IPOs Challenged By Changing Landscape

June 3, 2002
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Six of 10 entrepreneurs surveyed at Ernst & Young IPO Transformation CEO Retreat in May rated the current climate for Initial Public Offering (IPO) companies as “difficult but not impossible.”

More than 150 senior executives from 42 emerging North American companies attended the fifth annual conference survey, representing a wide range of businesses that included biotech, B2B exchanges, direct marketing, fiber optics and wireless providers, as well as law firms, venture capital firms and investment banks.

Executives attending the fifth annual retreat discussed the changing business and financial environment and the challenges facing pre- and post-IPOs this year. About 30 percent of conference attendees said they expected the global economy to bounce back in the first quarter of 2002, while 15 percent predicted the slowdown will continue a year or more.

The No. 1 business condition executives said they looked for prior to scheduling an IPO for their company was “greater investor enthusiasm.”

Furthermore, survey respondents felt the proceeds from their planned offering should initially go towards expanding business operations rather than paying down debt or creating personal wealth.

IPOs have raised more than $400 billion since 1970, yet studies indicate the majority of them under-perform in their first three years, according to Ernst & Young. A 10-year study conducted by the company revealed that “too many companies view their IPO as a transaction that essentially ends at the time they go public.”

The study showed that nine out of 10 IPOs fail to meet their pre-offering financial objectives. Why? Company officials in the study “repeatedly cited their failure to prepare for and grasp the magnitude of the IPO transformation process.”

The Ernst & Young research indicates that the keys to success for IPOs are preparation, sufficient lead-time and strong competitive position.

Some 53 percent of executives at the recent retreat said that one of the most important success factors was “acting like a successful public company before becoming one,” while 37 percent felt that a company’s competitive strength at the time of the offering — both financially and otherwise —was critical to long-term success.   

Other findings of the conference survey included:

  • 75 percent of those surveyed had never participated in an IPO as an officer of a company before now.
  • 54 percent of those surveyed felt that developing the business strategy is the single biggest leadership challenge for a pre-IPO company’s CEO.
  • 17 percent of those surveyed had only begun planning for their IPO in the last 90 days, while 22 percent had been planning for more than a year.

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