The Financial Times reported in this article that Europe continues to trail behind world markets in IPOs, particularly those in Asia and the United States. While this may be the current trend, all markets—including—Europe–can expect a significant uptick in IPO activity as the economy begins to rebound. Illustratively, Kohlberg Kravis Roberts is planning at least one major deal in Europe for Danish telecom giant TDC. As reported in New York Time’s DealBook, Dole Food Company Inc., is also planning a deal in the United States. According to Craig Coben, head of equity capital markets origination at Bank of America-Merrill Lynch:
If the Market is open for European capital raisings to finance new investment then the market should also be open to IPOs for strong Companies”
Three Key Areas of Focus
As global competition for IPO activity begins to heat up, those structuring an initial public offering would best serve their clients by focusing on three crucial components of the pre-IPO process: due diligence, valuation and capital structure.
1. Due diligence: During this phase, a company, its underwriters, and their attorneys must focus on the registration statement. An exhaustive auditing of the company’s finances is a crucial step towards substantiating the registration statement and maximizing the likelihood of long-term success for any IPO. The experience of executives and the integrity of financial forecastsmust also be painstakingly scrutinized.
2. Valuation: Because private firms do not have past stock prices, risk estimation must be based on an approach that does not consider past price parameters. The Relative Valuation Approach is best suited for this purpose because the comparables of similar publicly traded firms are considered. Under this approach, prices are more accurately estimated as a correlation between the revenues or operating incomes of the comparable firm and the firm being valued. If it is positive, then the firms are comparable.
3. Capital Structure: The number and class of shares that will be issued play an integral role in the valuation and appeal of an offering. It is important that the IPO team possess knowledge of and experience in the industry of the issuing company or at least in a related industry to determine how the offering will be structured. If the issuer is a company based outside the US, the team should also know the customs and business practices of the issuer’s home country.
Conclusion
Undertaking an IPO is a monumental and exciting event for a new company. A well received IPO means that the company will have funds to fuel its development and growth. Following these key points will serve as important guideposts for any company planning to go public.
Trend to Watch: The Market for IPOs will Continue to Strengthen. Europe, in particular, Will Post Sizeable Gains Vis à Vis Primary World Markets.