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EY IPO leaders’ insightsEurope, Middle East, India and Africa2015 Edition v2 | ey.com/ipo-leaders-insights
2 | EY IPO leaders’ insights
If you want spectacular results when you go public, you must prepare thoroughly. With IPO readiness, you can light the fuse on a successful IPO.
Visit www.ey.com/ipocenter
MAKE SURE YOUR IPO GOES OFF WITH A BANG.
© 2014 EYG
M Lim
ited. All R
ights Reserved. EYG
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one.
3EY IPO leaders’ insights |
Sofia Kalomenides Central and Southeast Europe and Greece › p48
Claus Kronbak Denmark › p38
The journey from private to public company is far more than a simple equity transaction. For your IPO to be successful, you must make the right judgment on countless decisions – and you only have one chance to get it right.
Our IPO leaders across Europe, the Middle East, India and Africa set out the key stages of the IPO process – from the decision to go public, to the critical post-IPO work needed for continued success.
Franck Sebag France, Maghreb and Luxembourg › p12
Scott McCubbin UK and Ireland › p26
Peter Wells Czech Republic › p62
Paolo Aimino Mediterranean and Italy › p18
Ambrosio Arroyo Fernandez-Rañada Spain › p42
Metin Canoğulları Turkey › p30
René Coenradie Belgium and Netherlands › p54
Anamaria Cora Romania and Moldova › p40
Dr. Martin Steinbach EMEIA and Germany, Switzerland and Austria › pp8, 22, 34
Andreas Dalhäll Nordics and Sweden › p36
Päivi Pakarinen Finland › p44
Bjarte Petersen Norway › p56
Matthew Lee Africa › p60
Daniel Mair Germany, Switzerland and Austria › p58
Anil Menon Middle East and North Africa › p14
Mayur Pau Middle East and North Africa › p52
Balachander Rajaraman India › p46
Gary Schweitzer CIS and Russia › pp16, 28
Sebastian Łyczba Poland › p24
Our IPO leaders
4 | EY IPO leaders’ insights
EY | Assurance | Tax | Transactions | Advisory
About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
About EY’s IPO servicesEY is a leader in helping to take companies public worldwide. With decades of experience, our global network is dedicated to serving market leaders and helping businesses evaluate the pros and cons of an IPO. We demystify the process by offering IPOreadiness assessments, IPO preparation, project management and execution services, all of which help prepare you for life in the public spotlight. Our Global IPO Center of Excellence is a virtual hub which provides access to our IPO knowledge, tools,thought leadership and contacts from around the world in one easy-to-use source. www.ey.com/ipocenter
© 2015 EYGM Limited. All Rights Reserved. SCORE No. CY0833 ED 0116
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
Contents
1 Strategic considerations 10
Driving activity 12 How are PE and VC changing the IPO environment? Franck Sebag
Listing as a family 14 What are the challenges of a family business IPO? Anil Menon
Selling privatizations 16 How can IPOs be used as a privatization strategy? Gary Schweitzer
Selling brands abroad 18 Why are global brands considering cross-border listings? Paolo Aimino
2 Where to list 20
Finding the right spot 22 How can companies ensure they select the right market for their IPOs? Dr. Martin Steinbach
Choosing a junior market 24 Why consider an alternative to the main markets? Sebastian Łyczba
Listing in London 26 What are the key characteristics of a UK IPO? Scott McCubbin
Entering US markets 28 What are the benefits of listing abroad? Gary Schweitzer
Going public in Turkey 30 Why might an IPO be the right strategy to fund growth in Turkey? Metin Canoğulları
Welcome to EY IPO leaders’ insights 6 Editorial by Demet Ozdemir
Making connections 8 How can the EY IPO leaders network help you? Foreword by Dr. Martin Steinbach
5EY IPO leaders’ insights |
4 IPO planning and plan B options 50
Perfect planning 52 What are the secrets to planning a successful IPO? Mayur Pau
Pulling it all together 54 How can a project management office lead to a smoother IPO? René Coenradie
Getting the facts straight 56 How can an IPO fact book help companies carry out a dual-track process? Bjarte Petersen
Covering both exits 58 Why is vendor due diligence crucial to a dual-track process? Daniel Mair
Digitizing diligence 60 Could a virtual data room smooth your IPO process? Matthew Lee
Alternative exits 62 Why should you run a multitrack process? Peter Wells
3 Getting IPO ready 32
Getting ready 34 Why start with an IPO readiness assessment? Dr. Martin Steinbach
Making a statement 36 How can companies manage the risks when issuing a working capital statement? Andreas Dalhäll
Optimizing taxes 38 Why does tax planning need to be a priority throughout the IPO process? Claus Kronbak
Converting quickly 40 How can IFRS be implemented in a short timeframe to make the most of an IPO window? Anamaria Cora
Closing fast 42 How can the financial statement close process be improved pre-IPO? Ambrosio Arroyo Fernandez-Rañada
Growing apart 44 How can companies make the most of a spin-off IPO? Päivi Pakarinen
Anticipating future risks 46 How should companies considering an IPO reassess their risk management? Balachander Rajaraman and Pankaj Chadha
Comforting thoughts 48 How can companies address the challenges posed by comfort letters? Sofia Kalomenides
“EY has guided more companies through their IPO than any other public accounting organization.”
6 | EY IPO leaders’ insights
Welcome to EY IPO leaders’ insightsDemet Ozdemir
In EY IPO leaders’ insights, our IPO leaders from across Europe, the Middle East, India and Africa (EMEIA) set out the key stages of the IPO journey – from the decision to go public to the critical post-IPO work needed for continued success.
For fast-growing private companies, an IPO can be an attractive route to raising capital and funding growth. And while challenging market conditions will come and go, companies that fully prepare will always be the best able to take advantage of open IPO windows.
Whether you have recently completed your IPO or are still in the process of preparing for now, we can help you adjust to life as a public company. Did you know that, in the last decade, EY has guided more companies through their IPO – and beyond – than any other public accounting organization?
We hope that you will find the perspectives and insights we offer in this publication of interest. And we will be happy, on request, to share further expertise with investors, with companies that are preparing to list and with those already established on the public markets.
Demet Ozdemir is an EY Transaction Advisory Services partner and the Leader for Strategic Growth Markets (SGM) in EMEIA.
She has 23 years’ experience working in corporate finance, during which she has advised numerous local and international clients on strategic decisions, including M&A transactions, privatizations and IPOs.
She has previously been the Leader of the Entrepreneur Of The Year program for Turkey, and the Private Equity Industry Leader.
Demet OzdemirStrategic Growth Markets Leader for EMEIAEYOrjin Maslak Plaza, Maslak MahallesiEski Buyukdere Caddesi No: 27 Kat: 5Sariyer 34398 IstanbulTurkeyTelephone: + 90 212 408 5405 Mobile: + 90 532 337 4400Email: [email protected]
7EY IPO leaders’ insights |
With you all the wayAt each stage – no matter what your sector, location or chosen market – we have the knowledge, experience and global reach to help you get the most from your IPO journey.ey.com/ipo-leaders-insights
8 | EY IPO leaders’ insights
Making connectionsHow can the EY IPO leaders network help you?Martin Steinbach
Preparing for an IPO is an intense and arduous process. It is easy for management and employees to become distracted by the sheer size of the task.
During an IPO, senior management must balance its focus between the IPO preparation and the company’s day-to-day operations. And they must have the experience and skills both to undertake the IPO transaction and operate a public company leading up to the road show and long after it is over.
To get the most from its IPO, a company needs external advisors who are highly skilled professionals with extensive IPO credentials, capital market contacts and industry expertise.
Detailed knowledge with global reachEY is the number one organization by audit share for helping high-growth companies list publicly. We use our international knowledge to guide companies as they address priorities and mitigate risks.
With its deep pool of knowledge and experience, our IPO leaders network in EMEIA can help you anticipate the risks and overcome the challenges of life as a public company.
The network is made up of interdisciplinary teams with market-specific knowledge that work together to facilitate cross-border IPOs and overseas listings. With strong links to capital market intermediaries, regulators and exchanges, EY’s IPO leaders network has a presence in every capital market in the world.
Preparation is crucialCompanies around the world continue to ready themselves to go public. Whether a company is owned by its founders, a family business, a conglomerate, government, private equity or venture capital, it is important to build confidence and gain investors’ trust. This can best be achieved by being IPO ready in all areas.
EY´s local IPO Leaders in EMEIA will be happy to discuss your plans with you.
With 30 years’ experience, we know what it takes to fully prepare for an IPO.
We are ready to help.
Dr. Martin Steinbach is an executive director at EY. He is the IPO Leader for EMEIA and Head of IPO and Listing Services for Germany, Switzerland and Austria.
His areas of expertise include initial and secondary public offerings, M&A transactions, investor relations and technology-focused private equity deals.
He has over 20 years’ experience working in corporate finance in Europe, China, Russia and India. Before joining EY, he held management positions in investment banking, private equity, IT and the securities exchange sector.
Martin has served on the supervisory boards of listed and non-listed companies, as well as the investment committees of private equity firms. He has published articles on, and contributed to books about, stock markets, IPOs, investor relations and real estate investment trusts (REITs). He is a frequent speaker at international seminars.
Dr. Martin SteinbachIPO Leader EMEIA Head of IPO and Listing Services Germany, Switzerland and AustriaEYMergenthalerallee 3–565760 EschbornGermanyTelephone: + 49 6196 996 11574Mobile: + 49 160 939 11574Email: [email protected]
Foreword
9EY IPO leaders’ insights |
“With strong links to capital market intermediaries, regulators and exchanges, EY’s IPO leaders network has a presence in every capital market in the world.”
Making connections
10 | EY IPO leaders’ insights
Strategic considerationsThere are different strategic considerations that may lead to the IPO decision. What are your goals and motivations for going public?
11EY IPO leaders’ insights |
12 | EY IPO leaders’ insights
Over the last few years, private equity (PE)- and venture capital (VC)-backed companies have increasingly been driving IPO activity, and now account for 43% of global deals. In the US, almost three-quarters of IPOs originate from PE and VC, as do more than a third of IPOs in Europe. There seems to be a strong appetite among institutional investors for this type of IPO, which can offer the prospect of higher returns.
Share of PE- and VC-backed IPOs in global deals
Key benefitsSome geographies, such as the US, have been more profitable for IPOs than others; as have some sectors, such as life sciences and technology. But for companies everywhere, IPOs offer some key advantages:
• An IPO remains a great opportunity to fund growth and increase a company’s exposure among stakeholders and the public. This can boost the brand and help attract new talent.
• IPOs can help investment funds keep their capital moving while keeping control of the company. Unlike M&A, an IPO can enable a company to continue functioning independently – without being absorbed by a larger entity – thus maintaining its strategic freedom.
• IPOs are an increasingly viable and highly attractive exit route. Sixty percent of institutional investors believe PE- or VC-backed IPOs offer equal, or better, returns on investment than offerings without financial sponsors.
A challenging processGoing public comes with greater exposure and increased responsibility regarding governance, financial reporting and internal controls. Listed companies are subject to multiple regulations and face many specific risks, which require the creation of solid financial, technological, control and risk management structures.
