarter. For a public company,
strategy that will attract the optimal ownership mix and long-
a single negative news item that is not well managed by the
term pipeline in the aftermarket. Successful executives target
investor relations function can have a significant impact
the type of investor that will maximize liquidity and valuation.
on a stock price. As always, you need to learn to manage
expectations of shareholders and analysts.

28 | EY’s guide to going public

 IPO readiness step 10

Delivering on your promises

Once your company goes public, the real work of running a Are you using the proceeds of your IPO to
newly public company begins. You must meet or beat the fund growth?
expectations that you set. (Please see Chart 8 on page 30
Growth is the key driver for market leaders. Investors prefer
for the institutional investor perspective on top internal
companies that will use IPO proceeds to accelerate growth.
business issues.)
As our survey results show, investors seek out companies
that plan to use the IPO capital to accelerate growth, whether
Have you prepared a long-term plan for growth
through expanding operations, moving into new geographic
and shareholder value? markets, acquiring other companies, developing new products
Market leaders deliver the post-IPO shareholder value and services, enhancing marketing and branding or upgrading
promised to stakeholders by demonstrating operational technology and infrastructure. By contrast, investors are wary
excellence. This means executing on your business plan, of investing in companies where members of the management
meeting financial targets consistently and attracting the right team are “cashing out” by selling more than 30% of their
investors. Your company needs to deliver on your promises for shares or where IPO proceeds are used only to pay off
growth, shareholder value and share price appreciation. company debt.
Current market leaders are driving new discipline into their
organizations in areas that, in less challenging times, may Do you have a long-term plan for managing post-
have been allowed to slip. The downturn has forced businesses IPO risk and regulatory compliance?
to look hard at driving operational efficiency, improved cash (See the table below for a basic approach to addressing areas
flow and greater liquidity. Define the parameters management of risk post-IPO.)
uses to track the business; this will give your investors and
analysts a blueprint to follow. It will allow you to dictate the
metrics by which external stakeholders will measure your
company’s performance.

Areas of risk post-IPO:

Risk Examples Strategy

1. Financial Accounting and reporting, market, liquidity Set realistic financial targets. Your new stakeholders will want your business to meet
and credit, tax, capital structure expectations and to be financially transparent. Do not surprise the market. Market
confidence can slip in the face of surprises, whether good or bad — along with your
credibility and share price!

2. Strategic Planning and resource allocation, Don’t lose sight of your strategy. Be careful and well considered as you approach new
communications, investor relations, major initiatives to accelerate your growth, such as acquisitions or rapid expansion into new
initiatives, competitive market dynamics, geographical markets. A robust approach to corporate development is essential.
M&A, divestitures, macro-market dynamics

3. Compliance Governance, regulatory, legal, code of Investors are becoming increasingly focused on corporate governance. As a newly
conduct public company, you have to comply with a host of new regulations, legislation and
filing deadlines. Thus, you need to get the right controls in place and communicate
clear policies and procedures.

4. Operational IT, physical assets, sales and marketing, You need to reconsider your current infrastructure, systems and controls, as you
people, R&D, supply chain, hazards now need to provide timely and appropriate information to your stakeholders. Keep
your team focused and fully aware of their new or expanded responsibilities.

EY’s guide to going public | 29

 Chart 8 | Internal business issues of greatest concern to investors*

Working capital management cash flow 72%

Regulatory and compliance risk 62%

Rationalizing business structure

43%
(eg. carve-outs, business simpification)

Timely financial reporting procedures 41%

Attracting/retaining qualified employees 23%

Counterparty risk 23%

Supply-chain risk 15%

Note: % represents the percentage of investors that chose the

particular issue as one of their top three concerns.

