«Blackrock famously wrote in an open letter in 2011 that they were tired of having to make investment decisions based on a "single one-hour meeting" with a company. That served as a definitive reminder to companies about the need to start their communication with the market considerably earlier than had until then been the norm»
PART 1. FINANCIAL COMMUNICATIONS: BEFORE, DURING AND AFTER IPO
The route that privately-held companies need to follow as they prepare for life as a public company is long and winding. There is plenty of scope to miss opportunities, or to take costly wrong turns.
The article below is a practical guide to help companies manage this process effectively, to avoid the common pitfalls, and to ensure that when they are otherwise technically ready to float (for example, on Moscow Exchange), they are also ready to proceed from a communications perspective...
...and then following the successful flotation, to ensure they are well prepared for the next stage of their development – that is to meet the persistent demans that come with "life as a public company".
Chapter 1. Pre-IPO
One of the challenges that many issuers have faced to-date is that they have left it late to start thinking about market-oriented communications.
It's worth noting the famous open letter by Blackrock in 2011, in which the asset management firm said that they were tired of having to make investment decisions based on a "single one-hour meeting" with a company. That underscored the need for companies to start their communication with the market considerably earlier than had until then been the norm.
In other words, companies need to start developing their market profile prior to entering "transaction mode", before walking into that one-hour meeting with the likes of Blackrock on the IPO roadshow.
But how early is early?
The traditional answer (usually given by consultants) is that companies should start "as early as possible". In fact, this answer is overly simplistic, and ultimately unhelpful.
Whether it should be one year in advance, more or less – this is a question that needs to be looked at case by case.
But irrespective of the precise timing of the kick-off of the IPO process, there are three broad areas of focus for private companies to consider in advance.
|1. Establishing company profile in media||2. Starting dialogue with market / investors||3. Creating necessary communications infrastructure|
|Build relationships with, and educate, journalists whose views can ultimately influence market sentiment||Early engagement with the sell-side community; educating the educators||Build the in-house IR function; including defining the role of IR within the company, ensure effective coordination with PR, finance, legal, etc.|
|Expand media coverage around key company news flow||Targeted meetings with investors through conferences, NDRs; introducing the story||Develop the necessary IR collateral that conveys company's investment story – website, presentation, other materials|
|Get the company's story to the press, through interviews, feature stories, etc.||Institute a system of market and peer group monitoring and benchmarking; gather feedback||Introduce a robust system of corporate governance that not only ticks boxes, but actually works|
1. Pre-IPO media engagement – issues, considerations, recommendations
A company's objective should be to start building its profile in key financial media, i.e. the media that reaches and influences investors.
However, a company's first interaction with financial media can present a cultural challenge, as well as a real risk if not managed carefully. The rules of the game with the financial media often come as a shock to companies engaging with them for the first time. To begin with, the level of "control" a company may have become accustomed to previously with other media (regional media, sector-specialist media) will no longer be possible. Local regional media, for example, may well show a higher degree of loyalty and subservience than, say, Vedomostior the Financial Times. The approach therefore needs to be more carefully considered.
At the same time, while the company itself may become more interested in being featured in financial media, given its future capital markets plans, it will not always be obvious to the financial media themselves (who write for investors) why they should cover a privately held company, unless they know about those capital markets plans, and those plans are imminent.
A creative approach needs to be adopted to find areas of common interest – that are interesting and appropriate for the company to talk about, and interesting and appropriate for the journalist to write about.
For example, companies that are of a sufficient scale can get interest in their own results, provided that there are other publicly traded companies in the sector. In this case, the media will be interested insofar as they can gain insight and draw conclusions from the private company's results about the future performance of publicly traded names. Accordingly, the more the private company can present its results in the context of what they mean for the wider industry, the more media will be interested.
Companies can attract media interest by elevating their story above a simple company story and tying to link it to larger themes of broader investor interest. For example: the performance of Company X gives insight into key consumer trends; or the results of Company Y are a proxy for macro-economic trends, etc. Or companies can put their story into the context of themes that are currently "hot themes" for media – e.g. real examples of import substitution, or demonstrating strong performance despite sanctions (or, even better, strong performance thanks to sanctions).
In short, the company needs to show why its performance is of material interest or value to the investment community. (Sometimes this requires serious creativity.)
2. Pre-IPO investor engagement – issues, considerations, recommendations
When is the right time to start meeting investors? Any meeting represents an investment of time for both sides; both sides will always want to get a return on the investment.
To begin with, companies can make good use of short presentations to large groups of investors at the major Investment Bank equity / pre-IPO conferences. Companies can increase their relevance and interest to investors at this stage if they are willing to speak not only about themselves, but also to provide analysis about the wider sector in which they operate and the overall economic environment.
As capital markets plans start to form, companies should then look to supplement conferences with focused NDRs to reach a more targeted group of potential investors, and to get critical feedback on market sentiment that can be factored into the IPO marketing strategy.
Just as importantly as who to meet and when is the question of what to say. Companies need to think carefully about what they present. By definition, they will likely not have a long history of talking to investors, and may be facing for the first time the question of what to disclose.
