Initial Public Offering (IPO)

IPO: Are you prepared?

Brad Douglas

Director, Global Capital Market Group, PriceWaterhouse Coopers, Russia

There is significant evidence to suggest that a well-prepared company with appropriate corporate governance will command an improved valuation premium by investors. It’s common sense. In the process of an IPO, management can optimize the valuation of their business and ensure that the IPO process itself runs relatively smoothly.

A well-rationalized and presented investment story is essential to communicate effectively with investors, intermediaries and regulators. Most important, it should clearly identify the unique features of your company that set it apart from its peer group and competitors and clearly articulates the objectives of the offer and the rational underlying them. Management focused on creating and enhancing shareholder value will be able to present their investment story to investors in the best light. You should explain your company’s market position, its strategy, how it is being managed to deliver shareholder value and the nature of activities that drive value creation.

Experience demonstrates that some of the most successful company IPOs are those where quality management have been in place for some time and have been able to prepare the business for an IPO. Quality of management is one of the most important criteria by which fund managers assess investment opportunities. Investors expect the board of directors and the management team to have an appropriate collective experience and expertise to run all areas of the business. Be prepared to justify your current board’s experience and structure.

Prior to an IPO your company may need to reconsider your company’s capital and organizational structure. Such structural changes may include the sale of non-core assets and/or business, or the simplification of legal and/or general corporate tax planning measures. The resulting corporate structure can raise issues of how the financial information is best presented to investors while at the same time complying with regulatory requirements. Early advice should be sought for issues arising in this area.

Effective corporate governance is the core of an efficient market economy. This requires shareholders to have the information, rights, and practical ability to influence management through the governance process in order to ensure that the company’s assets are being used fairly in the interests of all financial stakeholders. This involves both an efficient internal financial reporting system and controls, and external legal and regulatory mechanisms. If investors are unable to evaluate governance risk, they are likely to be reluctant to invest or they will require a significant premium to mitigate uncertainty. In many cases where the investor is unable to evaluate the risks associated with governance practices, equities may be inaccurately assessed. This disadvantages the company and raises the cost of capital. Market participants have numerous and vivid examples that show that poor corporate governance can destroy value.

The quality and standard of reporting demanded by the investment community and regulatory authorities is high. Institutional investors, both during and after the IPO, will require accurate financial and nonfinancial information to be produced efficiently and on a timely basis. The benchmark is extremely high. The investment community expect and the regulatory authorities require, a company to publish periodic financial and other information within tight time frames as well as publishing all price sensitive information immediately.

Answer the following questions to the text:

1. What is an investment story and what should it include?

2. What needs to be done prior to an IPO?

3. Why is effective corporate governance so important?

Russian IPOs: Expectations and Reality

Elena Khisamova

Vice President, ECM, Deutsche Bank, Russia

Since 2004, the Russian market has seen a real breakthrough in Russian companies’ initial public offerings and secondary placements in key sectors of the economy. The retail and consumer goods companies were particularly active, having pioneered the Russian IPO path with IPOs of the Seventh Continent, Lebedyansky, Pyaterochka and Magnit. We saw an increased number of landmark deals in other sectors, such as telecoms, metals & mining, oil & gas, energy and banking sector in 2006-2007, with multibillion Rosneft and VTB IPOs that once more proved a healthy demand from both domestic and international investors.

The Russian market is clearly coming of age, now fulfilling its primary function – providing capital for the growing local companies and facilitating further corporate expansion.

Last year Russian companies and those with assets in Russia raised in total $13 billion during IPOs with both international and local listings (LSE, NYSE, AIM, NASDAQ, RTS and MICEX).

The record number of IPOs in 2006 allowed us to speak about a sustained boom in capital markets activity among local companies and expect further growth in both numbers and volumes of IPO deals. 2007 showed this to be just the beginning as London alone saw $13.3 billion of Russian IPOs and the Russian market listings totaled $6.5 billion.

Companies representing new sectors of the Russian securities market, such as real estate, have been entering the IPO market recently with Europe’s largest real estate IPO of PIK group ($1.9 billion IPO), making investors see more exciting opportunities in the Russian market.

We see mid-cap and regional companies becoming more active on the local level that should be a potential source of more deals, especially on the domestic market. This is a positive sign for the Russian securities market, clearly showing that the local market is strong with real liquidity, which is why we can expect more and more IPOs with local listings on the RTS and MICEX.

However, investment bankers are cautious in their forecasts of IPO results in the coming months of 2007, with investors showing less activity than was earlier expected for the second half of 2007.

With investors being under pressure with the current situation in the US financial market and its inevitable impact on the global markets, it is quite understandable that the investor community prefers to wait and see how the situation develops in the nearest future. Meanwhile, the markets have evidenced a “flight to safety”.

The market is holding its breath while waiting for the coming macroeconomic statistics, The Federal Reserve rate revision and evidence of the recent crisis’ impact on the real sector of the economy which might influence the situation on international markets. In case of a consistent negative news flow coming in the next one to two months the situation might aggravate. And this will mean that investors will have to be patient and wait until markets improve.

The positive news for Russian companies is good fundamentals of the Russian economy. It is strong and showing healthy 7 percent annual growth and the macroeconomics forecasts for the next 5 years remain very positive for Russia. Experts say that the mid- and long-term domestic market will not be affected by the situation on the western markets.

Therefore, sooner or later investors will realize that Russia’s growing economy is the place to be to benefit from strong results of the Russian companies and promising perspectives of Russian IPO activity.

Answer the following questions to the text:

1. How would you describe the situation on the Russian market regarding IPO in 2004-2007?