In the shadow of Facebook’s (FB) awful IPO comes this list of “commandments” for successful public offerings (IPOs and secondaries) by Nic Colas of ConvergEx:
Create The Illusion of Scarcity. The biggest challenge to a successful stock offering is to convince the base of buyers that there is much more demand than supply. Raising the price range of an offering a good sign. Increasing the number of shares is much more problematic and requires a “Measure twice, cut once” approach. It is, after all, a signal that the sellers – who are almost always better informed than buyers – think the price of the offering is compellingly attractive versus their knowledge of the company and its prospects.
Maintain a Consistent and Improving Narrative about the Business. For an IPO, there is a fairly long window between when you FedEx the initial documents to the Securities and Exchange Commission and the pricing of the deal. Months, in fact. Investors’ initial contact with the company comes when they read that initial filing. From that point on, they want to see and hear an improving story about the business and its prospects. If that means keeping expectations and commentary about the business modest at first, so be it. Trajectory is everything.
Make Management Available To Investors. Chairmen/women and Chief Executive Officers rarely achieve those positions without a healthy dose of self-esteem. And they often bridle at being quizzed about their company by investors who know much less about the business than they do. Fair enough, but it is part of the process and investment bankers need to deliver that message and get the most senior people to travel on the roadshow. My most memorable experience with rocks-star management was Lee Iacocca, the former Chairman of Chrysler, and a bigger-than-life personality. The key to making sure he was happy on the roadshow was to simply book the biggest hotel meeting space in all the major cities on the agenda. We called him “Sinatra” and he enjoyed the nickname. And he was happy to go anywhere and meet anyone after selling out the big rooms. Investors appreciated that, and I believe they cut the company a lot more slack over time because they had seen Sinatra up close and personal.
Talk to your fellow underwriters. The best capital markets officers I worked with always maintained an open dialog with their fellow lead and co-manager counterparts. More information about how the market hears a story is always helpful. And yet certain investment banks have a reputation for keeping things very close to vest. Caveat emptor there.
Know Who is Buying. “Building a book” is the tough part of any stock offering. How much is “Real” – legitimate orders from institutions who want to own the stock – and how much are “Flippers?” Sadly for many capital markets desks, buy-and-hold institutions now trade far less than faster-moving hedge funds. As deals heat up, customers will try to leverage their importance to the day-to-day trading operation of the underwriters in return for better a allocation.
Frank is an entrepreneur who owned four restaurants by the time he was twenty. He sold his businesses and returned to school, completing a concurrent Law / MBA degree. At the same time, he successfully completed all three levels of the CFA exams. He now invests full time with a focus on value investing. Frank Voisin writes about value investing topics at http://www.frankvoisin.com.
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