Too many small companies make a crucial, sometimes fatal, mistake when raising capital through an initial public offering (IPO) and listing on the Australian Securities Exchange. After intensely promoting their prospects before and during the float, these companies seemingly “go to ground” when their offer closes. Their stop-start investor relations efforts contribute to poor after-market share price support.
I see this pattern often, having interviewed more than 200 chief executives of newly listed companies and analysed their IPOs for the Australian Financial Review in the past five years. My work as BRW magazine managing editor early last decade, and before that Shares magazine, also highlighted a pattern of small listed companies with poor investor relations processes.
Here is what often happens. Instead of working only on the business, the CEO works almost full-time on developing a prospectus and promoting the IPO for three to six months. They meet extensively with broking firms and fund managers, depending on their company’s size, and do public or background media interviews. Some CEOs actively promote their company’s offer overseas.
Once the offer closes, the CEO understandably wants to focus on their main job and put the capital to work. A small exploration company starts drilling, a biotech increases its research, and a manufacturer makes an acquisition, for example.. But an absence of news after listing kills the company’s IPO momentum. Early investors lose interest, new buyers are missing, and the share price falls below the issue price – in turn sending a bad early message about the company’ s prospects, which can be hard to recover from.
Not every company follows this script. Some CEOs have the foresight to build on their IPO work after the float. They ensure their company has good news soon after they float, and spend up to a third of their time on investor relations. They build relationships with the investment community and media, knowing that smart emerging companies are perpetually in capital-raising mode.
A weak sharemarket and tough IPO market means CEOs have to work harder than ever to promote their company after listing. Seven in 10 IPOs in 2011 finished the year below their issue price. The median share price loss (compared to the issue price) from the 104 IPOs was 22 per cent. Only 11 IPOs raised more than $20 million; the median capital raising was a tiny $5 million as small explorers dominated IPO volumes in 2011. Eighteen companies were forced to withdraw their listing application.
This analysis shows two key trends: building strong after-market support for IPOs is becoming harder in a volatile sharemarket; and after raising less capital than first sought, many companies will have to bring forward their next capital raising. Those whose share prices have fallen below the issue price, and had poor investor relations strategy, will find the process harder. They may be unable to raise funds, or have to issue many shares at a lower price – and badly dilute shareholders – to survive.
It is not just IPOs that have to work hard on investor relationships. Small listed companies generally are receiving less attention in this market. Lower ASX trading volumes have seen more sharebroking firms cut back or axe their small-company research. Small-cap fund managers have lower fund inflows to put to work, as retail investors reduce their sharemarket exposure. Offshore investors who may have previously supported small-caps have to contend with the higher Australian dollar.
All of this means companies need to communicate clearly – before, during and after the IPO – to maximise their chances of success in a tough market. The best investor relations in the world will not help a newly listed company that misses its exploration targets or has disappointing research. And short term “company spin” may do more harm than good in the long run. But a well-considered investor relations and governance strategy can add significant value for newly listed companies.
Here are 12 points to consider:
1. Run like a listed company before you list
Many companies, especially in mining, are formed to buy an asset through an IPO. Those that have been around longer need to operate like a listed companies from at least two years before an IPO. This might involve forming a board, providing more formal communication to seed investors, lifting company reporting standards, and developing a clear environmental, social and governance strategy. The aim is for a smooth transition when the company goes from private to public.
2. Focus on the right share register
Any capital will do for companies that are struggling to raise their minimum subscription. Smart companies think about their share register before and during their IPO. They try to attract long-term investors who can provide stability to the share register and will participate in future capital raisings. Having a prominent small-cap fund on the register, for example, may attract others.
3. Communicate well in seed funding
The booming fast-food chain, Pie Face Holdings, is a good example. It produced a well-designed, well-written 36-page information memorandum for its $10-million capital raising last year. The report clearly outlined the company’s strategy and the capital raising attracted new investors, such as Macquarie Group. Early investors could see Pie Face’s long-term growth targets; some may stick with the company well after its intended IPO late this year or next, knowing it could be more valuable.
