"Demystify the IPO Process"—Questions to Ask at the "Bake-Off"
The IPO is a significant milestone in a company's life cycle. For many private company founders, CEOs and CFOs, the IPO process can last to as long as six months. When a company's management (and backers) is making decisions on which banking firms to lead its IPO, the process culminates with what is often characterized as a "bake-off". During the bake-off, management and the board will have a series of meetings with potential firms to lead the IPO. However, as these meetings usually only last a short time (usually about 60 minutes), companies are often left with questions that go unasked and unclarified.
In an effort to demystify the IPO process for management teams, I've compiled a list of questions that should be asked during bake-off meetings which will help your company feel more informed about and secure in deciding whether or not to work with a particular banking firm.
"To what degree have the positioning and valuation thoughts in the pitchbook been vetted by your research analyst?"
Since the Global Research Settlement in 2003, the major banks have had to take a different approach to coordination between banking and research. While it is possible under the settlement for banking and research, with compliance, to "vet" information on a company they will potentially take public, how and when this happens varies by each firm's internal policies. Often, an analyst will not have had the opportunity to spend a lot of time with the company to formulate his/her thoughts prior to a bake-off. Because the research analyst will be talking to investors and ultimately could be publishing on your company, it's important to ensure you are comfortable with how they are thinking about your company.
"Tell us about your internal committee process and how you interact with them relative to our company throughout our IPO process?"
Each bank has its own internal committee process, in which it reviews each company it will underwrite. While the process is typically straightforward, from time to time issues may arise that could cause the committee to adjust or delay the IPO process. Recognizing that each firm has a committee process—and when/how often your banking team will meeting with them—can help your planning process.
"How could we expect valuation to change from what your firm is presenting today [bake-off] to when we print the preliminary prospectuses to start the roadshow?"
Typically, valuation adjusts in two primary ways:
1) The comparables trading at different multiples (compared to the time of the pitch).
2) The research analyst developing his/her financial model on the company, based on due diligence during the IPO process.
Additionally, if the market is not trading well, the firm may want to adjust the range lower, reflecting a larger IPO "discount". The price range the firm recommends to market the IPO is often decided by its internal committee or a subset of the committee.
"If we select other bookrunners to work with you to run the deal, how will you work seamlessly and consistently with them, and what can we do to facilitate this process?"
It was widely publicized on the Alibaba IPO that bookrunners divided up responsibilities (which is often the case). Other times, a "quarterback" is designated who often controls the process. It is important to understand how each firm works with other firms, and how comfortable you feel with how they will handle it.
"How will you interact with us through the roadshow, and how transparent will you be in communicating feedback, progress, etc.?"
The roadshow typically lasts eight to 10 days, and clarity of communication between you and your banking firms is critical during this time. During the roadshow period, management will likely host between 60 and 80 meetings with potential investors and you and your team will be exhausted running from meeting to meeting (and city to city). It is crucial that your team's communication style be cohesive with that of your banking firm, so make sure you understand how the investment banks plan to keep you informed during the roadshow.
"At the end of the roadshow, how will your firm determine what price you will recommend and how you will work with other bookrunners on this pricing decision?
While the press reports the level of over-subscription from investors on IPOs (as with Alibaba recently), this is generally a minor factor in how the deal prices. It is important to understand the factors the banks use to make a pricing recommendation to your company, and who from that firm is typically involved in making that recommendation.
It is also important that your company ask potential banking firms questions about their unique processes to assess if they are a good fit with your company. While these aren't all of the questions that should be asked, they will help your company (and backers) feel comfortable with the banking firm's choices, and ultimately help you get the most out of the IPO process.