- Start-up to IPO
If your business is at the vital intersection between being ‘medium-sized’ and ‘enterprise-level’, chances are you’ve considered the IPO as a viable option. Going down this route can not only have a liberating impact on your company’s cashflow but can also set you on a path to exponential growth and success. SME Advisor is delighted to present the views of Hisham Farouk, Managing Partner, Grant Thornton UAE.
When is the right time for an SME to go public? Typically, when does a business make the shift to public?
Going public varies for each company and its growth agenda, however typically a company may decide to go public when it wants to raise finance and is in the growth stage of its corporate lifecycle. This also allows a company to maximise its shareholder value whilst the market is buoyant within the sector that it operates within. The advantages are that an IPO will strengthen governance, help raise capital and may assist expansion plans. The company must ensure that it issues an IPO at the right phase of its growth lifecycle. If a company issues an IPO too early, it could have a negative effect on the future growth of the business; likewise if a company waits too long they may miss out on the opportunity which a competitor may capitalise on.
What are some of the major challenges to be prepared for?
When a dynamic business issues an IPO, the benefits can far outweigh the challenges. However, every change brings internal challenges which need to be addressed. Firstly, internal culture towards an IPO needs to be managed as the ownership model of the business changes, so does the ‘way of doing things’. Secondly, interests and expectations of the minority shareholders need to be taken into consideration, given they have also invested in the business via shares and time. We must also remember that the share price of a company is exposed to fluctuations in the market and thus the level and command of control is shared amongst the shareholders.
How important is it to have an effective communication strategy in place when going public?
An IPO can create resistance to change from within the organisation; therefore once a company has made the decision to go public, it is essential that an effective communication strategy is embedded into the process. This will ensure that all internal stakeholders and employees, who are aligned to the company, understand the benefits of the IPO and that they are brought into the notion of going public, thereby creating acceptance of change. The communication strategy should also consider the external market, which would require a PR agency and an assigned media spokesperson, who is trained and well positioned to manage the key messages that are delivered to the external market.
How important is it to sustain and deliver strong PR in the line-up to an IPO?
There are certain regulatory parameters which must be considered and adopted when announcing an IPO, however a PR strategy is equally valuable and essential to the company in question. Through an effective strategic communications plan the firm has an opportunity to reposition itself in the market, announce its growth plans and inform key external stakeholders of the company’s position. An effective PR plan will also provide an opportunity for the company to increase its visibility in the market, thereby attracting external interest and investment into the company, which will provide further funding to aid future growth plans. A PR plan can also deter any negative press or messages from being articulated in the market, therefore a planned and active PR strategy is essential when considering an IPO.
What are the key steps in evaluating the financial health of a company before entering the IPO market?
Before going public, a company needs to ensure that its internal processes and financial management is structured in such a way which will further promote the company. Investors want to make money and the only way to do so, is to invest in a company that will make them money. Therefore, a company should ensure that it has audited financial statements to further illustrate how appealing it is, so that shareholders will invest. The company should then conduct various due diligence assignments such as financial, commercial, legal, tax and corporate governance compliance to further strengthen its financial health before entering the IPO market. You must remember that when a company issues an IPO, you are giving away a piece of the company to the public. Therefore, what they are willing to pay depends on your rate of growth and profit.
A shift from private to public can have a huge impact on business culture. How can SMEs ensure that there’s a smooth transition?
When a company goes public it will inevitably have an impact on the business culture as the ownership model changes, impacting every internal stakeholder and member of staff. Therefore, as mentioned earlier, this needs to be managed by ensuring there is an effective communication strategy in place both internally and externally to keep them informed at all stages as this will require a level of change management. Any company wanting to make the shift should appoint lead bankers and advisors, who will work collectively to ensure the company is transitioned effectively and can continue to support the SME post-IPO to further implement and support the change that will be required internally
What would you say are regional trends in terms of IPO listings? Do you see significant potential?
The recent economic developments in the region have led to greater potential in relation to IPOs. The IPO market is relatively strong in the MENA region recovering from the economic downturn, with increased potential predominately in Dubai, Qatar and Saudi Arabia. These GCC countries have attracted large IPOs, due to reasonable valuations which continue to drive the activity. There is significant potential across the ME market, if approached and managed effectively. We have witnessed an increased appetite to IPOs in the real estate & construction, financial services and retailing sectors in Dubai - which is positive and further reinforces the proposed growth within the region.
