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Brilliant IPO success stories such as those of Yahoo! and Amazon.com are
widely known. The reality for many IPOs is quite different. Studies by E&Y
and data from Securities Data Company reveal a more realistic picture.
Why do so many IPOs wind up with these results? One reason is that companies going public through IPOs face two challenging and concurrent transformations. First, the business evolution required to add profitable growth, positive cash flow, and shareholder value to their technology and product focus, and second, a cultural transformation from a private company or internal division of a large company to a stand-alone public Company. IPO executive teams face four critical challenges: 1) building and maintaining investor confidence to attract capital, 2) maintaining Company value through the IPO process and beyond, and 3) preparing the organization and employees to manage a public Company that meets the profitable growth, return on investment, and cash flow expectations of shareholders, and 4) executing the transition to a financially focused public company. Building and Maintaining Investor Confidence Attracting investment capital requires the new Company executives to demonstrate that they understand the investors’ financial return and risk requirements, and be able to convince prospective investors that the new Company will satisfy those requirements. They must demonstrate how the new Company will be competitive, profitable, and generate shareholder value in the short- and long-term. In addition, quick and confident responses to questions or concerns raised by securities analysts, investors, and lenders in financial terms must become second nature to them. Realistic plans are required to manage the critical transformation from a parent corporate culture to an entrepreneurial culture. Executives need to prove that their business model, strategy and operating plans will provide outstanding customer value, sustainable competitive advantages in technology, products, innovation capability, and a highly skilled and engaged workforce. Stringent regulatory requirements such as Sarbanes-Oxley must also be met. At this juncture, CFOs play a vital role as presenter and as supporter of other executive presentations and Q&A sessions with securities analysts, investors, and lenders. Maintaining Company Value during the IPO Process and Beyond Extraordinary cooperation on multiple levels can make or break the transformation. Dealing effectively with transition requires all executives to demonstrate the leadership necessary to quickly design and implement the critical change initiatives. Paramount to the process is continuous communication with all stakeholder groups. Doing so assures that everyone’s interests are carefully considered before and after the IPO and that commitments made are honored. This is achieved by Company executives and operating managers meeting frequently with major customers, suppliers, investors, and lenders to maintain existing and ongoing relationships. Continuous, open and comprehensive communication with employees is also a vital part of maintaining business focus. Frequent CEO, CFO, and senior operating managers updates for employee with personal visits to sites and through the company newsletter can achieve this. Business unit finance managers can lead on-going information sessions for employees where the financial reasons and benefits of the required changes in operating strategies and organization are discussed. Quick Preparation of the Organization and Employees to Manage After the IPO Management performance guidelines and rewards shift from those dictated by the parent to the new Company’s goals, strategies, and business model. At this juncture performance in many newly public companies changes to being judged by profitable growth and cash to a much larger degree. It’s essential to implement performance measures that encourage managers to focus on financial results, along with technology and product results. Without the parent company ’bank’ to fund investments, the new company must generate or raise its own capital funds, requiring a laser focus on cash flow. Quite simply, cash flow becomes a major factor in all investment decisions. Once established, it is vital for the new Vision, Values, Mission, short- and long-term goals and strategies be communicated in clear and unambiguous terms companywide. Aligning managers and employees with the new goals and strategies speeds the shift to a financially focused public company. At all levels, managers and employees must have a working knowledge of business finance terms and concepts to better understand the company’s financial goals, how it makes money, why the organizational changes are being made, and what is expected of them going forward. Sound financial knowledge is needed to quickly design and implement the critical change initiatives to transform the new company into a profitable public company. Business unit finance managers can use this time to build their working relations with operating managers, many of whom need financial counsel. For these reasons, managers at all levels must become shareholder value leaders, able and willing to help people in their organizations manage for profitable growth and positive cash flow in an ever-changing market place. Meeting the Challenges For businesses being spun off from large corporations, incumbent division managers are often appointed executives and senior managers of the newly formed pubic Company. While they fully understand the products and technology of the business, they have little understanding of corporate finance, since corporate groups normally handle investor relations, financing, and cash management. Not only do they face a wide range of issues never dealt with before - stock exchange and government rules and regulations and oversight [previously the purview of the corporation] – but also they find that the ‘corporate bank’ is no longer