PE- and VC-backed companies have a head start here, being accustomed to having their finances and governance regulated.
And the challenges do not end once a company has gone public. When the excitement of the process and the attention of the media have subsided, the company must continue to communicate key corporate messages to investors to maintain their interest. IPOs should be seen as a milestone, not an end in themselves.
We offer a double advantageAn IPO is not just a financial event: it is a profound transformational process that requires extensive preparation and a clear strategy.
Driving activityHow are PE and VC changing the IPO environment?Franck Sebag
8367 67
57
1733 33
43
0
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012 2013
PE- and VC-backed IPOs Others
Strategic considerations
13EY IPO leaders’ insights |
To succeed at each stage – from defining an operation schedule to achieving post-listing financial goals – leaders and administrators will find it invaluable to have the support of external experience.
And as a global leader helping clients throughout their IPO journeys, EY has acquired unrivaled experience in cross-border operations – a crucial asset in sectors such as technology, where a presence is needed in all markets.
With proven experience in the most dynamic sectors for IPO activity and in-depth knowledge of the PE and VC sectors, EY delivers a double advantage when offering this support.
By being able to address issues that are specific to them, we can help companies through the course of the IPO while protecting their investors’ interests.
“Sixty percent of institutional investors believe PE- or VC-backed IPOs offer equal, or better, returns on investment than offerings without financial sponsors.”
Driving activity
Franck Sebag is an EY partner and the IPO and VC Sector Leader for France, Maghreb and Luxembourg.
His areas of expertise include acquisitions, due diligence, financing, IPOs and the needs and issues of companies experiencing rapid growth.
He has over 18 years’ experience providing audit and advisory services to both private and public companies.
Franck works as a coach and mentor for start-ups, and has served as a jury member in several competitions for fast-growing companies. He is member of a number of major French VC organizations, including France Digitale, CroissancePlus and France Biotech. He frequently speaks with the media and has been quoted by publications such as Les Echos, Option Finance and La Tribune.
Franck Sebag IPO and VC Leader France, Maghreb and LuxembourgEYTour First, TSA 14 44492037 Paris – La Défense CedexFranceTelephone: + 33 1 46 93 73 74Email: [email protected]
14 | EY IPO leaders’ insights
Listing as a familyWhat are the challenges of a family business IPO?Anil Menon
There are many reasons why a family business might consider an IPO, such as to enable succession and estate planning, to monetize existing investment, to increase visibility or to raise growth capital.
IPOs are once-in-a-lifetime events that need careful planning and preparation. One of the biggest mistakes a company can make is to approach an IPO purely as a capital event. The changes involved in the IPO journey, from private to public company, are permanent and far-reaching.
Pre-IPO questions for family businessesThere are a number of strategic issues family businesses considering an IPO must address:
• What is the optimal capital structure? When the IPO’s objective is to raise growth capital, this is a key strategic issue. Capital events are particularly tricky for family businesses where the group treasury allocates capital to group companies on an ad hoc basis.
• Is an IPO the appropriate equity solution? Having decided that offering equity is the right way to raise capital, the family business needs to evaluate the pros and cons of the different methods – such as an IPO, private placement or private equity. Given that IPOs come with significant public scrutiny and regulatory oversight, they should not be embarked on for the wrong reasons. Depending on the circumstances, other capital-raising mechanisms may be more effective.
• What is the transaction perimeter? It is very important to determine the exact scope of the business to be listed. This will determine the equity story and the overall pricing – factors that play a major role in generating market interest in the IPO.
In the case of family businesses, there may be relationships between various
parts of the business that will need to be regularized prior to the IPO. This may mean negative synergies, increased costs and redundancies.
• What will the board constitution be? Stock exchange and security market regulators demand that listed companies have a strong corporate governance framework, including independent directors to represent minority shareholders. Before the IPO takes place, family businesses need to decide on their board constitution.
We highly recommend that, before the IPO takes place, family businesses enlist independent directors to coach the family directors on their pre- and post-IPO responsibilities. Getting the right board members in place to achieve good chemistry, an appropriate mix of skills and knowledge and the right kind of networks is a key strategic pre-IPO task.
• What is the equity story and expected valuation? Family businesses embarking on an IPO need a clear equity story – the reasons why equity investors will find the IPO attractive. Throughout the road show process, the company’s management and select directors will be called upon to explain and defend the equity story, so they will need to be able to articulate it clearly and concisely.
How we can help you with your family business IPOEY has advised many family businesses with their IPOs. We act as a sounding board and a trusted advisor, and our advice is tailored to help the family plan and execute a successful IPO.
As American inventor Thomas Edison once said, “Good fortune often happens when opportunity meets with preparation.” IPOs are too important to be taken lightly. To be successful, strategic planning is imperative.
Anil Menon is an EY Transaction Advisory Services partner and the IPO and M&A Leader for the Middle East and North Africa.
He has led a number of high-profile IPO
advisory and sell-side engagements.
With 20 years’ experience working in corporate finance across the Middle East and North Africa, Asia and other markets, he has a strong focus on the retail, industrial and consumer products sectors.
Anil serves on EY’s Deal Review Board.
Anil MenonIPO and M&A Leader, Middle East and North AfricaEY18th Floor – Baitak Tower, Safat SquareAhmed Al Jaber StreetP.O. Box 74Safat 13001KuwaitTelephone: + 965 2 295 5238Mobile: + 965 97863077Email: [email protected]
Strategic considerations
15EY IPO leaders’ insights |
“We highly recommend that, before the IPO takes place, family businesses enlist independent directors to coach the family directors on their pre- and post-IPO responsibilities.”
Listing as a family
16 | EY IPO leaders’ insights
For centuries, governments across the world have found themselves with significant public deficits and the need to restore economic stability. In other cases, they have recognized that state-owned enterprises may not be operating efficiently or providing world-class services or products. In both instances, privatization may be the solution.
There are many ways a government can realize the value of state assets, such as through public-private partnerships or strategic sales. But often, the most transparent way to show that a government has maximized value is through an IPO.
Demonstrating value, protecting public interestThose responsible for executing an IPO of state assets face two major challenges: they must demonstrate that they have maximized value and that they have protected the public interest and the interests of all stakeholders.Based on EY’s studies of past privatizations, we have developed the Privatization Value Framework to help governments considering an IPO. It consists of the following steps:
• Understand the views of key stakeholders: taxpayers, employees and political leaders
• Explain the development of the historical ownership and structure of the assets to stakeholders
• Understand constraints, policies and motivations from the seller’s perspective
Identify creative and achievable alternatives:• Investigate a range of alternative exit
strategies other than an IPO• Consider the process of, and the
issues involved in, transferring ownership
• Develop a “do nothing” option for comparison
Establish clear value criteria and trade-offs:• Develop measures to assess the
effectiveness of each alternative• Establish a set of decision-making
criteria that aligns with the strategic objectives
• Understand the non-financial benefits of the privatization
Acquire meaningful and reliable information, including detailed financial information:• Identify the critical information needed
for the IPO offering document• Assess the data for relevance and
reliability
Build quality business modeling:• Construct robust business models• Incorporate risk and uncertainty
assessments
Commit to action:• Develop an IPO business case to present
to stakeholders• Gain full stakeholder buy-in• Execute the IPO
Lessons from historyPrivatization of state-owned enterprises is not new – it dates as far back as the Roman Empire, which privatized tax collection and military logistics.
From both ancient and modern history, we have learned some important lessons:
Selling privatizationsHow can IPOs be used as a privatization strategy?Gary Schweitzer
Strategic considerations
17EY IPO leaders’ insights |
• Before pursuing a privatization strategy, governments need to show that they can maximize value for their stakeholders and protect public interest.
• Regardless of the privatization strategy, e.g., strategic sale, peoples’ IPO, sale to financial investor or IPO, a similar exit-readiness process is needed to maximize value.
• Reliable, timely financial information is a significant factor in the success of privatizations.
• Investors do not like structural complexity or restrictive operating conditions.
• Investors need clarity on employment conditions and the composition of the workforce.
• To carry out a successful privatization, excess working capital and non-core assets must be eliminated.
• It is important for governments to understand the need for disclosures beyond the financial statements.
For governments that understand the challenges of privatization, an IPO of state-owned enterprises may be the best option to maximize value.
“For governments that understand the challenges of privatization, an IPO of state-owned enterprises may be the best option to maximize value.”
Selling privitizations
Gary Schweitzer is an EY Capital Markets partner and the IPO Leader for the Commonwealth of Independent States (CIS) and the Russian Federation.
His areas of experience include advising clients on debt and equity financing options and helping clients successfully complete IPOs in the US, the UK and other major and alternative markets.
He has over 30 years’ experience serving public companies in a variety of industries, including financial services, retail, telecommunications, energy and industrial products.
Gary is a frequent editor and presenter; for example, at Moscow’s Higher School of Economics.
Gary SchweitzerIPO Leader CIS and RussiaEYSadovnicheskaya Nab., 77, bld 1Moscow, 115035Russia Telephone: + 7 495 783 2526Email: [email protected]
18 | EY IPO leaders’ insights
Selling brands abroadWhy are global brands considering cross-border listings?Paolo Aimino
Today, companies have an increasing range of options when deciding to go public, including:• Listing on their domestic stock exchange• Accessing foreign capital markets• Considering a dual listing
The chosen path will significantly affect the value attributed to the business, available liquidity, the volatility of shares and future performance for investors.
Traditionally, companies floated on their domestic markets. But with the increasing globalization of capital markets, a growing number of issuers are seeking better growth prospects by listing abroad. And, in truth, the choice of listing market can be a critical factor in an IPO’s success.
The IPO choices of three Italian brandsThe range of factors considered by similar companies can be seen in the IPO choices made by three Italian luxury goods companies over the same period.
In recent years, luxury goods producers and fashion houses have started to consider listing in Far Eastern stock exchanges. Such companies are finding these exchanges more and more attractive because of their geographical proximity to China, which is expected to become the world’s largest luxury goods market in the near future. A listing abroad has become a tool for raising brand awareness in these rapidly growing markets.
Prada, a company expanding rapidly in Asia, was the first Italian luxury brand, and among the first leading brands from Western Europe, to list in Hong Kong.
At the same time, Salvatore Ferragamo considered floating on the Hong Kong Stock Exchange, which promised higher valuations and closer connections to emerging markets. However, the management regarded this as a more volatile market and felt Milan was a better fit for an Italian company with a wholly Italian supplier base.
Finally, Brunello Cucinelli always regarded its business as an expression of an authentic made-in-Italy concept: its entire production process is located in Italy. Recognizing that its success is based on Italian craftsmanship and modern, innovative design, it felt the natural choice was to float on the Milan stock exchange, the Borsa Italiana.
Making the decisionWhen assessing the opportunities offered by different global markets, there are a number of factors to consider.
First, the management should focus on achieving the desired valuation. To ensure visibility, a fair valuation and interest from international investors, they must select a stock exchange with a clear connection to the company’s business and its long-term strategy.
By choosing a market where competitors are listed, businesses ensure comparability of performance and increase the likelihood of attracting the interest of investors and analysts.
Second, the management should consider any differences in culture and expectations between the business’s stakeholders and the chosen market, the quality and number of investors, and the market visibility.
