By Rob Starr, Big4.com Content Manager
A new poll from Deloitte reports over one-third of companies see timing the market as the largest issue when considering an initial public offering (IPO). Conducted during a “Deloitte Dbriefs” webcast zeroing in on today’s market and legislative environment for IPOs, the poll queried 3,000 executives across a variety of industries. Mohana Dissanayake, partner and audit technology industry practice leader, Deloitte, and Heather Gates, managing director and West region emerging growth company practice leader, Deloitte , worked on our questions together.
- What’s behind the finding that more than one-third of companies view timing the market as the biggest concern when considering an initial public offering (IPO)?
In Deloitte’s poll, timing the market emerged as respondents’ top concern when considering an IPO. Companies’ concerns about timing the market reflect the correlation between the performance of IPOs and the volatility index. Heather Gates, Deloitte Managing Director and West Coast Emerging Growth Practice Leader, Deloitte Services LP, points out that market volatility has a significant impact on the outcomes of IPOs, and a poorly timed offering can be incredibly difficult to overcome. In lower volatility markets, more IPOs have lower discounts to the offering price, after market performance results are stronger, and more IPOs are issued. The opposite is true as well– there were no technology IPOs in Q4 of 2015, when the volatility index was the highest it had been since Q1 of 2012. Investment bankers keep a close watch on overall market volatility to select the ideal time for a company to go public.
Furthermore, Mohana Dissanayake, Managing Partner US Technology Industry, Deloitte & Touche LLP, identifies high private company valuations in the recent past as putting a damper
on the market thus far, which also contributes to companies’ concerns about the obstacles of going public. You can get an IPO done but the question companies are grappling with is at what price?
- How do recent improvements as a result of the JOBS Act come into play?
The JOBS Act is intended to encourage IPOs of emerging growth companies, defined as companies with less than $1 billion in revenue in its last fiscal year. The confidential filing allows companies to commence the IPO process out of the public eye. Furthermore, it eases the transition from private to public by providing temporary relief from certain requirements of being a public company, such as compliance with Section 404(b) of Sarbanes-Oxley.
- How does the legislative environment factor in?
Gates predicts that a variety of factors will continue to produce uncertainty in the marketplace, including Brexit and the upcoming U.S. presidential election.
- What are the other challenges according to the Deloitte poll?
While 30.1 percent of respondents identified timing the market as their biggest concern, 28.7 percent of executives polled say building the right team and business infrastructure worries them the most. Even though going public can provide significant benefits, the process can be long and complex and impose a variety of burdens on a company. Gates points out that companies must prepare for distractions from their core business, reduced flexibility, significant increase in governance costs, greater potential for legal liabilities, and heightened disclosures.
Dissanayake advises companies to have strong people, systems, and processes in place to withstand the rigors of the IPO process. He points out that companies should anticipate resource demands and focus on accounting, financial, legal, business, and systems matters at least 18-24 months in advance. Gates also indicates that preparation is crucial not only for the
initial offering, but for establishing credibility in the eyes of investors in subsequent quarters.
Executives also cited attracting the right investors and analysts (20.4 percent), and to a lesser extent, advance planning and early adoption (10.1) as major challenges in their decision-making process.
- What trends are developing for the year?
Surprisingly, despite the slowest start in the IPO market since 2009, many respondents are bullish about an upswing in IPOs in the second part of the year. In fact, the poll found that nearly 40 percent of executives expect the IPO market to pick up modestly or substantially in the remainder of 2016. Dissanayake points out that, in the current landscape, there is no seminal event that has put the brakes on the IPO market compared with the IPO droughts we experienced after the dotcom crash in the early 2000s and the financial crisis in 2008 – this is why this feels more like a valuation driven slow down.
Dissanayake also notes that the IPO market has been filled by tech and health science companies. Deloitte’s poll found that over 30 percent of executives believe the technology, media and telecom (TMT) industry will issue the most IPOs in 2016, followed by health sciences (20.7 percent). Dissanayake also notes that technology has become more of a horizontal category, converging with other industries and sectors as they increasingly integrate technology into their business models.
Another trend Gates and Dissanayake have noticed is the ability of private companies to tap into the private market to raise funds in an IPO-like financing round, which has delayed the IPO process and the associated risks. More than half of the respondents of the survey (54.5 percent) believe that greater access to private capital would delay their pursuing an IPO to a moderate or large extent. This year’s increase in M&A market activity may be reflective of companies opting for other growth strategies instead of going public.
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