What would be the right way to approach current investors when looking at an IPO listing?
Current investors should be approached through a prospectus driven by a lead arranger.
Could you share with us top factors an SME needs to keep in mind when looking to go public?
I would recommend that SMEs consider the following when looking to go public. These are all factors which an advisor can support with, in order to ensure that the IPO is effectively managed:
1. Choice of market and timing
2. Tax and legal structures
3. Transparency and corporate governance
4. Financial reporting & track record auditing requirements
5. Appointment of experts & advisors
6. Strategy & funding requirement
What are some of the prime advantages that an SME can enjoy as a result of going public?
As mentioned earlier, there are great advantages to going public if the transition is managed effectively. Nonetheless, the prime advantages are as follows:
• Access to capital to fund expansion and growth (used for R&D, fund capital expenditure etc.)
• Creation of liquidity & potential exit for current owners
• Maximise value of the company
• Improvement in debt finance terms
• Enhanced loyalty of key personnel
• Increased public awareness due to brand awareness
Subsequently, the above may lead to an increase in market share for the company or may be used by founding individuals as an exit strategy.
What transparency and disclosure policies does the business need to set in place at the IPO listing stage?
The business needs to ensure that it is transparent at the IPO listing stage. Going public will require a great level of transparency as the business will need to share its financial details to the public and its shareholders on a quarterly basis. This will mean more stringent management and ensuring that this element of change is managed internally. Furthermore, the board will be required to share its decisions and disclose agreements more openly than before. Therefore, the business must ensure that it has a clear transparency and disclosure policy at the onset.
Is there any need to put into place a document entailing shareholder rights?
When listing the company, it is advised that a shareholder is effectively communicated to, with the duties and power clearly mentioned.
Is there a negative impact for existing Directors, in that they see their shareholding dramatically diluted?
As mentioned earlier, the company must ensure that they manage this change effectively internally. Initially, Directors may feel that this will have a negative impact internally especially when considering the possible dilution of autonomy and the increased risk and responsibilities that may be presented to them daily. However, when looking at the advantages of IPO, which far outweigh the disadvantages, the change management that is required will inform these key stakeholders of the benefit to them and the business. Increased profits means increased share value, which will impact them directly should they invest in the business. This model will also allow each member of staff, who subscribes to the shares, to feel like they are a direct stakeholder. The more they put into the business, in terms of effort and drive, the greater the financial reward for everyone.
Why do you think that IPOs are so relatively rare in the GCC?
The GCC, particularly Dubai, was founded largely by family-owned businesses. The first generation may be resistant to change or fear that an IPO will mean relinquishing control as external shareholders begin to own a part of the business that they founded and established. This ownership model is now seeing the emergence of the second generation, who have witnessed and seen other western companies go from organisations to large conglomerates as a result of IPO. Therefore, regionally businesses have begun to embrace the change and consider IPOs to further strengthen and support business growth.
Grant Thornton provides IPO readiness assessments and acts as a sponsor to companies seeking to list; we have seen several UAE family businesses evaluating listing opportunities in the effort to seek capital injections and to raise their profile regionally. A well-known Abu Dhabi bank expects six companies to go public in 2014, which is estimated to raise USD 2 billion. In 2013, the only sizable local IPO was Damac Properties, however it’s Management opted to list on the London Stock Exchange being valued at USD 2.65 billion post-offering. The last significant IPO which was valued over USD 1 billion, which was 15 times oversubscribed, was the port operator DP World Ltd, raising USD 4.96 billion in November 2007. After a seven year retreat, it is widely anticipated that there will be a return to this kind of IPO activity within the local market.
Do you believe we will see the creation of an IPO funding in Dubai in the same way as there is in Qatar?
In May 2014, the UAE was upgraded to emerging market status which we believe will further support the IPO market within the region, increasing investor confidence and creating greater traction. In Qatar, the Mesaieed Petrochemical Holding company launched the region’s largest issue, which raised $903 million (Jan 2014). When looking at the IPO activity in the UAE, the appetite for growth and the improved valuation has further contributed to a better IPO market in the region. The equation is simple and one which many businesses within the region have begun to consider - the better your growth and profit projection, the higher the price you will get for your stock, the less equity you will have to sell, and the more money you will raise, supporting business growth and expansion.
As featured in SME Advisor Magazine - September 2014