Third, it is important to assess the technical factors, such as differences in regulatory requirements, the timing of the listing process, the associated fees and ongoing costs.
Paolo Aimino is an EY Assurance partner. He is also EY’s IPO Leader for the Mediterranean region and he is responsible for its Italian Capital Markets team.
His areas of expertise include providing audit and due diligence services and coordinating capital market transactions, including IPOs and bond offerings. He has an in-depth knowledge of Italian, IFRS and US accounting requirements.
He joined EY in 1989 and has extensive experience in the automotive and heavy industry sectors.
Since 2004, Paolo has been a member of a number of committees within Assirevi, the Italian association of auditing firms.
Paolo AiminoIPO Leader Mediterranean Region and ItalyEYVia della Chiusa 2MilanItalyTelephone: + 39 0272212532Email: [email protected]
Strategic considerations
19EY IPO leaders’ insights |
“ In recent years, luxury goods producers and fashion houses have started to consider listing in Far Eastern stock exchanges.”
Selling brands abroad
20 | EY IPO leaders’ insights
Where to listCompanies can choose from more than 100 stock exchanges and listing options worldwide. How will you find out which is the best fit for your individual strategy?
21EY IPO leaders’ insights |
22 | EY IPO leaders’ insights
IPO candidates have a choiceIn a global environment with highly connected electronic market platforms and converging regulatory requirements, many issuers now have a choice about where to list.
Most companies – 89% of global IPOs, accounting for 78% by IPO volume – go public in their home markets (where they are incorporated).
And this is where investors expect listings to take place, because companies are often tightly linked to economic environments in their home country (the economy, culture, infrastructure, technology base and taxes), and because it shows a company’s commitment to the relevant capital market regulations.
But it could be argued that a company is most at home where the people can best understand and evaluate its business model.
Listening to investorsIn EY’s global survey of institutional investors, over half those surveyed said they considered the exchange venue an important factor when making investment decisions.
When asked what the main criteria for their assessments of IPO destinations were, they cited liquidity availability, confidence in the regulatory environment and corporate governance standards. And if the IPO is listed abroad, they expect compelling reasons for this, and that the company will have a presence in the local market where the listing is made.
Set goals before picking a venueWhen embarking on an IPO, the first thing a company must do is set its goals. This will enable it to establish the specific requirements for its IPO, which will help it determine which capital market or listing zone (the Americas, Europe, Asia, etc.) and which stock exchange and segment will actively support its strategy.To achieve the right combination of corporate and capital market strategy for the IPO or secondary listing, companies can choose from more than 100 stock exchanges and listing options worldwide.But which stock exchange is right? Does it make sense to go public or have a primary listing outside the company’s country of
incorporation? How flexible is the company on the capital market?
Assess each potential destinationA guided assessment of potential IPO destinations can help a company clearly establish which destination best fulfills its main criteria. Decisions about the potential location of your IPO should involve careful consideration of five main factors:• Strategic motivations and goals• Factors affecting valuation• Considerations relevant for valuation
purposes• Costs and regulations• The preferences of shareholders
and management
Finding the right spotHow can companies ensure they select the right market for their IPOs?Dr. Martin Steinbach
0 20% 40% 60% 80% 100%
Derivatives exist to hedge and arbitrage
Well-known peers are trading at same venue
Availability of indices that track sectorperformance and act as benchmarks
Connectivity and accessibilityto the exchange
Own investment rules restrictions
Corporate governance standards
Confidence in the regulatory environment
Liquidity is available forinvestment and/or divestment 63
56
40
29
28
23
22
2
Why is the IPO exchange venue important for your investment decision?
Note: respondents were asked to select their top three reasons. The symbol “%” represents the number of respondents that chose the particular reason as one of their top three choices.
Where to list
23EY IPO leaders’ insights |
There are, of course, many other factors that motivate companies to go public outside their home market. These vary according to the company’s country of incorporation, and to assess them requires in-depth knowledge of various factors, including the size requirements of different regulators, any uncertainties regarding the listing process, and the waiting or processing times during the approval of the prospectus and the registration of the securities.
IPO destination guide - Find the right market strategy to maximize value for your IPO or secondary listing. Investment appetite up for IPOs among institutional investors
“Where’s the best place to take your IPO or secondary listing and how do you build the right market strategy?”
Dr. Martin Steinbach is an executive director at EY. He is the IPO Leader for EMEIA and Head of IPO and Listing Services for Germany, Switzerland and Austria.
His areas of expertise include initial and secondary public offerings, M&A transactions, investor relations and technology-focused private equity deals.
He has over 20 years’ experience working in corporate finance in Europe, China, Russia and India. Before joining EY, he held management positions in investment banking, private equity, IT and the securities exchange sector.
Martin has served on the supervisory boards of listed and non-listed companies, as well as the investment committees of private equity firms. He has published articles on, and contributed to books about, stock markets, IPOs, investor relations and real estate investment trusts (REITs). He is a frequent speaker at international seminars.
Dr. Martin SteinbachIPO Leader EMEIA Head of IPO and Listing Services Germany, Switzerland and AustriaEYMergenthalerallee 3–565760 EschbornGermanyTelephone: + 49 6196 996 11574Mobile: + 49 160 939 11574Email: [email protected]
Finding the right spot
24 | EY IPO leaders’ insights
Choosing a junior marketWhy consider an alternative to the main markets? Sebastian Łyczba
For any company considering an IPO, choosing the right stock exchange is an important and complex process, and a decision needing careful thought that should be based on hard evidence and calculation.The main criteria to consider include:• The size of the company• The regulatory requirements of the
stock exchange and their potential impact on the company
• Flotation costs• Liquidity • Primary market activity• The development of investor confidence,
based on the longer-term success of new issues
• The ability for companies to develop and move up to the main markets
This decision is especially important for small and relatively new companies, and those operating in emerging economies.
During the last decade, a lot of junior IPO markets have been established that are perfect for smaller, fast-developing businesses. These include the AIM London Stock Exchange, Entry Standard Deutsche Boerse, Alternext at Euronext NYSE, First North and New Connect in Warsaw.
What type of company suits a junior market IPO?Junior markets are intended for new, small to mid-size dynamic companies that need a capital injection in order to grow. They may lack the resources and processes needed to meet the requirements of the main regulated markets, so a junior market IPO may be their best option.
Junior markets mainly serve companies seeking to raise capital of between US$1m and US$30m. It is not only companies in innovative sectors relying on intangible assets – such as information technology, electronic media, biotechnologies, environment protection and alternative energy – that list on junior markets. Innovative, rapidly growing companies in any sector can consider this option if they have a vision and a chance for a future main-market debut.
Junior markets, major benefitsTypically, junior markets have lower requirements and regulatory reliefs compared with main markets. For investors, they enable access to emerging and growth companies, and offer the trading security expected in public markets.
They open up entirely new opportunities to investors, offering easy access to promising, rapidly growing companies. They also offer low transaction costs – comparable with those of the main markets – and all the advantages of stock exchange trading.
How EY can help you with a junior market listingEY operates in all main and junior IPO markets. We have professionals in London, Frankfurt, Paris, the Nordics, Warsaw, Bucharest and most junior markets operating in Europe who help businesses evaluate all the pros and cons of an IPO, including the question of whether to list in a main or junior market.
Sebastian Łyczba is an EY Assurance partner and the IPO Leader for Poland.
His areas of expertise include the auditing of financial
statements prepared according to Polish and International Financial Reporting Standards, audits of large multinationals and companies listed on the Warsaw Stock Exchange, IFRS financial statements and assurance work related to the IPO process, including due diligence projects.
He has 19 years’ experience working in financial services – including 9 as a partner. During this time, he has served clients in a number of sectors, including technology, communications and entertainment, media, construction, pharmaceuticals and industrial products.
He has lectured at a number of seminars and training courses organized by the Warsaw Stock Exchange and the Association of Stock Exchange Issuers, and has had many articles published in major Polish business newspapers, including Parkiet and Puls Biznesu.
Sebastian ŁyczbaIPO Leader PolandEYRondo ONZ 1Warsaw 00124PolandTelephone: + 48 22 55 77 218Email: [email protected]
Where to list
25EY IPO leaders’ insights |
“Innovative, rapidly growing companies can consider to list on a junior market if they have a vision and a chance for a future main-market debut.”
Choosing a junior market
26 | EY IPO leaders’ insights
For entrepreneurs considering an IPO, the London Stock Exchange (LSE) offers a whole range of options. It operates four markets in total, with equity IPOs concentrated on the Main Market and AIM (formerly the Alternative Investment Market).
The Main Market is subdivided into two segments: Premium for commercial company equity only and Standard for equity, debt and Global Depository Receipts (GDRs).
Regulation for the Main Market is provided by the Financial Conduct Authority, also known in this role as the UK Listing Authority (UKLA).
AIM is owned and operated by the LSE in its capacity as a regulated investment exchange. It is designed for smaller, faster-growing companies, but a broad range of businesses now choose to list on it. Its rules are based on similar principles to those of the Main Market, and it is subject to Financial Services and Markets legislation.
Regulatory requirementsThe UKLA listing framework underpins London’s reputation for balanced and globally respected standards of regulation and corporate governance. Regulatory requirements in London are principles-based, and provide an appropriate balance of investor protection, practitioner certainty and flexibility.
This framework is a combination of European law and the London Listing Rules, many of which are super equivalent (additional) to European minimum requirements, which principally apply to those companies seeking a premium listing. These additional requirements include substantive eligibility requirements, such as the need for a three-year track record, the class tests whereby transactions over a certain size require shareholder approval, and related-party regimes.
The listing processThe listing process in London requires more detailed financial due diligence than
some other markets. The scope of this is partly set by regulation and partly by custom and practice.
In addition to the financial information in the prospectus (typically a three-year track record and pro forma statement), a number of private reports are typically prepared in support of a London IPO:
• The long-form report: a detailed due diligence report on all aspects of the business being listed
• The working capital report: a report on the sufficiency of cash and funding for the business for at least 18 months post-IPO, which supports a statement made by the directors in the prospectus
• Financial position and prospects: a report detailing the systems and controls, reporting and budgeting, and corporate governance practices within the applicant’s business
Listing in London What are the key characteristics of a UK IPO?Scott McCubbin
Where to list
27EY IPO leaders’ insights |
Scott McCubbin is an EY Transaction Services partner and the IPO Leader for the UK and Ireland.
He has delivered a number of major capital market transactions, including the privatization of Royal Mail and the IPO of International Airlines Group.
He is a qualified member of the Institute of Chartered Accountants of Scotland and a member of the London Stock Exchange Primary Markets Group.
Scott McCubbinIPO Leader UK and IrelandEY1 More London PlaceLondon SE1 2AFUKTelephone: + 44 20 7951 3519Mobile: + 44 777 6493121Email: [email protected]
Sponsor and nomad rolesOne of the key roles in a Premium IPO is that of the sponsor, a role carried out by one of the banks involved in the transaction. The sponsor ensures the company’s directors have received advice and guidance about their obligations, and issues opinions to the UKLA on the applicant’s readiness to be listed. The role is distinct from any underwriting or book-running role the bank may have.
