SOURCE: The Boston Consulting Group

The Boston Consulting Group

October 26, 2011 00:01 ET

Although the Markets Have Turned Hostile to IPOs, Now Is the Right Time for Companies to Prepare for a Stock Market Listing, Says Report by The Boston Consulting Group

Companies That Complete the Time-Consuming Preparations During the Current Market Downturn Will Be Ready to Take Advantage of What May Be Short-Lived Opportunities When Prospects Improve

BOSTON, MA--(Marketwire - Oct 26, 2011) - The IPO market has been in the doldrums since the middle of the year, but businesses planning to make a stock market debut should use the opportunity to forge ahead with their preparations, according to a new report released today by The Boston Consulting Group (BCG). The report says that the current hostile environment is an ideal time to prepare for a listing, because waiting for a recovery may not leave enough time to complete the lengthy preparations before the next favorable window of opportunity slams shut.

No Time Like the Present to Plan an IPO: Prepared Companies Will Be First in the Queue When Markets Recover draws on a comprehensive survey of 1,062 IPOs on Europe's largest stock exchanges over almost a decade. It finds that the optimal time to launch an IPO is during "sweet spots," when stock market volatility is low and company valuations are above average -- periods that can be relatively short-lived, as the sudden downturn in the markets during the summer of 2011 demonstrated.

Drawing on BCG's experience in advising companies planning an IPO, the report says that the preparations often require fundamental changes to the organization that typically take a minimum of between 9 and 12 months. Ambitious companies seeking a stock market listing should have done most -- if not all -- of the work needed to launch a successful IPO before markets recover.

"While IPOs may have to wait until the gloom hanging over the market lifts, this is not a time to hunker down," said Axel Roos, the global sector area leader of BCG's Corporate Development practice and a coauthor of the report. "The chances of success with an IPO may depend on being ready to seize the opportunities as soon as they materialize."

The Early Bird Gets the Worm

The stock market performance of companies in the two years following their IPOs often disappoints. Two years after the European IPOs surveyed for the report, the stock price of the companies had on average fallen 11.4 percent below the price at the close of the first day of trading. These companies had also underperformed their sectors over this period by 11.8 percent on average, and their stock market's main index by 14.6 percent.

However, well-prepared companies that pick the optimal times to launch their IPOs can separate themselves from the pack. Not only is it preferable to launch an IPO during the sweet spots of low volatility and above-average valuations, it is also advantageous to make a debut during the early stages of market recovery.

"The chances of producing superior returns are enhanced if an IPO is launched ahead of the crowd," said Jens Kengelbach, a principal in BCG's global M&A team and a coauthor of the report. "The early bird gets the worm -- another reason to be ready to fly when the window of opportunity for IPOs opens."

The Anatomy of a Successful IPO

The two key variables in launching a successful public offering of stock are the proportion of equity issued and the price. The report's analysis of IPOs between January 2002 and May 2011 on the exchanges operated by the three dominant European stock-exchange groups found the following results:

  • Former owners stayed committed -- typically, companies offered only 35 percent of their equity to the public.
  • Most used their IPOs to raise capital -- only approximately one-third launched their IPOs purely to allow investors to cash out.
  • Pricing offered a relatively modest discount on fair value -- first-day gains averaged 8.3 percent on the offer price, which was much lower than historic underpricing levels in U.S. IPOs.

Almost half the IPO companies analyzed subsequently sold more shares through SPOs, almost invariably to raise further capital. These SPOs typically required a lower level of underpricing than the IPOs. The European IPO companies returned to the market almost two and a half times on average during the period reviewed.

The report sets out the extensive preparations required for a successful IPO. The aim must be to demonstrate to investors that the company has a compelling strategy and convincing financial data, and has prepared itself to meet the obligations of a listed public company.

Finally, the report reviews the experience of recent IPOs and secondary listings on Asian stock exchanges by companies from outside the region. It finds little evidence that companies that have cross-listed on Asian markets have experienced the expected benefits of increased liquidity in their shares, a broader investor base, or a higher valuation.

A copy of the report can be downloaded at www.bcgperspectives.com.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group

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