Pre-IPO Services

Keating International provides Pre-IPO services to companies in Europe for domestic and international listings. It has extensive experience have participated in selling IPOs in Europe and the USA and, in addition, of actually participating in two IPOs where it was an employee and CEO in the USA and Europe.


These services are focused on helping your company make the necessary preparations for selecting the investment bank and/or consortium to perform the listing. Plus, selecting the target investors that you would like to market your IPO to and have as shareholders in your company for the short, medium and long-term. 


Overview of the Initial Public Offering (IPO) Process


The Initial Public Offering (IPO) is one of the most important milestones in the life of a company, marking its introduction to a wider investment community and the broader public.  The rewards of going public are substantial.  Through an IPO, a company can raise a significant amount of capital and have substantial latitude in deciding where to channel the funds.  The stock market enables a public company and its shareholders to sell and buy equity with increased liquidity and at an independent valuation. 


Such liquidity and third-party established market valuations also increase the ability of a company to acquire other businesses with its stock.  A company will achieve greater prestige through public ownership and enjoy increased visibility through the research of investment houses as well as the financial press.  The improved financial condition and greater visibility that results from a public offering can also improve a company’s business prospects with its customers and suppliers.


While the rewards of public ownership are great, the IPO process is challenging and it is similar to a rite of passage.  The process can span several months, during which detailed information about a company, including its past and projected financial performance, will be subject to analysis by various experts and the investing public.  The company assembles an “IPO Team” of investment bankers, lawyers, public relations firms and accountants.


The greatest challenge, however, lies on the shoulders of the company’s management, whose ability to convey the company’s story to investors significantly influences both the success of the IPO and the perception of the company in the public market following the IPO.




·      Expand access to capital

·      Increase employee commitment and recruiting power

·      Complements product marketing

·      Expand business relationships

·      Facilitate mergers and acquisitions

·      Provides founders and shareholders with liquidity




·      Sharing corporate control

·      Sharing financial gain

·      Managing for shareholder value

·      Sharing strategic information

·      Start-up and ongoing costs of being a public company

·      Relinquishing control over personal assets invested in the company


Basic Offering Issues


A company’s first contemplation of an IPO is usually directed toward four interrelated issues: acting like a public company, timing, structure and valuation.  Investment bankers typically address these issues most directly, but a company’s Board of Directors, legal counsel and accountants can also provide guidance.


Acting Like a Public Company


In the two or three years before you anticipate going public, it is imperative to begin to think and act like a public company—develop a publicly held attitude and mindset—as soon as possible.  This includes addressing housekeeping issues such as cleaning up financials, establishing or reviewing internal controls, and reviewing company bylaws and share holding structure.


Prior to going public, a company should consider establishing and reviewing policies for corporate communications, developing investor and public relations programs, and setting aside resources to communicate with new consultants.  It is necessary to develop standards for timely annual and semi-annual filings with the stock exchange of choice and the related regulatory body and to prepare for after-market support for new vendors and current team members.


This prepares a company for going public and, better yet, being public.  It also saves on accounting fees and helps cut down on the stress and potential mistakes that are likely to occur during the process of going public.


IPO Timing


First, a company should consider whether it is indeed ready to go public.  Timing considerations should center on the predictability of operating results.  The more predictable a company’s results of operations and the closer it is to a long-term operating model, the more “ready” a company is for an IPO.  For companies, which do not have a long or consistent operating history meeting performance expectations for one or two additional quarters before going public can often add significantly to their credibility with potential investors. 


Examining the track records of comparable companies have recently gone public and their subsequent performance in the stock market provides useful guidance in determining whether a particular company is ready to go public.  A company that attempts an IPO before it is ready to run the risk of an unattractive IPO valuation, a postponed transaction, or even worse, disappointing investors with its operating results after going public. 


The revenue and profitability levels of companies, which have successfully gone public, vary greatly with each industry.  While sustainable revenue growth and consistent operating margins are a necessity for most IPOs, companies can go public with radically different financial models, depending on their particular business characteristics and industry.  As examples, software companies often go public with annual growth rates over 50% and operating margins of 20% or greater, while biotechnology companies can successfully offer their stock on the basis of long-term market opportunities, with losses continuing for several years before product revenues materialize.


A company’s management team should carefully examine the company’s capital needs and determine whether its financial condition should drive the time of the IPO.  Companies that plan to channel IPO funds towards the repayment of debt, important capital expenditures or time sensitive development projects may be particularly sensitive to the time of the IPO.  Other companies that do not have specific uses for the offering proceeds and plan to save the funds for long-term working capital may possess more flexibility on the timing. 