As ever, there is not one single answer to this question. The main point that companies need to understand is that whatever they say at this stage will likely be remembered. (In other words, anything you say can be held against you.)
- Investors will not thank you if during your meeting you say nothing.
- At the same time, saying too much, presenting data that has not been subject to sufficient consideration or verification, or looking too far into the future will also backfire.
- A balance needs to be found. Say enough to be interesting, but while ensuring that you will be able to stand by what you said six months later.
3. Creating the right infrastructure pre-IPO – issues, considerations, recommendations
What to disclose and when
Following on from the above, when private companies first start to consider public disclosure to support their communications with investors (e.g. publication of operational / financial results), the question is what is the appropriate level of disclosure. The simple answer is that in order for the exercise to serve the intended purpose, the disclosure needs to be sufficiently detailed to give the market a meaningful picture of how the company is performing and an understanding of its future prospects.
For example, showing a headline revenue number without any profitability indicators may be of limited utility, beyond simply showing absolute scale. At the same time, private companies will not want to disclose information that can be abused by competitors. A fine balance needs to be achieved, balancing out future capital markets objectives vs current competitive considerations (inevitably what's good for one is not necessarily good for the other).
A related question is when is the right time to start giving material disclosure. The same considerations outlined above apply here. In addition, once a company starts to disclose material information, it is considered bad practice from a maret standpoint to then stop or noticably scale back. It is much better to start modest and build up, than to go all out at the beginning and then go into hiding. Promoting good results one day and then concealing disappointing results the next is not a good practice, and one that the market quickly sees through.
How and when to set up the in-house IR function
By the time a company has gone public, it is firmly expected that it will have in place a full-time in-house IR function. But for the many Russian companies to have gone public to date, this has been one of the final critical path IPO work streams to complete. Often days before the roadshow, sometimes during, and at times even after.
This is definitely too late. Firstly, it can send the wrong message to investors about the level of importance a company ascribes to "investor relations". In addition, many of the other issues outlined above can be more effectively thought through with an IRO in place.
In a perfect world, a company might have the IR function in place about a year before listing. This would enable the company to have dealt well in advance with many of the critical pre-IPO communications and disclosure issues. The market would receive a signal about the importance of investor relations to a company they may consider investing in. The company can go on the IPO roadshow with an IRO that is already familiar with the business and familiar with many of the investors. This can make for a more positive and predictable interaction with investors at the moment when it really counts.
This is not to say that there is no risk in creating an IR function a year ahead of a planned IPO. For any company that plans to list "in one year's time", the timing will always be very notional, and subject to change. If market conditions deteriorate and the IPO gets pushed back by
Moreover, there is a general principle that the more the IRO's pre-IPO job description can be expanded to add value to parts of the business that go beyond IR (eg strategy, corporate finance, etc), the more sustainable this position can be over a longer period of time in the event that public life has to be postponed.
And there are other questions. Where should the IR function sit in the existing corporate structure, how can the company ensure effective interaction and cooperation between IR and other departments, such as PR. These questions are complex and sensitive, and require a tailored solution depending on company specifics (from structural to operational, and from cultural to emotional).
Getting the right corporate materials in place
This area is thankfully less complex than some of the other challenges addressed earlier, but still very important. The key is to do the minimum requirements well, and then prioritize the rest depending on available time, resources and general preferences.
From the first time that the phrase "IPO" comes up in internal discussions, this is probably a good time to take a look at the existing website. In addition to serving existing commercial and corporate purposes, a company wants to be able to say 'yes' to the following three questions. Does the website tell the basic corporate story we would want to tell to potential investors if we were to meet them today? Does the website look more or less respectable? And is it reasonably easy to use?
If the answer is yes across the board, then this is probably sufficient to begin with. Typically though the answer is 'no' to at least one or more of the questions, in which case there is a strong argument to allocate some resource to fixing this.
In the increasingly digital age, the website should probably be the first priority. A company will also need a strong corporate / market-focused presentation before it can contemplate equity conference appearances and NDRs.
And then there is the subject of annual reports. Certainly a company that produces a world-class annual report before it is required to do so may get some kudos from the market. But if prioritizing, this is definitely one work stream that canbe deferred to post-listing.
Investors appreciate seeing INEDs pre-IPO, but want to see more:
- Independent directors who have relevant sector experience, who know the company, its management and current owners (i.e. not just high-profile names, the value of "lords on Boards" has run its course);
- Corporate reporting systems in place that go well beyond the financial statements provided to investors on a quarterly basis: these systems should enable the company to provide timely and accurate data to management and the board so that these bodies can properly manage and monitor the company's performance on an ongoing basis;
- Established policies and procedures – usually through a highly professional corporate secretary – that demonstrate the company will not just abide by the rules, but also adhere to best practice.
In other words, investors want to see corporate governance that doesn't just tick boxes, but that really works in practice.
