People get excited about stock market flotations because they are (or should be) an opportunity to make money – this applies primarily to new investors of course, but management and the original investors may also be out to cash in some of their holdings.
Yet it is important to remember that an initial public offering (IPO) is also a great way for a company to market itself, not only to investors but also to customers, suppliers, potential acquisition targets and others – the deal can be important to a company’s workforce, particularly if they stand to benefit financially.
It is therefore vital that news of the IPO is conveyed with the right emphasis and detail. If a management team has successfully built a business to the stage where it can share its success with the wider world, it makes sense to spread the message far and wide. Similarly, a business that has gone through an IPO and intends to raise more money will want people to know about it.
A good management team will already have a strategy in place and be able to convey it clearly, consistently and accurately. The directors will also be able to demonstrate their ability to take the business to the next growth stage, protect its position in its marketplace and deal with the sort of adverse conditions that affect all firms eventually.
Running a company is tough enough without the potential distractions of an IPO, so it is important to have the right team in place to help – one that understands your business and how the financial media work. Companies that understand the value of effective communications tend to be better at raising cash at the target valuation.
Investors don’t become buyers unless they understand the whole story. In reaching their decision they look closely at the admission document, do some additional research into the market and ask probing questions of the management team. But they will also want to know what others think of the deal.
The most effective way to convey the story to a wider audience is through the media. As part of their responsibility to help make their readers rich and avoid bad investments, financial journalists are always on the lookout for stories, good and bad. They too will want to scrutinise IPO documents and test management at interview before reporting an IPO and possibly delivering their verdict of Buy or Avoid.
When investors don’t understand the equity story – or do but don’t like what they see – the result is often a poor take-up at a low valuation and an overhang of stock, a situation that has occurred with at least one company in recent months.
Markets have long memories and when a company gets this sort of reputation, it’s a hard one to shake off.
As in all elements of business, it is important to manage expectations.
Openness and honesty about even bad news can win friends if early action is taken to turn a situation around. Most investors are in it for the long term and see a willingness to keep the market informed as a sign of strong management.
Running a business requires vision, hard work, resourcefulness and creativity.
Achieving all that, without getting some credit for it, doesn’t make sense. A sound communications strategy, well worked out and professionally implemented, will underpin a company’s fundraising and help lay a firm foundation for future growth.
This article appeared in AIM Bulletin