In order to attract the interest of major investment banks and institutional investors investing on the NASDAQ or similar exchanges abroad, a company must usually be able to offer a minimum of from U.S.$1.0 - 3.0 to U.S.$3.0 - 5.0 million of equity in its IPO.  An IPO significantly less than these amounts offer less trading liquidity and may be considered more speculative.  In general, larger offerings achieve a wider distribution in the investment community, as well as more active research and trading coverage.


The state of the stock market is always another important consideration in the timing of an IPO.  It is only natural for companies in industries that are currently in favor with equity investors to seek to catch the “open window” and sell stock when valuations and market conditions are attractive.  The stock market’s demand for new issues does vary greatly over time, and ongoing market conditions can change quickly and dramatically influence IPO valuations.  However, initiating and then rushing through the IPO process in order to catch an “open window” is inadvisable.  Sufficient time should be given to implement the process.  IPOs usually require a minimum of three months and stock market conditions at the time of the offering could be radically different from those at the start of the IPO process.  Stock market conditions should only be one of the several factors to consider in timing the IPO.


Offering Structure


It is advisable for a company to settle on a tentative offering size, both the dollar amount and shares offered, early in the IPO process.  The company’s capital requirements should be the primary determinant of the dollar amount of the offering.  While it is not imperative for the company to have designated specific uses for the proceeds of the IPO, the company should consider carefully the amount of capital it can effectively assimilate.


Based on the valuation and the number of shares outstanding, the funds raised for the company in the IPO will translate into the number of new shares the company needs to issue in the offering.  These shares are referred to as primary shares.  Secondary shares sold in an IPO are shares that have previously been issued and are owned by individuals, such as company founders and early inventors, or entities, such as venture capital firms and corporate partners.  When secondary shares are sold, the associated net proceeds go directly to the individuals or entity selling the shares.  Together, primary and secondary shares determine the total offering size.


Although it varies, the primary shares sold in a typical IPO will represent between 15-25% of the company’s total shares.  While a number of IPOs are primary shares, to the extent existing shareholders wish to sell secondary shares sold in the IPO are subject to certain practical limits.  Potential investors are typically sensitive to large amounts of selling by “insiders” such as key executives or board members because of the risk of the knowledgeable shareholders are “bailing out” of the company.  As a rule of thumb, if no key member of management is selling more than 10% of his or her holdings and the aggregate number of secondary shares is less than a third of the total shares offered the marketing issues should be relatively limited.


The size of the offering also affects the stock liquidity and potential price volatility in the period following the IPO, or the “aftermarket.”  The number of shares that are available for free trade in the public market is called the public “float.”  Generally a larger number of shares provide liquidity levels that are attractive to the large domestic and international institutional investors.  Smaller floats tend to be more narrowly distributed which causes decreased liquidity, as buyers cannot as easily be matched with sellers and vice versa.




For the company and selling shareholders, the cost of capital is lower with a higher IPO valuation because fewer shares, and hence a smaller percentage of equity, can be sold for a given amount of proceeds.  However, to a degree, a trade-off exists between a high IPO valuation and the aftermarket price performance of the stock, and it may not be in the best interests of a company to push its IPO valuation to the limit.  An aggressive valuation may increase investor’s expectations and put more pressure on the company’s performance in the aftermarket. 


Furthermore, a higher valuations given the higher starting price of the stock, is likely to reduce the stocks rate of appreciation.  Strong aftermarket performance is desirable because it generates credibility with investors, creates positive visibility for the company and increases the company’s ability to pursue follow-on finances.  Consequently, companies should seek the highest sustainable valuation rather than the highest attainable valuation.


An investment bank usually completes it preliminary valuation analysis before being retained by the company since its valuation analysis is an important criterion in the underwriter selection process.  Investment banker’s valuations reflect certain relevant business and operating characteristics of the company that are communicated by the company’s management.  During the IPO process, the investment bankers refine their valuation analysis to incorporate the changing business conditions and stock market environment.  Ultimately, however, investor demand determines the final IPO valuation.


The list of specific factors, which can affect valuation, varies for each company.  The most important determinant of valuation is the company’s past and projected operating results and financial condition.  Other factors such as competitive position, management team, industry growth potential, economic conditions and the state of the stock market also play roles in the valuation of the company’s stock. 