An effective working capital management strategy can help As a result of financial or operational stress, some companies
companies release much-needed cash in uncertain times, when may need to financially or operationally rationalize their
“cash is still king.” The economic downturn led to declining business structure to maintain their market positions in the
revenue, major currency and commodity price fluctuations and a current environment. Boards are more actively seeking to establish
severe restriction of access to new funds. As a result, the ability a tighter grip on their core businesses. Many are closely monitoring
to manage working capital — the lifeblood of a company — and the performance of subsidiaries so that underperforming assets
promoting a “cash culture” have become crucial. Your company can be identified for divestment. Restructuring also allows some
will require a disciplined working capital management program companies seeking to dispose of non-performing assets to better
to access liquidity, manage cash more tightly, improve cash flow focus on their core businesses. Such restructuring initiatives are
forecasting, release cash and control costs. targeted to improve performance and increase cash flow and
liquidity.
Regulatory and compliance risk is a current strategic challenge
driven by escalating regulatory burdens in many markets and Timely financial reporting procedures allow public companies to
industries. As companies extend their value chains abroad, achieve accurate forecasts each quarter and consistently meet
numerous compliance risk challenges have also arisen. Your targets. While a private company may endure negative publicity
company needs to revitalize the way you manage risk, identify without major repercussions, a public company’s stock price will
the full risk complexity of the market and develop a strong control suffer unless it can file its periodic financial statements, accurately
framework for your business. and on-time, quarterly and annually, without fail.

*Source: Global Institutional Investor survey, 2009

30 | EY’s guide to going public

 IPO readiness post-IPO

Life as a public company:

renew and recreate
Are you ready for the ongoing challenge to Focus on being a public company (not just on going public).
re‑evaluate, renew and recreate your business, Throughout the IPO value journey, senior management’s focus
post‑IPO? should be not only on going public but also on being public.
Although IPO readiness can lead to a successful IPO outcome,
The IPO value journey is a recurring series of challenges for
all of the best financial engineering will not create business
executives. Market outperformers continue to accelerate
prosperity — only proper planning and adherence to strong
the business, all the while building the infrastructure and
operational execution will forge the path to long-term success.
management practices that a mature public company
requires. You may need to return periodically to the beginning The transformation from a private company to a public
of the cycle and recreate strategies and processes. enterprise is a life-changing process for any organization and
it will continue long after the actual IPO transaction. The IPO
What will your equity story be a year after the IPO? Will it be
may be the most important transaction in a company’s life to
as compelling as it was before you went public? Companies
date, but it’s often just one more milestone along the road to
must not be blinded by the euphoria of the IPO. Companies
market leadership.
are often well supported until the IPO, and then once they
are public, things get complicated. Companies need to be well
prepared for what follows.
How to be a public company
• Manage capital raised to execute strategic initiatives and
transactions
• Re-evaluate the management team
• Create and execute a strong communication plan
• Ensure transparency with no surprises
• Manage risk across the entire organization

EY’s guide to going public | 31

Appendix
In our 2009 study, EY and the US-based market research
group of Institutional Investor magazine conducted an
independent online survey of a total of 305 institutional
investors from around the world regarding how they
evaluate new equity offerings.

By region By type of institution

Other, 1%
Proprietary trading desk, 2%
Sovereign wealth fund, 0.3% Insurance, 5%
Other, 2% Private equity, 1%

Europe, 31% USA, 28% Bank, 12%

Hedge fund, 27% Independent

investment
advisor, 11%

Pension fund, 6%

Broker affiliate, 6%
Latin America, 18% Asia, 21%
Mutual fund, 33%

Total: 305 respondents

By total amount of assets managed*

$150b or more, 6%
Less than $50m, 6%
$75b – $149.99b, 3%
$50 – $99m, 8%
$30b – $74.99b, 6%

$10b – $29.99b, 10% $100 – $299m, 13%

$5b – $9.99b, 7%
$300 – $499m, 7%

$2.5b – $4.99b, 11% $500 – $999m, 9%

$1b – $2.49b, 14%

Mean value of assets managed by respondents: $20.1b

*Values in US dollars

32 | EY’s guide to going public

Are you ready?
Why not visit the EY Global IPO Center
of Excellence?
The Center powerfully showcases the EY
difference. It is a virtual hub that pools
our global IPO knowledge, experience and
resources in one place.
Visit ey.com/ipocenter and make sure you
are ready for the IPO journey.

EY’s guide to going public | 33

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