Should IPOs be on or off your agenda?

Should IPOs be on or off your agenda?

Martin Hulls, partner and head of corporate at law firm Ward Hadaway, looks at stock market flotations and whether they are right for you.

The North East seems to have an on/ off love affair with stock market flotations – or IPOs (Initial Public Offerings).

If you go back to the early 2000s there was a great spate of them – but after that things went pretty quiet. In 2013 there were two – Kromek and Applied Graphene Materials – then in 2014 these were followed by Quantum Pharmaceuticals and just this year ScS returned to the public markets.  

Elsewhere in the country, IPOs have been happening with a greater degree of regularity, especially in the North West where there have been several in recent years.

Is there a theme, a common thread? Well, as you’d expect from a lawyer, the answer is yes and no! There has been a growing use of IPOs to enable investors, often private equity funds, to realise an exit for their investment, and many of these transactions have been at the larger end of the market.

Another clear trend is the number of technology companies seeking to go on the market as an alternative way of raising money. Both Kromek and Applied Graphene Materials fall into that category, as well as several IPOs in the North West. So is it for you? Well there are considerable advantages with an IPO compared to other forms of fund raising: the level of control exercisable by the external shareholders is considerably less than you would find with a private equity investment.

There is a market for shareholders to realise some of their investment; there is a ready source of further funding for the company; it can help to give the company an enhanced profile and reputation; it can use its shares to fund acquisitions. The key is the success of the business – if it’s successful, further funding should be reasonably easy to raise, but a company that runs into problems will often find raising funds from any source more difficult.

So why shouldn’t you do an IPO? There is clearly an increased public scrutiny of the company; the costs of floating and the ongoing compliance and regulatory requirements; the current directors may neither want to nor be appropriate to run a public company; the company’s value and its ability to raise further funds can be highly affected by factors outside the company’s control; the company may not be suitable for being on the public markets.

However, for a growing company with good opportunities an IPO can prove a great way to develop the business. In the North East we have some great examples of success stories such as Sage. More recently, companies like Utilitywise have really benefited from going on the public markets.

So how do you go about an IPO? The key is to appoint a NOMAD – in old terminology a stockbroker. The NOMAD is the key adviser – he will introduce potential investors, co-ordinate the process and finally approve the price that any shares will be offered at.

So what’s involved? Due diligence (legal and financial in particular), the preparation of the ‘selling document’ called the admission document and, most importantly, the directors going to meet and present the company’s opportunity to potential investors introduced by the NOMAD. It doesn’t sound a lot but it really is, and in terms of timescale that varies massively from six to eight weeks at the shorter end to many months of planning and preparation.

Martin HullsIn summary, I think for every ambitious, growing company an IPO should be on the agenda for consideration, even if you conclude it’s not for you. If, however, you decide it is for you it can be the start of a fantastic stage of development for you and your business.

For further information on IPOs or any of the issues raised by this article, please contact Martin Hulls at martin.hulls@wardhadaway.com or on 0191 204 4215.