Everything that is done in the pre-IPO stage, if done correctly, should help to create additional value beyond the business fundamentals. By the time IPO advisors are onboard, in order to maximise the chance of IPO success, a company should already have achieved the following:
- Built key relationships with the most influential (and relevant) Russian and international media
- Generated accurate and positive coverage of the company and its equity story in key media
- Presented the company and established a dialogue with key sell-side analysts (including those that tend to be most vocal during an IPO)
- Presented to investors through group and one-on-one settings, ensuring that the company is not a "new name" to investors by the time of the IPO roadshow meeting
- IR is in place, and functioning well
- A clear and effective disclosure policy is being implemented
- Key materials, including website, are developed
- A credible system of corporate governance has been established
Why do all of this
It all boils down to value. While these activities are less measurable than tonnes of ore processed or customer traffic growth (or EBITDA and net profit), they can have a material impact on the potential value of a transaction.
There is, however, an additional benefit that is often missed. Once the investment banks and lawyers for the transaction are onboard, the infamous "publicity guidelines" kick in.
A key principle of the publicity guidelines when it comes to communications is that "if you didn't do it before, you can't do it now". Hence, companies benefit immeasurably from having "done it before", so that they can continue to do it at the time when it really matters.
Chapter 2. The IPO
Officially, public / media communications during an IPO are very simple, and highly regulated. They essentially boil down to three core announcements: 1) the "ITF" (the first time when the company formally announces its intention to float shares on the stock market); 2) the Price Range announcement (when the company announces the indicative price range of the shares to be floated, and kicks off the road show; and 3) Pricing (when the deal has hopefully completed and priced). These press releases are largely standardised and look the same in every transaction.
While the investment banks will handle all of the direct syndicate analyst and investor communications themselves, below is an overview of what the public communications process looks like. At least in theory. Three press releases. Very simple.
The practical reality is very different. The real challenge is in the intense unofficial communications which need to be conducted in order to manage unrelenting media interest and speculation. The chart below is a reflection of semi-public IPO communications in practice.
Chapter 3. Life after IPO
First big results announcement as a public company: There are many parts to a results announcement that must be prepared in the short period of time between when the numbers are finalized and when they are published. While the main attention will be on the financial statements themselves, investors will also expect a press release that describes in the Company's own words the main reasons for its performance during the period and a presentation from management followed by a Q&A session about these results.
Some of the key areas that will help a company succeed with their first announcement are:
- Start early – even if the numbers aren't ready, prepare a detailed draft of the press release and presentation so that the "form" can be approved even if content is not yet ready.
- Tell the story in your own words – one of the classic mistakes that companies make when they disclose results is to do little more than repeating the information that is in the financial statements. This is both uninformative for investors and suggests that the company is not able to explain the reasons for its performance. Investors will expect the company to provide its own narrative and additional colour to explain the key factors influencing performance during the reporting period.
- Rehearse – management must balance its requirements to focus on the business with the importance of sounding confident and prepared as it presents results.
First annual report – annual reports are difficult and often seemingly thankless tasks. Thinking of the annual report as a good "spravka" that you should be able to open at any investor meeting to reference certain facts or messages is a good way to start thinking about the report. In addition:
- Start early. Very early. The classic trap is to think that an annual report should start once the year is over. Sensible practice is to actually develop and sign off the design, key messages and content outline in September-November – well before the year is over. (For those that work in somewhat bureaucratic companies, all it takes is a "rasporyazhenie" from senior management or a Board of Directors agenda item to make this happen.)
- Establish the sign-off and approval procedures at the beginning of the process. Nothing can be worse for a document that has taken months to prepare to have a key decision maker say: "this looks nothing like I was expecting" at the very end. Getting the sign-off and approvals right from the beginning, and at key stages in the process, will help to avoid this.
First time being legally required to disclose bad news – whether it is bad financial results, a regulatory setback or an emergency situation at one of the company's sites, investors will expect to hear about bad news in the same timely and accurate fashion as they expect to hear good news. While talking about the bad news can be extremely unpleasant, the companies that are prepared to do this, and that do it well, ultimately benefit more in terms of their ability to control the news flow around the bad news, and build credibility with investors.
Even after the first year as a public company, when a company has already gone through all the painful firsts, there are always issues that continue to present a challenge.
Many of these challenges have to do with balancing the demands and requirements of the local market regulator, with the demands and expectations of investors. For example – what to do with "sushfakty" – the local regulator might have a formal list of corporate events and actions that are considered "sushestvenny", but they are not always so sushestvenny for investors. And vice versa. Companies need to find a way to satisfy both regulator and investors.
Most companies start thinking about all of these questions too late in the IPO process, when their hands are largely tied and management has bigger and more pressing issues to focus on. Starting "as early as possible" is not the right guidance. But between as early as possible and when most companies actually start, the truth probably lies somewhere in between. And for those companies who do get it right, they make their lives much easier and open new potential in terms of how the market might value them at the time of listing.
Life after listing is full of new challenges. But whereas most companies will instinctively point to first results, first reports, etc. as the big challenges, the reality is that a bit of preparation and process defined early can turn these "challenges" into normal routine IR activities. In doing so, companies can free up their energy, time and resource to deal with real challenges. Shareholder conflicts or activism. Operational disasters. Financial crises. In other words, the challenges which make the first results release feel like a walk in the park.