available to them. The new Company must generate or raise its own operating and investment capital. Managers who have not had return on investment and cash flow responsibility previously may be reluctant to take responsibility for financial performance if they are unclear about what their new roles entail and what is expected of them. Financial Management Development Strategy There are a number of ways to satisfy four collective objectives: building investor confidence, maintaining the value of the Company during the IPO process, preparing the new Company for speedy profitability to meet shareholder expectations, and successfully executing the transition to a financially focused public company. While senior management can elect to deal with each of the challenges individually, some companies take another approach. They start by providing executives and managers with the foundation upon which meeting all the objectives stand - strategic financial knowledge, information, and tools. Their plans are based on bringing all executives and managers into customized management development workshops starting immediately; followed by employee participation on a second tier. Not only does this prepare the managers for the IPO and successful operation as a public company, but it also shows prospective investors that the company is serious about increasing managers’ financial knowledge, skills, and commitment to financial results improvement. Strategic Financial Workshops Before launching the workshop program business unit executives and operating managers should be interviewed to determine their comprehension of the new Company vision, values, mission, goals, and strategies, and to determine how well they understand the Company’s new business model and financial performance measures. Even at the executive level there are often wide differences in knowledge and commitment. “Our workshops provided practical examples and exercises that focused on identifying what factors determine shareholder value,” the CFO of a newly public company said. “It was critical that our management discover the significance of the shareholder value. They needed to learn the most beneficial approach to interact with investors, analysts and everyone involved.” Workshops in several companies studied focused on six key challenges that Company executives and managers would face: 1) the business would receive more scrutiny from analysts, investors, and lenders than it did as an operating division or private company, 2) changes would be required in strategies, organization, and performance measures, 3) cash would become a significant factor in the Company’s success, 4) all managers would have two jobs – to build successful products and create shareholder value, 5) new ways to communicate the strategic and financial reasons for all changes to all employees would be essential, and 6) transformation of the organization to an entrepreneurial culture would be imperative. Executive workshops examine key factors that drive valuation of the Company during the separation and beyond. Financial valuation models can be used to illustrate how changes in income and expense impact the valuation of the Company and its share price. Senior managers must understand how their decisions directly affect shareholder value, and how to evaluate decisions about buying and selling businesses, long-term investments, financing, cash-flow planning, make vs. buy decisions, the effects of different strategies, and performance improvement measures. Specialists should be engaged to inform senior managers about areas requiring detailed understanding and analysis including government regulations, tax issues, currency issues, stock exchange rules and regulations, and financing options and tradeoffs. Operating Management workshops provide managers opportunities to discuss with other managers vital issues facing the business units, including:
Workshop participants profit improvement recommendations can be collected in every workshop and given to management for evaluation, selection, and funding. Planned results of chosen ideas can be added to individual and organization performance measures. Successful goal achievements should be publicly recognized and rewarded. The most effective implementations are often a top-down process with the information cascading throughout the organization from the executive team then filtering to middle management and to all employees. Results of the Financial Management Development Strategy Companies that have employed the strategic financial management development strategy report several results that include: 1) executives successfully responded to potential investors’ and lenders’ requirements, concerns, and questions, 2) the two major transformations proceeded according to plan, 3) managers demonstrated substantial increases in financial knowledge, 4) executives and managers learned to speak the language of business finance within the Company, and with investors, customers, and suppliers, and 5) the new Company’s business vision, mission, goals and strategies, market challenges and opportunities, internal Company challenges and opportunities, financing needs, and requirements for positive cash flow were documented and communicated to managers and employees throughout the company. Conclusion Strategic financial management development - when incorporated with other initiatives – can be a powerful force for change and profitable growth in business. Author: Penn Post PENN POST designs and conducts seminars that promote positive change within organizations. Incorporating proven tactics with unmatched success for 25 years, Mr. Post’s seminars include: Managing for Financial Success & Shareholder Value; Shareholder Value Leadership; Business Planning and Analysis; Growing Revenue; Profit and Cash Flow Management; and Sales Training. e-mail: penn@postassoc.com · Telephone: (949) 706-0623 Mr. Post authored Ten Ways to Improve Profitability, and is a Certified Management Consultant (CMC). |