Each company applying to the AIM must appoint and retain a nominated advisor (nomad) to guide it through the admission process and its subsequent life as a public company. Nomads are full-time corporate finance advisors approved by the exchange. They have a similar role to the sponsor, but also act in a regulatory role.
If you are considering a London IPO with its many benefits, it is vital you ensure you have a team of advisors that understands not only the IPO process, but also the unique aspects of a London IPO.
“The listing process in London requires more detailed financial due diligence than some other markets.”
Listing in London
28 | EY IPO leaders’ insights
Entering US marketsWhat are the benefits of listing abroad?Gary Schweitzer
When selecting an IPO destination, many rapidly growing companies will consider the US. But before they can make that decision, they must see past the myths and understand the benefits of a US IPO.
Some of the myths about listing in the US• “The preparation of a registration
statement for a US listing is too complicated.” Actually, the form and content of a US registration statement is substantially the same as that required under the European Union Prospectus Directive. A large number of non-US listings also include a private placement in the US, using the same offering document for both transactions.
• “Going through the Securities and Exchange Commission (SEC) review process is too painful.”
It is true that, to complete an IPO in the US successfully, a company must comply with extensive rules and regulations. But the SEC is very clear in communicating these requirements to the capital markets community through Staff Accounting Bulletins, Staff Legal Bulletins, the Financial Reporting Manual, speeches and letters. Those issues that are of high concern to the SEC are well known and can be anticipated.
• “Compliance with the internal control requirements of the Sarbanes-Oxley Act Section 404 (SOX 404) is too difficult.”
Becoming SOX 404 compliant is a major investment for most companies. And “investment” is the right word. Regardless of the listing location, management is required to publish timely and reliable financial information for the benefit of shareholders and other stakeholders. Eliminating material weaknesses in
internal controls over financial reporting is a goal for all public companies. SOX 404 provides a framework that gives investors more assurance that the financial information used for decision-making is reliable.
What are the benefits of listing on a US stock exchange?• The main US stock exchanges are well
known, which provides brand recognition.
• US stock exchanges list companies of all sizes, sectors and geographies, which provides diversity.
• With billions of trades and trillions of dollars of equities traded each year, the US stock exchanges provide unparalleled liquidity.
• US stock exchanges have invested in technology heavily over the years to allow for automated order execution, improved price discovery and added liquidity.
• Companies that qualify as emerging growth companies under the JOBS Act can take advantage of confidential submissions to the SEC, reduced financial disclosure requirements, extended phase-in of new accounting principles and extended phase-in of the internal controls audit.
• After a successful IPO, US markets have shown a strong appetite for secondary public offerings and follow-on offerings.
Where to list is one of the most important IPO-related decisions a company has to make. Companies going public must consider strategy, valuation, shareholder preferences and initial and ongoing costs. Companies that can see through the myths and understand the benefits will often choose the US market.
Where to list
Gary Schweitzer is an EY Capital Markets partner and the IPO Leader for the Commonwealth of Independent States (CIS) and the Russian Federation.
His areas of experience include advising clients on debt and equity financing options and helping clients successfully complete IPOs in the US, the UK and other major and alternative markets.
He has over 30 years’ experience serving public companies in a variety of industries, including financial services, retail, telecommunications, energy and industrial products.
Gary is a frequent editor and presenter, for example, at Moscow’s Higher School of Economics.
Gary SchweitzerIPO Leader for Russia and the CISEYSadovnicheskaya Nab., 77, bld 1Moscow, 115035Russia Telephone: + 7 495 783 2526Email: [email protected]
29EY IPO leaders’ insights |
“After a successful IPO, US markets have shown a strong appetite for secondary public offerings and follow-on offerings.”
Entering US markets
30 | EY IPO leaders’ insights
Executing a company strategy and funding growth in Turkey require access to capital. One of the options for accessing capital is to go public. But preparation is critical: successful IPO candidates often spend up to two years building business processes and infrastructure, recruiting executive and advisory talent, and dealing with financial and external reporting issues.
A draw for investmentTurkey’s foreign direct investment (FDI) profile is a dynamic mix of established and emerging sectors. The country attracts projects in knowledge-intensive sectors as well as in heavy industry. Between 2007 and 2012, knowledge-driven sectors, such as business services, information and communication technologies and financial services, generated more than one-third of
FDI projects in Turkey. And foreign investors expect real estate, hospitality, construction, energy and heavy industries to drive economic growth in the coming years.
Most FDI into Turkey comes from developed countries. In terms of existing projects, Germany is the leading European source. Many major German entities, such as Mercedes, Siemens and Bosch, have operations in Turkey. The strong demand expected from the Turkish infrastructure, energy, automotive and finance sectors are driving investment in the country.
Funding growth via capital marketsIPOs and dual listings are again on the rise – albeit with new motivations. For many companies, a primary or an additional stock exchange listing,
particularly in rapid-growth markets, is becoming increasingly important for strategic reasons. This is especially true for companies with a core strategy in the market of the dual listing, that believe that a dual listing will give them a higher profile with end consumers and better access to, and commitment from, the market and government. One example of a company that has followed such a strategy is Austrian catering company DO & C0, which went public in Vienna 1998 and has been listed in Istanbul since 2010.
Meeting investors’ demandsAny company considering a listing outside its home market needs to get IPO ready. When preparing for the IPO value journey abroad, a company will need to address investors’ needs and include their feedback. The top three issues that
Going public in TurkeyWhy might an IPO be the right strategy to fund growth in Turkey?Metin Canoğulları
Where to list
31EY IPO leaders’ insights |
Metin Canoğulları is an EY Assurance partner, the IPO Leader in Turkey and the SGM Leader for Central and Southeast Europe. His areas of expertise include external audit, due diligence assignments, investigations and financial reporting. Additionally, he has experience working with IFRS, US GAAP and Turkish Capital Market Board (CMB) accounting standards. He has 24 years’ experience in financial
services, during which time he has worked in a wide range of sectors, including telecommunications, retail, food and beverages, and cement. He is an independent public accountant and financial advisor (SMMM) and a member of the Institute of Certified Public Accountants in Turkey. He is also the author of a handbook on inflation accounting.
Metin CanoğullarıIPO Leader TurkeyEY34381 IstanbulTurkeyEmail: [email protected]
companies face while conducting a cross-border IPO are: • Investors’ corporate governance
complaints• A company’s failure to state compelling
reasons for a cross-border listing • The absence of a company’s
management at the listing destination
For those who can overcome or avoid these issues, Turkey offers a lot of investment opportunities and a large appetite for IPOs.
“In Turkey, foreign investors expect real estate, hospitality, construction, energy and heavy industries to drive economic growth in the coming years.”
Going public in Turkey
32 | EY IPO leaders’ insights
Getting IPO readyThere are many steps involved in fully preparing for an IPO. What are the areas companies need to focus on?
33EY IPO leaders’ insights |
34 | EY IPO leaders’ insights
As companies that have completed a successful listing know, an IPO involves a complete transformation of processes and culture.
Going public takes a great deal of planning, organization and teamwork. Organizations must prepare for a whole new phase of corporate life, which is why market outperformers treat the IPO as a long-term transformational process.
Getting IPO readiness right requires establishing a sound financial reputation. And, once listed, companies will be subject to increased filing requirements, transparency and compliance; greater scrutiny from investors and analysts; and more overall accountability around delivering on promises.
Starting early: the IPO readiness assessment workshopDuring an IPO, senior managers will face numerous challenges that test their business’s IPO readiness. And executives will need to understand what it takes to win in the capital markets. To clarify these key issues, successful businesses typically start to prepare 12 to 24 months before their IPO, in many cases with an IPO readiness assessment.
Eight main areas are usually covered in the Q&A session of an initial one- or two-day IPO readiness assessment workshop:
• Potential IPO strategy, motivation, use of proceeds, relevant market, right exchange, first check of equity story and main elements of offering concept in an IPO base case
• Legal structures, potential issuer, transparent company structure, design of articles of association and type of shares
• Tax optimization pre-IPO, country of registration and legal form
• Transformation to external reporting, fast-closing ability, IFRS conversion and prospectus preparation
• Systems infrastructure, internal controls, compliance and risk management
• New functions, corporate governance, investor relations, insider regulation, directors’ dealings and ad hoc disclosure
• Leadership structure and organization, and remuneration
• Choosing the right IPO window, IPO schedule, plan B and internal resources
Informing decision-making: the IPO readiness result report
The next step is to define an initial target structure and an IPO base case in line with company objectives. Then a gap
analysis will be undertaken to identify the gaps between the target IPO and current structures.
The results are used to develop the IPO readiness report. This defines the initial strategy, identifies gaps between current status and IPO-ready status, and establishes a road map with estimated time lines and the resources needed to fill the gaps and achieve IPO readiness.
This holistic assessment has a number of advantages. It can help companies:
• Determine which options best fit the business’s strategies and objectives
• Deliver an IPO base case and the road map to enhanced value
• Set up and improve the infrastructure and processes needed to get IPO ready
• Save time by gaining insight into capital-raising options
• Map out organizational changes needed to successfully execute an IPO in one go, which reduces costs by achieving transparency on how to get IPO ready
These discussions about the big picture and the specific requirements of the IPO are an ideal opportunity to address questions, share knowledge and prepare the company’s IPO project team.
Getting readyWhy start with an IPO readiness assessment?Martin Steinbach
Getting IPO ready
35EY IPO leaders’ insights |
IPO readiness - Save time and costs and increase transaction certainty by adopting a structured approach to your IPO journey
“The IPO readiness assessment workshop is an integrated approach that can include up to eight modules tailored to your specific needs.”
Getting ready
Dr. Martin Steinbach is an executive director at EY. He is the IPO Leader for EMEIA and Head of IPO and Listing Services for Germany, Switzerland and Austria.
His areas of expertise include initial and secondary public offerings, M&A transactions, investor relations and technology-focused private equity deals.
He has over 20 years’ experience working in corporate finance in Europe, China, Russia and India. Before joining EY, he held management positions in investment banking, private equity, IT and the securities exchange sector.
Martin has served on the supervisory boards of listed and non-listed companies, as well as the investment committees of private equity firms. He has published articles on, and contributed to books about, stock markets, IPOs, investor relations and real estate investment trusts (REITs). He is a frequent speaker at international seminars.
Dr. Martin SteinbachIPO Leader EMEIA Head of IPO and Listing Services Germany, Switzerland and AustriaEYMergenthalerallee 3–565760 EschbornGermanyTelephone: + 49 6196 996 11574Mobile: + 49 160 939 11574Email: [email protected]
A tailor-made and integrated approach: the IPO readiness assessment workshop can include up to 8 modules tailored to your specific needs.
36 | EY IPO leaders’ insights
A company planning an IPO on a regulated market in Europe will need to prepare a prospectus, which must then be registered with the domestic financial supervisory authority.
The board of directors of the company executing the IPO is formally responsible for the contents of the prospectus. But, in many cases, the board and management team will need to seek the assistance of the company’s legal and financial advisors.
Working capital statementsThe contents of a prospectus are governed by the European Commission’s Regulation No 809/2004. It states that prospectuses for shares must include a working capital statement.