4. Think about service providers
The involvement of other firms in a float can be a strong investor relations tool in itself. Spending more on better-known professional services firms, be it accounting, law or geology, can make a big difference. Working with a better-known broker or corporate adviser also helps. This is not always possible and some small service providers do an excellent job with IPOs, but think about how other service providers sell the float to investors. Internally, an experienced chief financial officer can give investors more confidence in a company’s accounting, which is critical with unknown IPOs.
5. Get the board right
Small IPOs often take one of two approaches with boards. They recruit a “trophy” chairman or director, more for their name than what they contribute. Or the board has three of four directors (none well known as governance specialists), little independence, and does not comply with several ASX Corporate Governance Council Principles and Recommendations. It is such a lost opportunity. Thinking about board composition early, and showing a company has strong governance, can be an important selling point for IPOs.
6. The prospectus
The Australian Securities and Investments Commission has lifted its scrutiny of IPO prospectuses in the past few years and provided new guidelines on how to write disclosure documents. ASX also pays great attention to IPOs and their compliance with ASX Listing Rules. Yet many IPO still have prospectuses that regulators consider misleading. They contain forward-looking statements with too few assumptions; aggressive marketing, including unrealistic photos (often of producing mines); and too much generic information on risks. The company then wastes time and money producing supplementary or replacement prospectuses and is off to a terrible start before it lists. Spending more time on a clear, balanced, readable prospectus can make a big difference to IPO prospects and after-market support.
7. Watch the ‘spin’
Good CEOs find the right balance between promoting the company’s prospects while complying with continuous disclosures rules and treating all shareholders equally. Bad CEOs hype their company’s announcements, provide information to some investors before others, and only care about short-term gains. The hype quickly fades and the company damages its investor relationships.
8. Plan the news flow
Smart companies think about their announcements after listing, while complying with compliance obligations during the prospectus process, and continuous disclosure rules, and avoiding corporate spin (as per point seven above). An exploration company, for example, might announce assay results from its drilling program within months of listing. A biotech might announce its research progress. An industrial company might provide a quarterly update or release an investor presentation as a company announcement. But resist announcing meaningless news designed to inflate the share price. Investors soon tire of it.
9. Maintain the communication
Know that up to a third of your time as CEO could be spent on market communication and listing compliance issues. Aim to build long-term relationships with several broking firms and the media. Take advantage of services such as ASX’s small and mid-cap investor roadshows that help promote more-established small listed companies to offshore investors. Think about a regular investor communication program and how technology, such as webcasts and webinars, can help.
10. Spread the communication burden
In many small listed companies, only the CEO talks to investors, analysts or the media. That makes sense, but consider the role of the chairman and chief financial officer. The CEO might talk on all matters relating to company strategy. The chairman might talk on governance issues and broader industry issues where appropriate. The CFO might talk to professional investors and analysts on the company’s numbers. Of course, the CEO should be the focal point and there is nothing worse than mixed messages from having too many spokespeople. But with careful planning, a small company can maximise its investor relations effort and minimise communication risk.
11. Escrow anniversaries
I’m always surprised how little attention newly listed companies give to escrow anniversaries, when shares that the ASX deems as restricted securities are able to be sold a year or two after listing. All too often the company’s share price is hammered as seed investors dump their stock as soon as they can. Smart companies think about how investor relations before and during escrow anniversaries can minimise share register volatility. It doesn’t take much selling to crunch illiquid small stocks.
12. The next capital raising
The best emerging companies always have an eye on their next capital raising. They do not lose momentum when capital is raised. They know the name of the game is getting a higher share price that allows more capital to be raised, with less dilution from excessive share issuance. Even better is growing the company from its cash flow and issuing few new shares. But cash flow for most small IPOs is at best several years away. Survival depends on their ability to raise fresh capital, and a having strong, well-planned investor relations program to support the process.