Investor-Relations Support

For some private companies, the lure of going public may be too much to resist. Practically instant growth, and the chance to put business on a faster track, are certainly tantalizing.

More than $180 billion in finance was raised by underwriters over the past ten years for thousands of companies.

Even so, why are many new companies left feeling like stock-market orphans after the hoopla and initial-public-offering process is completed? Why do the strongest only get the full support of their underwriters after the IPO tag falls from the stock?

Part of the reason is investor relations (IR), a strategy used by public companies to disseminate their business objectives to the financial community.

Of course, the underwriters' unwritten rule is that they provide coverage of the company after the IPO process, according to Sarah Mavrinac, research director on a recent IPO survey conducted by accounting giant Ernst & Young. About 30 percent of these companies, she noted, are "orphaned" immediately after the IPO is completed.

Indeed, most newly-public companies are satisfied with the IPO process overall, according to another IPO survey, released by Stapleton Communications, a Mountain View, Calif.-based investor relations firm.

Almost 90 percent of the 200 technology companies surveyed by Stapleton said they had chosen the right underwriter for them. The Ernst & Young survey found that nearly 72 percent of the 474 responding companies were satisfied with the process.

However, when it comes to aftermarket support, companies in both surveys were less than pleased. Mavrinac said that many of the companies without aftermarket support didn't invest in IR. These companies fall into two categories: those that don't properly value IR and those that do but don't know how to engage IR strategies.

"[IR] is key in developing relationships with the investment banker and analysts," Mavrinac said, adding that the companies that do, generally pick-up coverage quickly.

"Today, companies, rightly or wrongly, expect underwriters to hold their hands a little bit after the IPO," said Stapleton President Deborah Stapleton. The survey found that in many cases, respondents felt their first research report was not as timely, comprehensive or positive as they would have liked.

"The IPO process has become a commodity," Stapleton added. "Every firm conducts the IPO process in basically the same way. What sets banking firms apart is their ability to place the stock with the sought-after long-term investor, and to be there to support the companies long after the deal is done."

While 90 percent of the respondents in the Stapleton survey believe that they chose the right underwriter, 81 percent wished they had conducted more research before their selection.

On average, the companies looked at 8.13 underwriters before their selection. The vast majority, 93 percent, said they had absolute confidence in their underwriter and were well prepared for the roadshow.

Ranked on a scale from one to five, underwriters got 4.34 for their overall support and commitment during the transaction, but that number slipped to 3.76 for their support and commitment after the transaction. The Stapleton survey gave an average rating of 3.60 to underwriters' ability to place shares with long-term investors. While companies named a strong research group as the top reason for choosing an underwriter, companies were also "underwhelmed" with the quality of research they received from firms in their IPO syndicate.

According to the Ernst & Young survey, the failure of managers to adequately prepare themselves and their employees for the responsibilities of public life may have some impact on their companies' long-term performance.

"Almost all 90 percent of our respondents report making some change in the company's policies and procedures," Mavrinac said. The most popular change, made by 90 percent of the companies before an IPO, was to create an IR strategy. And 68 percent reported making changes in their board structures, while 62 percent reported making changes in their executive-compensation systems.

Mavrinac said successful firms launched changes in their IR, internal-control systems, financial accounting, executive compensation and employee-incentive programs about one-and-a-half years prior to the IPO. The majority of "super successful" IPOs installed their IR strategy at least six months before the IPO, Mavrinac said.

When asked what they would do differently if they had a second chance, respondents' in the Stapleton survey concentrated on three main topics: timing, research and co-managers.

First, the old hats at the IPO process said they would focus more attention on understanding the underwriters' knowledge and background in a particular industry. Others said they would spend more time thinking about post-IPO events and changes to the business. Others believed the main issue is post-IPO support and the underwriters' ability to bring in additional market makers and liquidity for the stock.

Philip Scipio is senior editor at Investor Relations Business, a sister publication of Traders Magazine.