During the marketing of the IPO and in the aftermarket, the company and the investment banks will be marketing the company’s strengths, differentiating the company from its peers and addressing investor concerns.  The effectiveness of this “positioning” of the company will also have a significant impact on a company’s IPO valuation.


An analysis of the stock market’s current valuation of “comparable” companies is the most basic and most effective valuation tool for investment bankers.  The analysis involves compiling a set of publicly traded companies that best match the business, profitability, risk structure and growth potential of the company going public.  Generally, the best comparables are in closely related businesses and frequently include competitors of the company.  The company’s management may provide valuable input in helping to identify the companies. 


After the comparables list is assembled, the investment bankers compile a set of data for each comparable company and calculate various financial and market value ratios.  Ultimately, the investment bankers will use such comparables analysis to determine and substantiate the IPO price.


Because the IPO Valuation could very well reflect the lowest stock price a company will experience, many companies pursue a “seasoning” strategy, which involves a relatively small IPO and, sometime afterward, a larger follow-on offering.  With this strategy, a company structures a small IPO at a conservative valuation and allows the company and the stock to become better known or “seasoned” in the investment community.  As the stock price appreciates due to improving market conditions and/or as the company builds credibility with investors, the company can structure a larger follow-on offering at a higher valuation. 


In this scenario, the company’s cost of capital declines as additional funds are raised.  Furthermore, as discussed earlier, upward stock price momentum appeals to existing and new investors and generates positive visibility for the company.


Investment Banks


An investment bank’s most basic function is to serve as the intermediary between companies seeking capital and institutions and individuals seeking investment opportunities.  Because of the many challenges and potential pitfalls of the IPO process, early advice from experienced investment bankers is valuable.  For a typical IPO, a company retains two investment banks as “managing underwriters” to serve as the primary financial advisors to the company and to manage the offering process. 


For very large IPO’s three or more investment banks may be retained, and smaller IPO’s may be sole-managed.  When chosen to manage an IPO, an investment bank usually commits to providing aftermarket support in the form of investment research and market making for the new issued stock.


As the financial advisors and managers of the IPO process, the investment bankers draw on their experience in public offerings to guide the company through all aspects of the IPO process.  The investment bankers provide particularly important input on the timing, size and structure of the offering, valuation, preparation of the prospectus and marketing to investors.  In addressing these issues, the managing underwriters analyze the company in the context of their financial expertise and broad knowledge of the investing public and the financial markets. 


The investment bankers, particularly the managing underwriter designated as the “lead manager”, are responsible for leading the IPO team through the complex steps of the IPO process as well as creating and coordinating a group of other investment firms which will participate in the underwriting. 


The IPO process is time-sensitive and frequently requires consensus among the numerous groups and individuals who are involved, including the company executives, managing underwriters, legal counsels and accountants.  The leadership and experience of the investment bankers in coordinating the process contributes greatly to the success of the IPO.


The second role of the investment banks involves the underwriting and selling function.  After the distribution of the prospectus, the lead manager organizes a group of underwriters into a “consortium” to participate in the offering. A consortium is used to spread the underwriting risk and to help obtain the optimal distribution and visibility for the stock. 


As the selling efforts get underway, the managers receive “indications of interest” for purchase of the stock from institutional and retail investors.  Dealers and brokers, many of which are members of the underwriting syndicate, also receive indications of interest and request allocations of shares from the lead manager. 


Following the offering, the managing underwriters of the IPO provide ongoing services for the company through their investment banking, research, sales and trading departments.  The investment banking professionals involved in the IPO will provide financial advice and information to the company on an ongoing basis.  The research department of each managing underwriter will write and distribute reports which provide an evaluation of the company’s stock as an investment opportunity through an analysis of the company’s performance and detailed projections for the company’s near-term operating results. 


Such reports target an audience of institutional investors, brokers, and the financial press.  Active and effective research coverage can affect the stock price of a company by stimulating buying demand or selling interest.  For companies going public on the NADAQ or similar markets like AIM or EURONEXT, the sales and trading departments of the managing underwriters will devote resources to market making activities.  For a substantial period after the offering, the managing underwriters will be the most active participants in the trading of the stock. 


The managing underwriters familiarity and relationship with the major buyers and sellers of the stock and their active market making provide increased support for the stock.  Some investment banks will also provide valuable brokerage services to the company and its executives.


