IPO (Initial Public Offering)

IPO (Initial Public Offering) becomes an incredibly popular way of capital raising in the world. The Ukrainian companies also start to realize the benefits of public listing and join the world-wide incremental trend of raising finances through IPO.

Such popularity of IPO is explained by the unique opportunity for current owners of a business to get a fair price for the share of their business offered to the capital market. Another important factor is that current owners may offer for listing less than 50% of total share capital preserving by this way their control over key management decisions within the business. In addition, the current owners are free to choose between domestic and international stock market exchanges where to place the shares to maximize their bid price in the first day of listing.

If to compare the advantages of different financing forms the balance is constantly shifting in the world.

The stock exchanges compete with each other internationally as well as with another forms of financing (private equity, bank loans and venture capital). Some of them, like London's second market Alternative Investment Market (AIM), turned out to be quite successful in the year 2008 at attracting smaller businesses due to relatively low costs and eased regulatory regime. At the same time, the US based NASDAQ and NYSE have been experiencing hard times in attracting international IPOs due to complex new legislation introduced by Sarbanes-Oxley Act that required some time and efforts from both the companies and their advisors to fully digest its provisions. Starting from the year 2006 the rules regarding the costs and regulations became clearer on the US capital markets and now they are comparable with the rest of leading international markets.

The regulatory environment in Europe is also in the process of fundamental change due to the introduction of International Financial Reporting Standards (IFRS) that caused significant revision of IPO's plans for those international companies which were in the middle of their spade-work.

As a general trend, in the long term all the leading international stock exchanges are likely to meet the clients' demands for lower costs and wider global reach.

The major Ukrainian stock exchange (PFTS) was set up in 1996 and since then demonstrated continuous growth of its index and volume of trading up to the 4th quater of 2008 when the interntional financial crisis caused drastic fall of indexes all over the world. It still remains limited by the little number of shares in issue and investors who take part in day-to-day trading. The communication of PFTS with the world leading exchanges is also not developed enough to guarantee the best share price to the business from IPO listing. As a result, regardless of the significant preparation costs and complicated regulatory framework the strongest Ukrainian businesses prefer to arrange their IPO's on the international capital markets. But this trend again goes in line with the world statistics.

Through our international network of partners Alt offers you our full support on the long road of IPO. We closely monitor the changes in local legislation and regulatory regimes of the following stock exchanges:

PFTS (First Securities Trading System) - Ukraine;
LSE (London Stock Exchange) - UK;
AIM (Alternative Investment Market) - UK;
NASDAQ (National Association of Securities Dealers Automated Quotation) - USA;
NYSE (New York Stock Exchange) - USA;
RTS (Russian Trading System) - Russia;
MICEX (Moscow Interbank Currency Exchange) - Russia;
HKEx (Hong Kong Exchange) - Hong Kong (China).

The question of choosing the right exchange for your international IPO is important since it drives the value of shares. Besides the obvious factor of compliance costs, the exchanges should be compared by complexity of regulatory regimes, time to finalize your IPO and potential investors pool.

For instance, the major international computer software companies prefer the US market since they think it really maximizes their value. At the same time, the businesses from the energy sector soundly consider London as a target for their IPOs.

But for the companies that have just decided to go public the question what the international exchange to choose really takes the last place in their "to do" list. To our estimate, on average, the time period from the moment of strategic decision on behalf of IPO to the first day of listing may take not less than 3 years for companies from the former CIS. This timing estimate just seems to be exaggerated until the full scale of workload is disclosed to the management and shareholders. Basically, we are talking about the biggest internal transformation project the business has ever gone through.

It is one of the common expectation gaps that only accounting and financial departments realize the IPO project. In fact, these two departments just play their roles as communication center within the organization. But their efforts get useless without continuous support and information supply of other functions, the board of directors and the shareholders. IPO should be viewed as an investment project.

In our contacts with clients we like to stress the point that the more they invest in their business transparency, information system and business processes excellency the higher return they can expect from international IPO.

