Debt levels, management credibility top factors of IPO success: Ernst & Young

Firm warns lack of adequate preparation can jeopardize IPOs

TORONTO, Feb. 1 /CNW/ - Recession-battered investors now see low debt levels and high management quality as two of the top indicators of a promising initial public offering (IPO), according to a report from Ernst & Young.

"Even though the IPO market is coming back to life, investors are more wary of highly leveraged companies since the financial crisis," says Colleen McMorrow, Ernst & Young Partner and Canadian Strategic Growth Markets Leader. "New international listings and a lot of pent-up investor demand for attractive new offerings are driving the market. But after the downturn, Canadian businesses looking to go public will face greater scrutiny from cautious investors. They'll also need to watch out for emerging-market competitors who are fighting for the same investment dollars. That's why it's important for companies to plan well for the IPO process."

Company debt levels are currently the biggest concern for investors. In a recent report, Ernst & Young's guide to going public, the firm finds that a whopping 63% of investors surveyed rank debt-to-equity ratio as the top financial IPO success factor. Before the recession, it was only the ninth-most-important financial factor to investors, according to a 2008 institutional investor survey by Ernst & Young.

"Today, investors expect companies to be properly funded. That includes reducing or refinancing debt before going public" notes McMorrow. "It's important for businesses to prepare as early as 24 months before the IPO. They should also consider other capital-raising options and recognize the need for enhanced corporate governance."

Canadian business will also need to watch out for global competition as they plan for an IPO. Last year, over 100 IPOs were added to the Toronto Stock Exchange (TSX). There were also more than 70 new international listings on the TSX and TSX Venture Exchange, indicating strong worldwide interest in Canada's capital markets.

The report also suggests companies evaluate all possible transactions that could serve as stepping stones or attractive alternatives to a public listing, including selling to a strategic buyer through the M&A market, private placements, joint ventures or strategic alliances. Going public isn't for everyone; the potential pitfalls are numerous and the stakes are high.

McMorrow also points out non-financial factors that influence investors' decisions. According to the report, while investors base an average of 60% of their IPO investment decisions on financial metrics, 40% of their decisions are rooted in non-financial criteria, such as management credibility and experience, quality of corporate strategy and execution, as well as brand strength and market position. In fact, 90% of respondents said quality of management was the most critical non-financial factor to a successful IPO.

"People are what make or break great companies," McMorrow says. "Investors often say they back the people and not the plan, so companies need to focus on building a powerful management team with the right experiences, skills and incentives to undertake the IPO transaction and run a public company."

About Ernst & Young
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Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.


For further information:

Julie Fournier
514 874 4308
    Brooke Morris
604 899 3597
    Serina Yau    
416 941 1810

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