Selecting Investment Banks


By the time of the IPO, most private companies will have had some contact with various investment banks, and as the IPO approaches this contact will increase significantly.  During the final selection process for managing underwriters, which is typically conducted by the company’s top executives and Board of Directors, investment banks will compete intensely and can become very aggressive in promoting their qualifications.  While a management’s trust and confidence in individual bankers will perhaps be the most essential factors in the selection process, the following criteria give some important baseline considerations for evaluating investment banks.


1.     Experience and Focus.  Given the high stakes of a company’s IPO choosing managing underwriters with substantial experience in the IPO arena is absolutely necessary.  Experience in the company’s particular industry or niche, is instrumental to an investment bank’s ability to understand the business of the company and its ability to market the company’s story to investors.  Investment banks that focus on particular industries tend to have the greatest access to investors who are most likely to invest in such sectors. 


2.     Research.  The investment banks will usually designate a specific research analyst to cover the company.  The knowledge, focus and credibility of this individual can influence the success of the IPO and the demand for aftermarket orders.  Assessing these determinants can be accomplished through reference checks and examining the research analyst’s written reports and coverage universe. A company should also request a “positioning” statement from the investment bank to gauge its understanding of the company’s business and industry and ability to create demand for the stock as an investment opportunity.


3.     Sales and Trading.  A company should try to assess the sales and trading departments of each investment bank.  Investment banks will have particular strengths in certain industries and for certain types of securities.  In addition, the company’s distribution objectives should influence its choices of investment banking partners, as certain investment banks have a strong international or domestic institutional clientele, while others are more oriented towards domestic retail investors.  It is important to know how many clients each investment bank has in each area.  Plus, its annual trading volume as report by the relevant stock exchange.


4.     Credibility with Investors.  An investment bank’s credibility with key investors and the perceived ability of the firm to assess and provide good investment opportunities are critical to a successful offering.  As a result, it is to a company’s advantage to select and investment bank with a client base of quality companies and a strong reputation in the domestic and international capital markets?  Investment banks will generally provide their credentials and corporate client list to companies evaluating bankers.


5.     Commitment to Long-Term Relationship.  Choose an investment bank that can and will provide ongoing financial services as the company grows and is committed to building a long-term relationship.  Companies that receive quality investment banking services during the IPO and in the aftermarket will likely utilize the same bankers for general advisory roles, future financing and other types of transactions, such as mergers and acquisitions.  Information concerning an investment bank’s track record and ability to provide a full range of financial services to its client base will provide a valuable perspective.


The IPO Process


The entire initial public offering process is at once fast-moving and highly structured, governed by an interlocking set of laws, regulations and guidelines.  Each member of the IPO team has specific responsibilities to fulfill.  Members of your own team will advise you with regard to their specialty; however, you must decide what is best for your company.  Ultimately, the company calls the plays for the team.


Present the Proposal to the Board.  The IPO process begins with the management making a presentation to the board of directors, complete with business plans and financial projects, proposing that the company enter the public market.  The board should consider the proposal carefully.


Restate Financial Statements and Refocus the Company.  If the board approves the proposal to go public, your company’s books and records should be reviewed for the past three years.  Financial statements should be restated to adhere to the stock exchange’s and regulatory body’s standards.


Any intracompany transactions, compensation agreements, and relationships involving management or the board which are customary to private enterprise but improper for a public company must be eliminated and the statements appropriately restated.  Also, you should consider whether the market will perceive any exploratory affiliated operations tangential to your company’s core business.


Find an Underwriter and Exchange a “letter of intent”.  At this point, your company should select an investment bank as an underwriter for the issue if it has not already engaged one and formalize your relationship with the underwriter through a “letter of intent,” outlining fees, ranges for the stock price and number of shares, research coverage  and certain other conditions between the underwriter and the consortium it assembles for the issue.


Draft the Prospectus and Necessary Documents.  After the letter of intent is exchanged, your attorneys and underwriter should being work on the prospectus and necessary filing documents.


Respond to “Due Diligence.”  The next step is to ask your investment banker and accountant to begin an elaborate investigation of your company.  This should include a checklist of topics and procedures which serves as an aid in the due diligence process.  Your underwriter will examine your company’s management, operations, financial condition, performance, competitive position and business plan. 


Other factors open to scrutiny are your labor force, suppliers, customers, creditors, and any other parties that have a bearing on the viability of the company as a public entity and could affect the proper, truthful, adequate disclosure of its condition in the prospectus.  The accounting firm will examine financial information and such specific documents as contracts, billings, and receipts to ensure the accuracy and adequacy of financial statements.