This is a statement to the effect that the company has sufficient working capital to support its business for a period of at least 12 months from the date of the prospectus.
If no such statement can be made, the company needs to disclose how it proposes to provide additional working capital.
The working capital statement provides investors with assurance that the company is adequately capitalized and that, unless something unexpected occurs, it will not need to raise additional funds within 12 months from the date of the prospectus.
In many markets (including, for example, the Swedish Stock Exchange Nasdaq Stockholm), applicants need to provide a “clean” working capital statement, i.e., one that does not contain reference to any caveats.
ESMA Level III GuidanceHow working capital statements should be prepared is set out by the European Securities and Markets Authority (ESMA) in its Level III Guidance in the ESMA update of the CESR recommendations.
This guidance sets out what procedures issuers are expected to have undertaken to support the statement, including:• Preparing cash flow, profit and loss and
balance sheet information• Business analysis, covering cash flows,
as well as banking and other financing relationships
• Considering business strategy and plans and related risks, with checks made against external evidence and opinion
• Assessing whether there is sufficient margin or headroom to cover reasonable worst-case scenarios
The role of due diligenceThe thorough preparations of a working capital statement should be central to any company executing an equity offering, because of:• The statement’s importance to investors• The responsibility of the board of
directors for the statement • The due diligence requirements of banks
involved in many equity offerings
However, in our experience, many Nordic share issuers underestimate what is required to follow ESMA’s Level III Guidance in order to gain an appropriate level of confidence in their working capital statement.
Other markets have a more formalized due diligence process for working capital reports. For example, in the UK, it is relatively rare for a working capital report to be included in a prospectus without the company having
Making a statementHow can companies manage the risks when issuing a working capital statement?Andreas Dalhäll
Getting IPO ready
37EY IPO leaders’ insights |
commissioned a specifically related due diligence report.
How EY can help manage the risks involved in issuing a working capital statementWithout outside help, many companies are unable to prepare the complex financial reports pertaining to the working capital statement.
EY can provide the necessary assistance to help an issuer prepare the required supporting documentation for the working capital statement in accordance with ESMA Level III Guidelines.
We are experienced in providing regulatory support and advice in financial centers around the world. And, thanks to EY’s global network of professionals, we have both domestic and international knowledge.
Our clients value their direct access to our team of professionals, our technical and industry knowledge, and the insights and practical experience we bring to each IPO journey.
“The aim of the working capital statement is to show that the company has sufficient working capital to support its business for a period of at least 12 months.”
Making a statement
Andreas Dalhäll is the Head of EY Capital Markets Nordics and Sweden and the IPO Leader for the Nordics and Sweden.
He is experienced in IPOs and capital markets law, corporate governance and company and M&A law.
Andreas DalhällIPO Leader Nordics and SwedenEYP.O. Box 7850SE-103 99 StockholmSwedenMobile: + 46 761 264 879Email: [email protected]
38 | EY IPO leaders’ insights
Optimizing taxesWhy does tax planning need to be a priority throughout the IPO process?Claus Kronbak
When it comes to designing its new legal and tax structure, each company undergoing an IPO will have different needs and priorities. There is no one-size-fits-all solution, but there are a number of key areas that all companies must consider.
Finishing the housekeepingEarly on in the process, the company’s tax risk and exposures should be identified and assessed, and how to manage them should be carefully considered. As far as possible, tax audits and other tax work streams should be completed and closed.
This is important because the company’s tax situation will be covered in the IPO prospectus, and because extensive tax due diligence will be part of the IPO process. Tax risk and exposures will need to be discussed with analysts and potential investors, and this can have an impact on valuation.
Putting the structure in placeCare must be taken when putting the company’s IPO structure in place. During this process, it is important to ensure that tax assets – such as tax loss carry forward – are not lost, and that the steps taken during reorganization do not trigger transfer taxes (such as real estate transfer tax), capital duty or stamp duty.
To prepare a company for an IPO, it will often be necessary, for example, to:
• Restructure, to simplify or optimize the corporate structure
• Spin off business activities• Make changes to, or increase, share capital
Such changes must be carefully considered, because they can have a significant tax impact on the company and its shareholders.
These changes can also be time-consuming. So it is necessary, early on in the process, to work out what steps need to be taken so that they can be implemented prior to the IPO.
Shareholders and picking the right locationPrior to the IPO, the key shareholders should assess their tax situation and the potential tax consequences of the IPO. Key shareholders are often surprised by the various tax implications, risks and – in some cases – opportunities that can arise throughout the process. And key shareholders will often have to remain shareholders for a given “lock-up” period after the IPO.
Whether a company will face withholding tax will depend on where it chooses to locate its head office. The choice can also have a substantial impact on the tax efficiency of profit repatriation and income pooling. When selecting the head office location, companies must also be aware that they will need to carry out genuine business activities there.
Making changes to management An IPO will often involve changes to management or the board of directors. So it may be necessary to amend existing annual incentive plans or to establish new ones.
Incentive plans should be based on the key drivers for increasing shareholder value, over both the short and long term. Incentive plans can help to ensure the retention of important existing personnel.
Keeping track of expensesIPOs involve substantial expenditure on advisors, lawyers and banks. So it is important to consider how to allocate and structure these costs in order to maximize tax deductibility (including for VAT).
How EY can help you with your IPO tax planningIPOs involve many complex transactions and carry a variety of risks. Any misstep during the process can prove very expensive.
EY’s IPO leaders network has the expertise – across sectors and jurisdictions – to help your company to put the right structures in place and to avoid serious tax pitfalls.
Claus Kronbak is an EY Financial Accounting Advisory Services partner and the IPO Leader for Denmark.
His areas of expertise include small-, mid- and
large-capitalization IPOs, and merger and demerger transactions involving listed companies and companies that are being listed as part of the transaction. This expertise includes providing comprehensive advisory services relating to exchange readiness assessments, equity stories and pro forma financials.
He has more than 20 years’ experience working in financial services, and over 10 years’ in the capital markets field.
He is Chairman of the Exchange Committee of Danish FSR – Danish Auditors, a trade organization for the Danish audit profession.
Claus KronbakIPO Leader DenmarkEYOsvald Helmuths Vej 42000 FrederiksbergDenmarkTelephone: + 45 73 23 34 44 Mobile: + 45 25 29 34 44Email: [email protected]
Getting IPO ready
39EY IPO leaders’ insights |
“Key shareholders are often surprised by the various tax implications, risks and – in some cases – opportunities that can arise throughout the process.”
Optimizing taxes
40 | EY IPO leaders’ insights
Companies wanting to carry out an IPO in the EU must present three years of annual consolidated financial statements in accordance with International Financial Reporting Standards (IFRS).
An effective approach to IFRS conversion can be critical for an IPO’s timing, and the smartest application of conversion options can help make a business more attractive to potential investors.
Depending on its complexity, conversion from your current GAAP to IFRS can be very time-consuming, with tight deadlines.
Even after almost a decade with IFRS as the EU’s main reporting framework, our experience is that most companies start the IFRS adoption process thinking of it as a purely technical accounting exercise.
This is a mistake that generally has a number of unfortunate results: failure to involve all people with the required knowledge, business decisions taken in ignorance of the financial reporting
consequences, lack of reliability and speed in producing IFRS financial statements, and gross underestimation of the time needed to convert.
We believe that, in anticipating an IPO, companies need to apply a thorough conversion approach in order to effectively adopt IFRS to a tight deadline.
The diagnostic phaseThe first step is a detailed review to identify the differences between your current GAAP and IFRS requirements.
Each difference will be analyzed from an accounting perspective for its tax implications and impact on IT systems and processes.
The most effective way to do this is through workshops with your finance team, other relevant stakeholders and your IFRS conversion advisors.
This phase will provide a diagnostic report and a clear conversion road map, including
prioritization of activities and a detailed time plan.
The design and planning phaseThis phase aims to set up the structure and project management organization for the conversion.
One key task is developing customized IFRS work plans for high- and medium-impact accounting work streams, based on differences identified during the diagnostic phase.
Another is to train members of the core team and establish an ongoing training plan for all relevant people.
The solution development phaseStarting with issues identified by the diagnostic, this phase addresses the impact of the conversion on accounting, tax, business, IT and processes.
Accounting policies and related choices are analyzed and selected, and on this basis, the skeleton accounts, accounting manual
Converting quicklyHow can IFRS be implemented in a short time frame to make the most of an IPO window?Anamaria Cora
Getting IPO ready
41EY IPO leaders’ insights |
Anamaria Cora is an EY partner and the Assurance and IPO Leader for Romania and Moldova.
She has worked in financial services for over 15 years. Her areas of expertise include the auditing of large companies and the application of IFRS, and she also has wide-ranging expertise relating to the accounting, fiscal and legal issues of statutory mergers and divisions. She has worked extensively
on IPOs and bond issuances, as well as on due diligence assignments (on both the buy side and sell side) and has a great deal of experience working for clients in the oil and gas, power and utilities, telecommunications, and banking and insurance industries.
Anamaria CoraIPO Leader Romania and MoldovaEYBucharest Tower Center, 22nd floor15-17 Ion Mihalache Blvd., Sector 1011171 BucharestRomaniaTelephone: + 40 21 402 4000Mobile: + 40 723 685 685Email: [email protected]
and reporting package (which must fulfill all disclosure requirements under IFRS) are developed. Last but not least, training can be started.
The implementation phaseThe main outputs of the implementation phase will be: • The first set of IFRS financial statements,
prepared in accordance with IFRS 1• Approved accounting policies and
accounting manual• A finalized training program• Changes to IT and processes rolled out
As for most significant changes, the company may also benefit from a post-implementation phase, which assesses the implementation, addresses any items deferred and establishes a process to address changes in IFRS.
We have applied this IFRS conversion approach during numerous IPOs undertaken by our clients, and it has proved to be one of the critical ingredients to the success of the IPO and post-listing financial reporting.
“To start the IFRS adoption process and think of it as a purely technical accounting exercise is a mistake that generally has a number of unfortunate results.”
Converting quickly
42 | EY IPO leaders’ insights
Ambrosio Arroyo Fernández-Rañada IPO Leader SpainEYTorre PicassoPlaza Pablo Ruiz Picasso, 128020 MadridSpain
Telephone: + 34 91 572 50 05Mobile: + 34 618 726 453Email: [email protected]
Closing fastHow can the financial statement close process be improved pre-IPO?Ambrosio Arroyo Fernandez-Rañada
Companies going public face many challenges, including:• Reorganizing – and, if involved in an M&A
deal, combining with another business• Internationalizing as part of expanding
into mature and emerging markets
These challenges mean that, when getting ready for an IPO, companies must adapt their financial reporting processes and related IT systems.
In addition, new regulations and IFRS developments, including new disclosure requirements, will affect the financial statement close process.
Key tasks for a more efficient closing processWe have identified 10 tasks that will help the advance and fast closing of financial statements, create a more cost-efficient process and meet stakeholders’ expectations on financial data:
1. Create a timetable. It is critical to establish a timetable with your IPO advisors and auditors, featuring deadlines and responsibilities. Companies must establish realistic and well-defined reporting and review deadlines, communicate the closing timetable to those involved within the organization, and clearly set out the owners and reviewers of each task so everyone involved has a clear understanding of their role.