Companies planning their IPO in the international markets need to be aware of IFRS's effect on their activities and reporting. This effect for the UK based companies may be minimum but if we take such countries as Germany and France, the companies in these jurisdictions are likely to experience significant modernization of their financial information systems.

If we consider Ukrainian businesses, their full transition to IFRS may take a couple of years due to the following reasons:

significant educational gap regarding IFRS of Ukrainian accounting profession, management and shareholders;
lack of general corporate accounting policy applied by all the companies of the group;
lack of reliable integrated information system to consolidate financial information from all the controlled subsidiaries;
significant gaps between IFRS and National Accounting Standards (NAS) which have to be evaluated and reconciled;
poor system of management financial control including performance measurement under IFRS, budgeting, cash flows and fair value calculations;
lack of proper communication chain between production, marketing, logistic, legal, tax and financial departments; financial staff is not just calculating what the others have done but it must also receive relevant and timely management information from other departments to evaluate leases, provisions, assets impairment, NPVs of the projects in progress, etc.

The above list of potential barriers is given here just as a general guidance and is not exhaustive.

By giving some examples of the likely barriers we would like to demonstrate that transition to IFRS is not just a purely accounting technical issue. To get unqualified audit opinion for the financial reporting prepared on the basis of IFRS the business is to initiate and realize the fundamental change of itself internally and externally.

The auditors of the business on its way to IPO look not so at the particular balances and transactions but consider the business processes and information system on its adequacy to produce the final accounts in line with IFRS requirements. The external change presumes much higher level of transparency and new communication standards in relation to the general public and capital markets. In general, the business becomes much more complicated and expensive but its value in the eyes of investors increases accordingly since they get an independent professional assurance that this business reports its financial information under IFRS.

As a common trend, the Ukrainian companies are significantly undervalued. Their real financial position and performance can only be demonstrated by the two successive years after adoption of the IFRS reporting system. Thus, the investment to such a system is very likely to produce a high rate of return as long as the IPO project has been realized.

The next step after the strategic decision to go public has been taken by the owners of the business comes to IPO diagnostic. That is the stage at which Alt can contribute our professional strategic advice. We undertake a comprehensive analysis of the current state of your business to evaluate its maturity for IPO on a specified stock exchange.

Our diagnostic report covers the following IPO related issues:

current value of your business under IFRS after re-statement of its local financial statements to IFRS; the re-statement process is carried out as a one-time technical accounting exercise based on the best possible information available within the organization;
comprehensive analysis of the business structure and processes to identify the areas where the value can be maximized including possible disposals, acquisitions, re-organization and tax implications;
evaluation of the feasibility and effect on the shareholders value after IPO projects which are going to be publicly announced as part of the IPO promotion program; the investors like to know what the cash form IPO is going to be spent on; the proper presentation of such projects and their convincing valuation may be the crucial factor for success of your IPO;
schedule of your IPO project estimated progress with detailed description of risks and value drivers at each stage including IFRS "to do" list;
detailed analysis of regulatory regime of the chosen exchange including compliance costs during the first and 3 successive years of the listing;
estimated costs to finalize IPO project by its key stages as well as the price of shares during their first day of listing.

As a completely new long-term project for any Ukrainian business, IPO almost certainly presumes the participation of external professional advisor, especially at its first organizational stages. The choice of such advisor is, no doubt, a crucial decision for the project's success.

We are always ready to demonstrate you that we know what we are doing. From the first day of our engagement we will start to supply you with a reasonable load of well-structured information relevant to your business situation. As an objective of primal importance, we will create a mutual understanding of the general concept of your IPO project, its key stages, likely costs and benefits. At the beginning of the project we perceive our services more as of educational nature then of practical one. But this stage can not really be ignored. You, as a manager or shareholder, should be armed with a full set of all-round information regarding IPO to take successful tactical decisions on the later stages of the project.