Select a Financial Printer and Public Relations Firm.  Your company should select an experienced financial printer – one who is familiar with regulations governing the graphic presentation of a prospectus and has facilities to print sufficient quantities under severe time constraints.  A public relations firm familiar with the IPO process should be retained to help create interest in the offering and get the right message out to the investment community.


Assemble the Consortium.    After the prospectus and necessary documents have been filed and is approved for circulation among potential investors, your underwriter should assemble the “consortium,” consisting of additional investment bankers who will place portions of the offering to achieve the desired distribution. 


Your underwriter should also accumulate “indications of interest” – solicited through its efforts as well as the consortium’s – from institutions and brokers that have approached their clients.  These give assurance that the IPO is viable and help to determine the final number of shares to be offered, the price and the allocations to investors.


Perform the Road Show.  Next, your company and your investment banker should design and perform the “road show,” a series of meetings held with potential investors and analysts in key cities across the country and if appropriate, overseas.  The “road show” consists of fairly elaborate formal presentation on the company’s operations, financial condition, performance, markets, and products and services delivered by the company’s top executives, who are then available for questions. The “road show” has become increasingly important not only to communicate key information to investors but also to display the managerial talent and expertise that will be leading the company.


Price the Offering.  Your investment banker should recommend for your approval a price per share, taking into account your company’s financial performance and competitive prospects; the stock price of comparable companies; general stock market conditions; and the success of the road show and ensuing expressions of interest. 


While your company will want as high as price as possible, an offering that does not sell or sell completely will not be in your best interest, or the best interest of investors who may find the share price declining in the market after their initial purchase.  In fact, investors look for at least a modest increase in the market price to reassure them about their investment decision.


Measurement of Success


A success of an IPO can be measured by careful monitoring of several factors including the following:


Total Shareholders.  Is this number increasing or decreasing?  What is the rate of increase or decrease per year?  While market conditions and corporate events will have an affect on this number, a decrease does have implications for corporate control and future securities sales.  Aftermarket performance is crucial in the first few years following the issue.


Number of Analysts Following the Company.  A modest annual increase in the number of analysts producing reports on your company is desirable.  Just as important, your company should gradually be securing the following of the most well-known and well-respected analyst in its industry sector


Number of Stock Brokers Recommending the Stock.  A decrease in this number my call for increasing efforts to reacquaint brokers with the company if the decrease cannot be accounted for by your company’s industry being temporarily out of favor or substantial problems at the company.


Price-to-Earnings Ratio.   Is your company’s price-to-earnings multiple maintaining a position above the industry average?  Is it increasing or decreasing over time?  In line with the rest of the industry or counter to it?  More work focused on increasing the market’s valuation of your company’s stock may be needed.


Average Trading Volume.  Your company needs to monitor trading volume daily, particularly block volume, as a barometer of market sentiment and for advance notice of threats to corporate control or market upswings or downswings. 


Number and Quality of Inquiries to the Company.  The number of inquiries to your company over time will indicate in itself the range and intensity of your investor and public relations programs.  These inquiries can be analyzed further according to audience and geographical region. 


The quality of these inquiries—how much knowledge of your company, its industry, and the stock market is evident—will indicate the degree to which your investor and public relations messages are being understood.  To a certain extent, your company must educate its audiences—observing the appropriate level of sophistication and tact—not only your company’s characteristics but also its industry and competitors as well as the general business and economic environment.




In closing, it is important to note that the IPO is the beginning of a new existence rather than the end of a process.  Public ownership provides tremendous opportunity but the new responsibilities that arrive with it require a strong commitment by the company.  For a public company, communication and continuous interaction with the investment community are key elements in creating demand for its stock. 


While the stock exchange authorities and other regulatory authorities require public companies to file periodic financial statements and to disseminate certain material information to shareholders on a timely basis, a company should go beyond these minimum requirements.  An investor relations person or department should be designated within the company to handle this role once the company is listed on the stock exchange. 


Within limits of non-selective disclosure, a company should encourage securities analysts to obtain guidance on the company’s financial and business outlook through regular contact.  A company should also seek to maintain its relationships with its investment bankers while developing new ties to other securities analysts and market makers.  Through these actions, the company helps provide the market with full and fair disclosure necessary to determine the efficient prices for its stock. 


Life in the public market can be rewarding but challenging, and the IPO is merely the launching point.  Nonetheless, the IPO process serves as an excellent learning process for the company, and after experiencing its complexities, a company will be more prepared to meet the responsibilities of public ownership.