2. Establish common reporting standards. To avoid inconsistencies, companies must standardize accounting reporting standards (IFRS) across all locations; for example, by using a group accounting manual. They must also implement the same chart of accounts in each location.
3. Integrate financial IT systems. It is critical to integrate accounting IT systems across locations and create standard
disclosure schedules for inclusion in financial statements.
4. Anticipate new standards. Companies must anticipate the impact of new IFRS standards and evaluate the impact of early adoption.
5. Anticipate new regulations. Companies must anticipate the impact new regulations could have on their financial statements and disclosures, as well as on future results.
6. Revisit the routine estimation process. The estimation process should be reviewed at an appropriate level within the organization with enough time to ensure quality estimates are delivered on time.
7. Generate impairment and non-recurrent provision estimates. Companies must have controls and procedures in place for the timely identification of impairments and other risks so they can assess their impact on financial statements. This area should be regularly reviewed by the company’s key executives.
8. Establish links between tax and accounting departments. Regular and adequate communication and analysis between tax and accounting departments is needed to ensure income tax calculation is properly reflected in financial reporting, as well as associated deferred tax accounting.
9. Reconcile management reporting and financial reporting. This is critical in order to provide quality information about the different segments of the company and for risk management. It is vital to have a proper IT systems infrastructure to provide consistent data on all internal and external company reporting.
10. Obtain quality non-financial information. It is critical to establish adequate procedures and controls to obtain quality non-financial information to include in the financial statements (regarding, for example, litigation, guarantees and risks).
As you can see, advance and fast closing is all about:• Obtaining quality data• Integrating and standardizing systems,
processes and procedures• Automating reporting• Anticipating issues• Achieving the right level of managerial
involvement to achieve an efficient closing and compliance with reporting deadline.
Getting IPO ready
43EY IPO leaders’ insights |
“When getting ready for an IPO, companies must adapt their financial reporting processes and related IT systems.”
Closing fast
44 | EY IPO leaders’ insights
A spin-off is the process by which one existing listed company is turned into two separate listed entities. The underlying motive for most spin-offs is shareholder value generation, but this is not always the case.
Why a spin-off IPO?In general, investors like to create their investment portfolios themselves. And boards like to have greater focus and more resources for business development.Following a spin-off, both entities will be able to sharpen their strategy and investment story; the new entities will gain significant interest from stakeholders and, more importantly, the entities will be able to reorganize their funding structures and gain new funds for future investments.Furthermore, the management of each company may be improved by recruiting new board or management team members.
Unique challengesA spin-off IPO is not something CEOs and CFOs experience often during their careers, and it is a challenging process for
any management team and board.Spin-offs present a wide range of challenges, including:• Creating an interesting investment story• Handling all legal and regulatory matters• Avoiding tax risks• Managing the operational separation of
businesses The original entity being split will already have in place the required public company practices and processes. So these can, to a certain extent, be adopted by the spin-off entity.
However, in a demerger, these practices and processes will need to be refined for both entities because the context and scale will change.
Operational carve-out issues may be significant, especially those regarding IT systems. To secure a smooth separation requires careful planning, including for the resourcing of the IPO project.To avoid business disturbances, existing customers, suppliers, debtors and employees need to be given consistent, fact-based information throughout the process.
How EY can help with your spin-off IPOEY has been involved in a number of spin-off IPOs as an auditor and advisor. And we have supported many companies undertaking complex operational and financial carve-outs. In addition to the typical IPO-related services — such as financial, tax and IPO due diligence and auditor’s comfort letters — EY can provide entities undertaking a spin-off IPO with expertise and resources in several key areas: • IFRS carve-out financial statements
An EU prospectus must include three audited IFRS financial statements. The challenge in a spin-off case is that the corporate structure of the new entity will not be in line with existing reporting structures. And the figures for the new entity will often need to be prepared during the IPO process. In practice, this means the accounts are prepared on a carve-out (also known as combined) basis for the business to be spun off. The preparation needs more judgment than standard consolidated accounts. The carve-out statements must also be audited.
Growing apartHow can companies make the most of a spin-off IPO?Päivi Pakarinen
Getting IPO ready
45EY IPO leaders’ insights |
Päivi Pakarinen is a senior manager at EY Transaction Advisory Services and the IPO Leader for Finland.
She has extensive knowledge of transaction-related advisory services for both public and private companies, including acquisitions, divestitures and carve-outs. She is also experienced in IPO processes and has managed a large number of IPO-related due diligence assignments, led IPO readiness workshops and
provided audit and attest services in connection with IPOs.
Päivi has a total of 15 years’ experience providing transaction advisory and assurance services across a number of sectors, including retail and consumer products, chemicals, manufacturing and IT. She is an authorized public accountant with a deep knowledge of IFRS and local GAAP.
Päivi PakarinenIPO Leader FinlandEYAlvar Aallon katu 5 C00100 HelsinkiFinlandTelephone: + 358 40 754 8419Email: [email protected]
• Pro forma information Because of the nature of a spin-off transaction, there may be a need to include a report by auditors on the pro forma information in the prospectus.
• Operational carve-out A spin-off is a demanding process for any organization. Typically, the management and support functions have to incorporate the planning and execution of the separation of operational systems into their already busy schedules.
EY can provide experienced advisors to facilitate each step in each area of the process. For example, splitting the IT system can be particularly difficult. EY IT specialists can help you to identify the requirements of the spin-off company, and to carry out the split in a way that provides both entities with the systems they need.
Our experience of working on spin-off IPOs has highlighted the importance of building teams from across our different service offerings that can best respond to the wide variety of client needs that arise during this process.
“ A spin-off IPO is not something CEOs and CFOs experience often during their careers.”
Growing apart
46 | EY IPO leaders’ insights
Balachander Rajaraman is a partner at EY and the IPO Leader for India. He is also National Leader for Accounting, Compliance and Reporting.
His areas of expertise include the management of advisory assignments and audits, mainly for large corporates, in both private and public sectors.
Balachander has over 20 years’ experience advising corporate clients and is regularly quoted in the media on IPO-related matters.
Balachander Rajaraman IPO Leader India EY Golf View Corporate Tower Golf Course Road, Sector 42 Gurgaon, NCR Delhi India 122002
Telephone: + 91 124 464 4080 Mobile: + 91 9810062802 Email: [email protected]
Pankaj Chadha is an EY partner and the National Leader for Financial Accounting Advisory Services (FAAS) in India.
His areas of expertise include the management of
advisory assignments and audits, mainly for large corporates, in both private and public sectors. Pankaj has over 20 years’ experience advising corporate clients and is regularly quoted in the media on IPO-related matters.
Pankaj Chadha Assurance and FAAS Leader India For EY address, please see above. Telephone: + 91 124 464 4150 Mobile: + 91 9810038824 Email: [email protected]
Anticipating future risksHow should companies considering an IPO reassess their risk management?Balachander Rajaraman and Pankaj Chadha
A business considering an IPO is more likely to succeed if it carefully considers the impact of integrated risk, compliance and control functions on its financial performance.
The transformation from private to public requires a company to understand the impact its new stakeholders – both internal and external – will have on risk and compliance. These stakeholders typically include independent directors, auditors, regulators, analysts and investors.
The stakeholders of public companies, particularly regulators and investors, react negatively to surprises. Even positive surprises can suggest that a company’s control over its business is not what it should be. Effective risk and compliance management processes can significantly reduce the risks arising from such surprises.
When a company goes public, it must become more transparent, ensure compliance with a greater amount of regulation and open itself up to scrutiny from investors, regulators and analysts.
What is effective risk management?Risk assessment should be an ongoing, systematic process to identify and evaluate any possible future events – whether within the organization or in its external environment – that have the potential to affect its ability to meet objectives.
Effective risk management is the product of organizational strengths in a number of important areas, for example, the company´s ability to:
• Manage surprises – positive and negative – to investors, analysts and regulators
• Set and fulfill realistic and sustainable financial goals
• Anticipate and address regulatory changes and business risks in an efficient and timely manner
Additionally, the ability of management to communicate the company’s risk management policies and processes is important, as is the quality of its corporate governance, including its approach to compliance issues.
Setting the scopeBusiness dynamics change as the environment changes, or is anticipated to change, so risk management is a continuous process.
To determine the scope of the required risk assessment, organizations must develop an understanding of both the nature of their objectives and the types of possible risk. The scope is typically enterprise wide, but with a specific focus on individual business units and geographical areas.
Preparing for increased scrutinyIt is not enough, however, to just understand the required scope and put a plan in place to address it. Companies considering going public often carry out a thorough benchmarking of their risk identification and mitigation processes against their listed peers and the reports of industry experts.
To make sure it can withstand investor, analyst and regulator scrutiny, a company’s risk mitigation plan should be carefully deliberated and tested. The risk management process is as important as the final risk management plan, and investors will demand to know who is involved.
How EY can help you prepare your risk management frameworkEY has extensive experience assessing the effectiveness of risk management frameworks and processes, providing design and implementation support, and continuous monitoring and oversight through internal audits. Through this experience, EY has developed insights and knowledge that can prove invaluable to companies planning to go public.
Risk management after an IPO - The essential guide for IPO-bound companies
Getting IPO ready
47EY IPO leaders’ insights |
“The stakeholders of public companies, particularly regulators and investors, react negatively to surprises.”
Anticipating future risks
48 | EY IPO leaders’ insights
When companies seek to raise funds in public offerings of securities, discussions inevitably turn to comfort letters, which underwriters and other parties will commonly request before closing on the offering.
What is a comfort letter? A comfort letter is a letter issued by an auditor to underwriters and other requesting parties, providing a level of comfort regarding the company’s financial statements included or incorporated in the offering document.
In international offerings, the form and content of the most commonly used comfort letter is governed by the American Institute of Certified Public Accountants’ AU-C Section 920, “Letters for Underwriters and Certain Other Requesting Parties,” historically referred to as SAS 72.
The purpose of a comfort letterThe requesting parties, among others, are liable if any part of an offering
document contains a material omission or misstatement. A comfort letter helps them complete their due diligence procedures in connection with public offerings of securities.
The company’s auditor is typically asked to perform procedures relating to the financial and accounting data included in an offering document, and then issue a comfort letter. The sufficiency of the procedures the auditor is asked to perform is the requesting parties’ sole responsibility, not the auditor’s.
The limitations of comfort lettersWhen it comes to financial and accounting data in an unaudited offering document, the procedures the auditor performs are limited, with the ability to provide, at most, negative assurance on the unaudited financial information.
Negative assurance consists of a statement by the auditors that, having performed specified procedures, they have not noticed anything causing them to believe matters
do not meet required standards and, for example, unaudited condensed financial statements do not require any material modifications to conform with generally accepted accounting principles.
If negative assurance cannot be provided, the auditor can perform other agreed-upon procedures and report on the findings.
Serious challengesThere are many complex rules and regulations surrounding the issuance of comfort letters. In addition to the limitations on the type of comfort an auditor can provide, auditors are only able to comment on matters relating to financial reporting – their area of professional expertise.
