Here’s the good news: the IPO market is back with a bang. A line of companies stretching from London to the Wirral are preparing to list on the London Stock Exchange and the window of opportunity looks like it will stay open for some time, despite the situation in Ukraine.
But here’s the puzzle: in this frenzy of activity, some financial PR firms are seemingly prepared to give away their services for free or at cut-price rates, arguing that locking into a retained revenue stream post-float compensates for foregoing a transaction fee.
Fortunately, in cases where we have come across it, the company offering the mandate has chosen to pay on the premise that anyone giving away their services for free clearly doesn’t value the advice they are giving. And I hope such views triumph elsewhere, as this is a road to financial ruin and those that do it would be better off flipping burgers at McDonald’s.
This is not an argument based on self-interest. To explain that further let’s look at some of the dynamics in the IPO market. At the moment IPOs look easy; even with Royal Mail there was little debate around valuation. Such was the relief that the London market was open for business again that no one dared raise a red flag and that situation has continued.
Compare last month’s float of AO, an online appliance retailer, with MAID, Dan Wagner’s nascent dotcom company that floated in the mid-1990s. The latter was publicly grilled in a way that made an appearance in front of the Treasury Select Committee look like a walk in the park. AO, where the earnings multiples are every bit as demanding, was virtually unchallenged in the financial media (with the exception of a few).
This will not stay the case for long. In the past two years, it has been common practice for companies heading for market not to make available their pathfinder prospectus to potential new investors – something that never happened in the past. This document contains a lot of financial information around risk, remuneration, litigation and director track records. Those who want to be reminded how explosive these documents can be should recall PartyGaming at the turn of the millennium.
Institutions will not stand for this for much longer, and neither will the financial press. Good communication that focuses on valuation will become front and centre of the IPO process again and that is where financial PR earns its bucks. The bigger companies that are intent on floating know this already and have retained advisers for at least two years prior to listing. Some of the smaller ones heading for market and doing it on the cheap will come unstuck. A handful of these will get publicly roasted by fund managers, analysts and the financial media and, in the process, will suffer huge reputational damage.
So what is the moral of the story? It’s simple: taking shortcuts never pays. Financial communications play a vital role in the float process. Ignore that at your peril.
John Waples is senior MD and UK head of strategic communications at FTI Consulting