Business

Why Creating Value with Restructuring is a Necessary Part of IPO

Initial Public Offering (IPO) is the process by which companies seek funding from the general public. Equity share capital is raised for the first time by a company through the IPO route. IPOs are also a method to reduce leverage for the company, as equity shareholders are effective owners of the company. Prior planning and investor relations are important steps to be taken before the IPO process begins.

Companies fall under additional scrutiny after listing on a stock exchange. Regulatory bodies such as SEBI (Securities and Exchange Board Of India), BIS (Bureau of Indian Standards), RBI (Reserve Bank of India) and RoC (Registrar of Companies) along with others monitor the activities of listed companies and track the share price movements as well. As the general public is invested in the stake of public listed companies, they have to undertake compliance efforts.

Raising capital through an IPO investment is not a simple affair as investors are well educated and often consult experts on the matter before making buying decisions. The past track record of the company and financial ratios, of the company, are studied in-depth by potential investors of an IPO. A comparison of targets with actual results on a periodic basis is also made.

Companies must create sustainable value for investors in the pre-IPO stage. Often corporate restructuring, a change in management personnel or style, strategic sales or buyouts, joint ventures, or other business alliances are common before an IPO is raised by a company. There are several reasons for this trend:

  • Investor Scrutiny: An IPO is scrutinised by the public at large to determine the mission, vision and objectives of the company, before investing in a stake. Businesses must have clear models and a strategic vision aligned to create sustainable value for the stakeholders such as- shareholders, creditors, government, regulators and customers.
  • Expert opinion: Retail investors flock to specialist advisors and portfolio managers in order to get an insight into the buying decision of investing in an IPO. Companies that enrol to have an IPO are unlisted companies that are seeking to raise funding from the public. Experts comment on the financial performance and management of these companies in the media and to their clients as investment advice. This is a major reason why companies must look to create value in the course of the IPO process.
  • Public relations: After an IPO process is successfully conducted, the company listed on the stock exchange becomes a target for PR and media publicity. Companies must ensure a trust factor for the public for the IPO to be successful. Corporate restructuring is a significant driver for public relations of the company.
  • Precedent to operational change: For an IPO to work, there is a need for operational changes in line with management vision and the IPO objective. This objective could be one or many of the following – reducing leverage, exit plan for venture capitalists, geographical expansion, strategic diversification etc.
  • Strategic realignment: A restructuring framework enables strategic realignment to fresh goals formulated before the IPO was issued. Restructuring can include the introduction of a new product line, discontinuation of a loss-making category, re-branding, strategic buyout of competitors, joint ventures, mergers and acquisitions etc.
  • Effect on financials: The efforts of a company to create value for potential stakeholders before going public also have an impact on the financial ratios of the company. Investors, financial experts and even credit rating agencies scrutinise these indicators to judge the financial soundness of the entity seeking to list itself by an IPO. Regulators such as SEBI also inspect the financials of the entity seeking to raise funds by an IPO.
  • Opportunity creation: Investors invest in IPOs or trade in secondary markets based on their investible surplus, risk appetites and other investment vehicles available. However, companies can attract investors for the IPO by communicating a clear method of shareholder value creation and sustenance in the future. Also, any kind of restructuring builds the confidence of a potential investor in the action plan and overall strategy of the company.

Every company seeks to create value through its operations for its stakeholders- shareholders, creditors, customers, regulators, lenders etc. For a company seeking to raise money from the public by an IPO, this is even more important. A business may well sabotage itself if it takes no steps to enhance shareholder value by strategic goal realignment, operational changes and a general restructuring of the business.

Restructuring is part and parcel of the efforts taken by a company to differentiate itself from the competition. It calls for a strategic change of management vision, deeper goal orientation and alignment to the expansion goals of the company. The top management of the company raising money through an IPO is key to the value creation efforts of the company. They are the drivers of the strategic planning and execution of those plans.

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