Auditors are also unable to issue comfort letters including capsule financial information relating to a company’s fourth fiscal quarter or full fiscal year before audited financial statements are issued. This is because this financial information is subject to change.
Comforting thoughtsHow can companies address the challenges posed by comfort letters?Sofia Kalomenides
Getting IPO ready
49EY IPO leaders’ insights |
Timing is also critical. For the auditor to provide negative assurance, the cut-off date by which comfort letter procedures are performed must be less than 135 days from the end of the most recent period on which the auditor has performed an audit or review.
How EY can help you deal with comfort letter requestsEY has extensive experience of comfort letter issuance. We can provide practical guidance on comfort letter requests to help clarify expectations, avoid misunderstandings and make sure complex and costly procedures are performed on time.
For further information about SAS 72 comfort letters, please visit www.aicpa.org.
“EY can provide practical guidance on comfort letter requests to help clarify expectations, avoid misunderstandings and make sure complex and costly procedures are performed on time.”
Comforting thoughts
Sofia Kalomenides is an EY partner, the IPO Leader for Central and Southeast Europe and Greece, and the Head of Accounts and Business Development for Central and Southeast Europe.
Her areas of expertise include auditing Greek and US listed companies, including conversions to IFRS and US GAAP, and advising on IPO transactions in Greece and the US.
Sofia has over 28 years’ experience in audit services, during which time she has worked for clients in a wide range of sectors, including shipping, construction, cement, oil, telecommunications, publishing and real estate.
Sofia KalomenidesIPO Leader Central and Southeast Europe and GreeceEY11th Km National Road Athens-Lamia144 51 AthensGreeceTelephone: + 30 210 288 6199Email: [email protected]
50 | EY IPO leaders’ insights
IPO planning and plan B optionsCareful planning and keeping your options open is essential for IPO success. Have you drawn up your road map?
51EY IPO leaders’ insights |
52 | EY IPO leaders’ insights
IPO planning and plan B options
For many fast-growing private companies looking to fund growth, the rejuvenated market is an attractive route to raising capital. However, it also presents a number of challenges.
Planning your IPOIdeally, planning should begin up to two years before the listing, taking into account a number of factors when designing an IPO road map:
• Decide whether an IPO is right for your business. Some businesses may not be ready for an IPO, and some may not have the right culture.
• Identify the best market for your IPO. There are a number of high-performing markets companies should consider, and the choice of venue needs to be carefully considered from a regulatory and financial perspective.
• Ensure a strong management team is in place. For successful pre- and post-IPO phases, the management team needs to have a blend of capabilities and a high level of experience.
• Prepare your business for life on a public market. Ensure the business’s systems, operations, reporting and corporate governance will meet the level expected
of a listed company.• Formulate your equity story. Outline a
clear direction and strategy to deliver growth and returns to potential investors.
Simple stepsWhen considering an IPO, companies should not underestimate the scale of the undertaking.
A few simple steps can make the process an achievable, value-enhancing journey:• Begin the IPO readiness process early
enough to allow time for getting the pre-listed company to function like a public company.
• Commit enough resources to build a quality management team, a robust
financial and business infrastructure, and a corporate governance and investor relations strategy that will attract the right investors.
• Carefully consider the level of scrutiny and accountability you will face as a public company.
Key tasksA good IPO planning process should include the following key tasks:1. Carry out an IPO readiness assessment
One of the first steps in preparing for an IPO is an IPO readiness assessment. EY can help with this, through a combination of direct observation, and interviews and workshops with senior management
Perfect planning What are the secrets to planning a successful IPO?Mayur Pau
IPO value journey
53EY IPO leaders’ insights |
Perfect planning
to help identify gaps that need to be addressed.
2. Formulate a strategy and road map Develop a strategy and road map to address all the identified gaps. EY can offer a range of services to help with this, covering governance, financial reporting, performance improvement, IT and risk.
3. Appoint trusted advisors Advisors should be appointed to help deliver the program of improvement initiatives, and IPO specialists should be enlisted to provide advice throughout.
How EY can help with your IPO planningFor decades, EY has been guiding high-growth companies and business leaders safely through the IPO process. Many of these have gone on to become major global organizations.
EY’s experienced team is supported by our Global IPO Center of Excellence, which provides a virtual hub for all our IPO resources and gives our clients easy access to the power of our network and knowledge.
EY‘s Guide to going public - Are you ready? We are.
“For successful pre- and post-IPO phases, the management team needs to have a blend of capabilities and a high level of experience.”
Mayur Pau is an EY partner and the IPO Leader for the Middle East and North Africa region (MENA).
His areas of knowledge include stock exchange assignments, lead advisory (buy side and sell side), vendor due diligence, pre-acquisition due diligence, commercial due diligence and strategic reviews.
He has led a number of transactions (including cross border), advising clients on flotation (AIM and LSE transactions).
Mayur has over 12 years’ experience working in corporate finance across a number of sectors, including financial services, hospitality and leisure, and consumer products. He has worked with many large corporates and private equity clients.
Mayur PauIPO Leader Middle East and North AfricaEYAl Attar Business Tower, 28th FloorP.O. Box 9267, Sheikh Zayed RoadDubaiUnited Arab EmiratesTelephone: + 971 4 312 9446 Mobile: + 971 56 655 4034Email: [email protected]
54 | EY IPO leaders’ insights
stream leaders, the PMO, leadership teams, the steering committee and other sponsors
• Create a stakeholder matrix, outlining key sponsors’ involvement and the activities they need to carry out, to ensure appropriate engagement
• Ensure the quality of the IPO process by implementing templates for the following:- The process for work stream, program
and executive reporting, including creating a management dashboard (e.g., status reporting)
- The process for the review, sign off and distribution of project communications and deliverables
IPO processes involve many different work streams and the input of multiple internal and external experts, such as management, legal counsel, investment banks, auditors, tax advisors, strategy consultants, investor relations consultants, financial reporting experts, employee benefit consultants, transaction support advisors and environmental advisors.
IPO processes are very time-sensitive, so high-quality project management is essential. And rapid changes are often needed, so it is vital to remain flexible.
To ensure effective IPO project management, it is important to have an IPO project management office (PMO).
Core tasks for an IPO PMO• Drive the IPO process and maintain a
focus on priorities• Act as a gatekeeper to minimize business
disruptions• Monitor deadline attainment• Escalate decisions, risks and issues to
management or the steering committee Setting up the PMOTo set up an effective PMO, you must:• Establish and document key IPO goals and
principles, including project scope, time lines and decision-making processes
• Define key responsibilities for work
- The process for managing project costs, including implementation of cost tracking tools.
- The process for submitting, evaluating and agreeing changes to project scope, costs or time lines
The planning process must ensure the clear identification, for each work stream, of the time, resources, dependencies and detailed activities needed to achieve key milestones.
Once you start operating the PMO, you will need to:• Identify internal and external resources
to support it, as well as individual work streams
• Prepare meeting schedules and reporting time lines
• Organize meetings• Conduct status reporting• Communicate PMO processes and
distribute templates• Solve problems
The following are examples of work streams that can be carried out by a PMO as part of an IPO process.
The EY IPO leaders network has extensive, proven experience running PMOs for IPO processes and advising companies on setting up effective PMOs.
Pulling it all togetherHow can a project management office lead to a smoother IPO?René Coenradie
IPO planning and plan B options
PMO
Management
Externaladvisors
Project decisionsand issueresolution
Progressreporting and
timetablemanagement
Investmentbanks
Core tasks for an IPO PMO
55EY IPO leaders’ insights |
Work stream Objective
Strategy and business plan
• Strategy confirmation
Restructuring and reorganization
• Implementation of new corporate structure and performance improvement
Documentation and marketing
• Regulated documentation and assurances
• Marketing and fund-raising
Financial reporting systems and controls
• Financial reporting
• Financial controls
• Financial accounting
• Information technology
• Preparation of long- and short-term forecasting
• Coordination of accountants, tax advisors and actuaries
Governance • Establishment of committees and procedures
Legal • Coordination of legal due diligence
• Collation of internal legal documents and provision of support for other work streams
Financial PR • Key messages and consistency
Acquisition strategy • Completion and integration
Tax structuring • Tax rate management and exit structuring
Incentive plans • Design and implementation
René Coenradie is the EY Partner responsible for Transaction Support Services in the Netherlands. He is also Leader of the IPO Center of Excellence in the Netherlands and Belgium.
His areas of knowledge include advising clients on IPOs and other stock exchange-related matters. He has led teams in a variety of transactions, covering pre-acquisition due diligence, mergers, exit and IPO readiness assessments, stock exchange admission and vendor due diligence.
René has been a partner at EY for 15 years, and has over 25 years’ experience in assurance and transaction advisory services.
René CoenradieIPO Leader Belgium and the NetherlandsEYBoompjes 2583011 XZ RotterdamNetherlands Telephone: + 31 88 407 8777Mobile: + 31 6 2125 1453Email: [email protected]
“IPO processes are very time-sensitive, so high-quality project management is essential.”
Pulling it together
Work streams that can be carried out by a PMO as part of an IPO process.
56 | EY IPO leaders’ insights
Getting the facts straightHow can an IPO fact book help companies carry out a dual-track process?Bjarte Petersen
Any company carrying out an IPO must collect and deploy a great amount of data.
This is needed for important documents, including prospectuses and marketing material, and responses to information requests from lawyers, investment bankers and the auditors carrying out due diligence.
To ensure consistency and efficiency in this process, it can help to compile an IPO fact book – a single collection of consistent financial and non-financial data.
Key decisionsAn important part of the IPO readiness process is the establishment of the company’s equity story. This must be supported by historical financial information, demonstrating its underlying trends and building a bridge to management’s business plan. When the equity story is established, the company should decide which KPIs to measure and monitor. These decisions should be reflected in its financial reporting in annual and interim accounts, and in its presentations and other communications to the market.
A complex processIn a dual-track IPO, the owners pursue different routes to exit in parallel. These can include an IPO or a trade sale to a strategic industrial investor or a private equity investor. Each route presents its own risks and opportunities.
Dual-track processes often involve strict timetables and highly complex tasks that are difficult to coordinate. In this situation, it is of great importance to have a single source of information and to make sure this is consistent and has been subject to proper review by management, and perhaps also the auditors. This single source usually takes the form of a fact book. Its content must be designed to meet the company’s specific needs, based on its sector and performance.
Preparing a high-quality fact bookThe financial part of an IPO fact book should be prepared in an integrated model, e.g., a Microsoft Excel workbook. The content should be prepared based on the list of financial information requests from the different work streams involved in the (dual-track) IPO process.
When populating the fact book, all information entered should be reconciled to other information in the fact book. All financial information should (where applicable) be reconcilable with the audited profit and loss statement, balance sheet and cash flow schedules. Information sources should be listed so that auditors, lawyers and others needing to verify the information can do so more easily, with minimal help from management.
An IPO fact book is often a joint effort from management and advisors, but it can be beneficial to have a single person responsible for coordinating the input and following up questions and requests from the various work streams.
In a dual-track process, the parties and potential investors involved in the different exit routes will have a lot of common information needs. As a single source of high-quality information, an IPO fact book can serve these needs.
IPO planning and plan B options
Bjarte Petersen is a senior manager in FAAS (Financial Accounting Advisory Services) at EY Oslo and the IPO Leader for Norway.
