Once a company has decided to go public, it will evaluate the market to determine the best time to maximize its value. Timing the market is a major concern for pre-IPO companies because a lot of money is potentially at stake. In fact, about one-third of companies view timing the market as the biggest concern when considering an IPO. Because of the anxiety surrounding IPO timing, companies often look for market “windows” during which a public offering has a better chance of maximizing the valuation of the company.
This period of time, known as a market “window,” occurs when public investors are more receptive to purchasing shares in a newly public company. Hitting these elusive windows is a concern for many companies and can lead to major pricing setbacks if they are not prepared to act swiftly and execute the registration process when the right timing strikes.
This article will explore factors that can help companies to identify open market windows and will provide practical advice on how management can take steps to prepare for a pricing window and successfully time the IPO.
Factors That Help to Identify Open Market Windows
The Volatility Index
One of the strongest indicators of an open IPO window is the CBOE Volatility Index (the VIX) which measures investors’ expectation of market volatility over the next 30 days. Most companies prefer not to make an IPO during risky and uncertain times. Researchers have found that during periods when the VIX is higher than 20, the number of IPOs decreases significantly. When the VIX is below 20 for an extended period, the number of monthly IPOs increases dramatically, and the IPO window is considered “open.” An added benefit for companies that IPO during these market windows is that increased demand generally results in more favorable pricing.
Institutional investors want to make a return that sufficiently rewards them for the risk they take in investing in an IPO. Volatile market conditions increase investor risk, driving up the required return — which leads to a meaningful discount on a company’s stock.
Companies may be unwilling to decrease the stock price to a level that is acceptable to investors when the market is volatile and instead choose to wait for more stable conditions.
Underwriters work to find an offering price that satisfies both the institutional investors and the company going public. Finding that mutually agreeable price can be difficult even in good market conditions, but it is especially difficult in times of high volatility.
The desire of underwriters and institutional investors to protect themselves from financial and reputational losses conflicts with the company’s desire to raise the capital they need without excessive equity dilution. During volatile market conditions, a company can either decrease the price range to increase demand or delay the IPO until uncertainty decreases and market conditions improve. Both options can have their disadvantages.
In many cases, companies are not willing to reduce the price range of the offering to appease investors and underwriters, so they more commonly delay the IPO. Whether a company chooses to continue with an IPO during volatile market conditions or to wait for a short period until the VIX drops, the possible disadvantages of either option should be carefully considered.
Competition Analysis and Industry Outlook
The current competitive landscape and outlook of a company’s industry can influence IPO timing strategies. The actions of competitors can be especially impactful in emerging, high-growth industries where companies are fiercely competing for market share.
Nowadays, IPOs are no longer isolated events. They are capable of exercising a huge influence on all other firms in the industry.
There are several advantages when a company is the first to IPO successfully in a competitive industry. One of the biggest benefits is the ability to capture more market share by leveraging the infusion of capital and increased publicity generated by the IPO.
When a company goes public, it must report quarterly and yearly financial statements. While this information is important to investors, it can also be used by competitors to improve their own strategies and operations, putting themselves in an improved competitive position.
Steps to Prepare for a Pricing Window and a Successful IPO Timing
However, despite the many factors beyond a company’s control when going public, management can take steps to prepare for a pricing window and successfully time the IPO.
Engage external auditors early
A company that wants to go public needs to have audited financial and interim statements. It is easier and more cost-efficient to perform audits of financial reports in the normal course of business, rather than shortly before going public. As a company gains financial sophistication, it should also begin preparing quarterly financial statements. When companies go public auditors must ensure that previously issued financial statements meet the CMA requirements. Engaging external auditors early and ensuring independence standards are met is crucial to avoid derailing a company’s timeline.
Evaluating the impact of the compliance requirements upfront, rather than waiting until after the company begins the process of going public, will help to maximize the opportunity to hit the optimal market window.
Successful IPOs align these messages early, ensuring such consistency across all channels. This consistency ultimately helps to avoid confusion among the working group members and by the CMA when commenting on the registration statement, thereby limiting any potential delays.
Discover how acquisitions will impact the registration
Identifying the financial statement reporting requirements for all acquisitions and getting the auditor’s agreement early can be a key factor impacting a company’s ability to hit its pricing window. Many companies leverage previously engaged audit firms that maintained independence to upgrade the audits to CMA compliance but getting those firms engaged and comfortable with newly acquired subsidiaries requires thoughtful planning and coordination. Ensuring that the prior auditor maintained the regulator level of independence is imperative.
With the inherent risk that comes with a foray into the capital markets, companies that invest in preparation will be best positioned to raise capital when the right opportunity presents itself. By focusing on specific complex matters early in the process, management teams and stakeholders will be able to maximize the IPO pricing window when going public shifts from a long-term goal into a current reality.
Unfortunately, most of the timing issues related to pricing your IPO such as VIX levels and the industry outlook are out of your control. While you don’t have control over these factors, understanding them can help you recognize when IPO windows are open and when it may be better to wait.
A successful IPO requires careful planning. A company must prepare its management team and business units to begin acting and functioning as a public company, both internally and externally. Here at Sager IR, we believe that focusing narrowly on accounting and financial reporting matters surrounding the preparation of the offering document is the wrong approach – a cross-functional, holistic view to readiness is critical to preparing the organization to operate as a public company.
An experienced advisor can help the “going public” and “being public” processes stay on track. At Sager IR, we work diligently to spot opportunities to help advance your strategic agenda. We will assist in the development and execution of an IPO strategy that drives your long-term growth agenda while delivering value in the short term.
By pairing with an experienced advisor, your company can maximize its chances of hitting a market window and, as a result, raise more capital at a higher valuation.
Sager IR has a comprehensive set of integrated services to help you from the strategic planning stage through the execution of your IPO and then to prepare for life as a public company and beyond.