His areas of knowledge include IPO readiness-related services, internal controls relating to financial reporting, and financial audit of both public and private entities.
He has worked in EY Assurance for 12 years, and has substantial experience and knowledge in the retail and construction sectors.
Bjarte leads EY’s Transaction Advisory Services (TAS) Nordic Real Estate Sector Group. He is responsible for quality and risk management in TAS Nordics. And he is a member of the EY Nordic IFRS Desk.
Bjarte Petersen IPO Leader NorwayEYDronning Eufemias gate 6Oslo AtriumP.O. Box 20 NO-0051 OsloNorwayMobile: + 47 98 20 68 47Email: [email protected]
57EY IPO leaders’ insights |
“In a dual-track IPO, the owners pursue different routes to exit in parallel, e.g., an IPO or a trade sale to a strategic industrial investor.”
Getting the facts straight
58 | EY IPO leaders’ insights
In today’s volatile capital markets environment, it is essential to get the timing of an IPO right. However, the process’ considerable length means it is hard to predict whether the IPO will coincide with favorable market conditions.
For this reason, it is strongly advisable to plan and execute a dual-track strategy – in other words, to be fully prepared for a trade sale as plan B to the IPO. And a key success factor for a dual-track strategy is value-driven vendor due diligence (VDD).
The challenges of dual-track due diligenceThe trade sale strategy’s key participants are largely the same as those for an IPO: exiting shareholders, management and the investment bank, legal, commercial, tax and accounting advisors, and the company’s external auditor, and it is
crucially important that they work effectively as a team.
Despite numerous overlaps with the IPO equity story, a different perspective is needed to develop the commercial proposition for the trade sale. This is because capital market investors and potential buyers need different types and detail of information.
Depending on the type of business being sold, both private equity investors and strategic investors interested in combining the business with their own may be potential buyers. This means that, to prepare for all the potential perspectives investors might take when performing buy-side due diligence, the VDD process must consider the different information needs of these two investor groups.
Running an exit readiness diagnosticSimilar to the IPO readiness diagnostic carried out as part of the IPO process, an exit readiness diagnostic is a necessary first step to being fully prepared for plan B. Key areas of the diagnostic include a commercial and growth strategy; operational effectiveness; structural considerations; financial, tax and legal information requirements; and last, but not least, the effective and efficient preparation of a trade sale process.
The results of the exit readiness diagnostic will enable the creation of a detailed plan B and form the foundation of a value-driven, robust and independent review of the business – commissioned by the vendor, and relied on by competing bidders and lending banks.
Covering both exitsWhy is vendor due diligence crucial to a dual-track process?Daniel Mair
IPO planning and plan B options
59EY IPO leaders’ insights |
Daniel Mair is a partner in EY’s Transaction Advisory Services Restructuring Practice and IPO Leader for Germany, Switzerland and Austria.
His specialist areas include managing restructuring projects, buy- and sell-side transactions services projects, buy- and sell-side nonperforming loan portfolio projects, year-end audits of technology, communications and entertainment clients, and audit and advisory services for publicly listed companies.
Daniel received his federal appointment as Wirtschaftsprüfer (the German equivalent of Certified Public Accountant) in 2000. He has significant experience in the real estate, financial services and technology, communications and entertainment sectors.
Daniel MairIPO Leader Germany, Switzerland and AustriaEYMergenthalerallee 10–1265760 EschbornGermanyTelephone: + 49 6196 996 24703Mobile: + 49 160 939 24703Email: [email protected]
The value of VDDThrough VDD, all the questions likely to arise from different buyer due diligence processes will be answered at a time when the process is still under the vendor’s full control. This will result in a sales process where surprises remain limited and the vendor can run the process efficiently and create the highest possible value on exit.
EY is well placed to help with the VDD process, and our experience and credentials can help you get the most out of a dual-track strategy.
“ A key success factor for a dual-track strategy is value-driven vendor due diligence (VDD).”
Covering both exits
60 | EY IPO leaders’ insights
Digitizing diligenceCould a virtual data room smooth your IPO process?Matthew Lee
With an increasing number of transactions taking place across borders, transactors are beginning to consider different ways to make the deal-making process more efficient.Working across different countries with different technologies and the unavailability of hard-copy documents can add up to a frustrating deal experience, protracted timetables and value erosion.These problems can all be avoided if the process is carried out online using a virtual data room (VDR).
What is a VDR?A VDR is an online repository used for storing, disseminating and monitoring the use of documents and other sensitive information. VDRs are mainly used to facilitate the due diligence process during an IPO, M&A, private equity or venture capital transaction. Information can be uploaded and stored in many different file formats and can be accessed from anywhere in the world with an internet connection.
The benefits of VDRs• They can be securely, conveniently and
quickly accessed from anywhere, any time.• They remove the need to tie up physical
space for weeks on end.• They increase the speed and efficiency of
the deal-making process.• They enable a larger number of interested
parties to access data.• It is possible to restrict the printing
and downloading of certain sensitive documents to selected users.
• The audit trail function of a VDR allows for the tracking of documents accessed by specific users, and allows sellers to monitor and profile users.
• They are renowned for their security features, such as access controls, encryption protocols and document restriction capabilities.
• A VDR solution can attract more bidders to the M&A process, which may result in a more favorable purchase price for the seller.
The challenges of using a VDR• Because full reliance is placed on the
internet, all parties need adequate bandwidth.
• All documents must be available electronically.
• It can be time-consuming to upload large documents.
• There is no guarantee that the most sensitive documents cannot be copied by, for example, using the screen print function, photographing the screen or copying information down.
Irrespective of whether a VDR or physical data room is used, the quality of the data it contains is absolutely critical, as are timely populating of the data room and a prompt response to enquiries. Poor-quality, poorly organized data (virtual or physical) can erode underlying confidence and, potentially, value.
How EY can help with your VDRPreparation is crucial. EY has provided a range of services to many international clients to help them project manage VDRs. We can help identify a global leading VDR provider and provide a number of services to enable companies to optimize their VDR structure, including:• Preparing a suitable process strategy• Helping list information needed and
allocating responsibilities for document collation
• Structuring the data room index• Helping to populate the VDR• Following up with information for owners
to provide documents and documentation• Providing management with continuous
updates on data room status• Creating user access profiles• Gathering Q&A from the data room
and referencing questions to specific documents
• Providing relevant questions to designated information owners
• Uploading answers or information to the relevant data room section
• Providing day-to-day project management and monitoring VDR activity
Matthew Lee is an EY Transaction Advisory Services partner and the IPO Leader for Africa.His areas of knowledge include coordinating and executing complex cross-border sell-
side and buy-side services and listings.He has specialized in transaction support for the last 14 years, serving major clients, including larger corporates and private equity clients, across a range of sectors and geographies, including many African countries.Matthew sits on EY’s EMEIA Divestiture Advisory Services team and delivers sell-side and Transaction Advisory Services training around EMEIA. He is a regular speaker at conferences, and has spoken as part of the Gordon Institute of Business Science (GIBS) MBA program.
Matthew LeeIPO Leader AfricaEY102 Rivonia, Sandton Johannesburg, South AfricaTelephone: + 27 11 772 3025Mobile: + 27 82 329 5842Email: [email protected]
IPO planning and plan B options
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“ A VDR is an online repository used for storing, disseminating and monitoring the use of documents and other sensitive information. ”
Digitizing diligence
62 | EY IPO leaders’ insights
“How can I successfully exit my business?” This question is asked by entrepreneurs across the globe. The answer is relatively simple: keep your options open, be realistic with pricing and be prepared for anything.
The challenges of an IPOFor entrepreneurs, an IPO will often be the preferred exit plan because it provides an elegant way to step away from the business while converting part of their stock into cash. However, to list successfully, two major challenges must be overcome:• Preparing the company: this is time-
consuming, complex and costly, and there are plenty of obstacles.
• Getting the timing right: many companies make all the right preparation then find the IPO window has closed just as they are ready to list.
If an IPO is so difficult – with factors beyond the entrepreneur’s control – is it really worth pursuing? The answer is yes, but sellers
should plan other exit routes in parallel. Typical alternatives will be a trade sale to a strategic investor or a sale to a financial investor.
Preparing for a trade saleFor a trade sale, it is critical for sellers to look at the business from the strategic investors’ perspective: how will it affect their market and competitive position? What revenue or cost synergies will they achieve? How can it be effectively integrated?The key to a successful sale is to provide sufficient information to enable strategic bidders to understand what the combined business will look like (and be valued at), so that their bid can reflect the incremental value being created.
Preparing a sale to a financial investorFor a sale to a financial investor, such as a private equity fund, it is important to provide far more information on the commercial and operational aspects of the business than for
a trade sale. This is because these investors will not be as familiar with the business as strategic investors.Financial investors will expect a high degree of detail on trends in revenues, gross margin, EBITDA margin, capital expenditure and working capital requirements. They will also want to understand the business plan fully (and the link to historic performance achieved) and be sure management has the skills and motivation to execute it.
The common requirementsThese three processes – IPO, trade sale and sale to a financial investor – have unique features. But they also have common requirements, which can make a multitrack process more efficient.One is the equity story. Any investor – whether strategic, financial or retail – will want to understand why they should invest in the business. For example, is the company offering growth or yield? Is future growth going to be organic or via acquisitions?
Alternative exitsWhy should you run a multitrack process?Peter Wells
IPO planning and plan B options
63EY IPO leaders’ insights |
Peter Wells is an EY Transaction Advisory Services partner and the IPO Leader for the Czech Republic. He is also responsible for Transaction Support Services in the Czech Republic and Slovakia. He leads a team of 20 transaction support professionals working across the two countries.
Peter supported many major companies as they considered IPOs in Europe and the US, and as they sought to buy companies based in Central Europe. He has worked for EY since 1989, working for clients in many different industries, and has developed experience expertise in the telecommunications, technology and manufacturing sectors.
Peter is a seasoned transaction practitioner, and has led over 500 transaction support projects over the last 11 years.
Peter Wells IPO Leader Czech RepublicEYKarlovo namesti 10Prague 120 00Czech RepublicTelephone: + 420 225 335 254Mobile: + 420 603 577 898Email: [email protected]
A second shared requirement is the financial information presented. In any type of exit, there must be one core set of data prepared on an adjusted basis, in order to present the business in a consistent and comparable way.
How EY can help you run a multitrack processEY has a wealth of experience successfully advising companies on multitrack exit processes. We can provide all the services entrepreneurs need to assess strategic options and IPO and exit readiness. We can deliver performance improvements prior to the exit. And we can advise on all aspects of any type of exit – including alternatives that may not have been considered, such as a dividend recapitalization, bond offering or the forming of a strategic alliance.
“ If an IPO is so difficult – with factors beyond the entrepreneur’s control – is it really worth pursuing?”
Alternative exits
When you take your business public, it can feel like the process has a momentum all of its own. But you can stay in control by planning carefully right from the start. Find out how to improve your IPO readiness and IPO project management. Visit ey.com/ipocenter.
PREPARING FOR AN IPO CAN FEEL LIKE ROUNDING UP A HERD OF WILD HORSES.
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