IPO_Book

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Gettingready or theIPO journey

kpmg.com

KPMG International
http://www.kpmg.com/http://www.kpmg.com/

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ForewordConducting an IPO is a longand complex process

While many new IPO candidates

mistakenly believe that the path to

an IPO starts with the creation o a

prospectus and ends the day that the

stock debuts on exchanges, nothing

could be urther rom the truth.

In reality, the IPO process starts longbeore the underwriters rst show upon

the scene. It requires companies to

be sel-aware, to understand their IPO

objectives, and to take the dicult steps

needed to meet the market expectations

o a publicly-traded company.

This book builds o o the rst in the

series (So you want to take the IPO

road?), in which we examined the

IPO journey and the many challenges

and opportunities that oten present

themselves. In this edition, we takea closer look at the pre-IPO process

and shine a spotlight on a number o

key considerations or IPO candidates

approaching this metamorphosis. How

will you choose the right exchange or

your company? How will you select

the right underwriting bank to t

your companys needs? How will you

know i you are ready or the scrutiny

o public markets? How will youtransorm your organization to

become `IPO-ready?

Sharing our insight andexperience

We believe that experience only

becomes valuable when it is shared. That

is why we have combined the experience

and insight o some o KPMGs top IPO

advisors rom across our global network

to develop this guide. Within these

pages, well tell you about some o the

big challenges that IPO candidates willace as they get ready to embark on their

journey. Well share some o our rms

proven approaches and methodologies

or cutting through the complexity o IPO

preparation. And well strive to help IPO

candidates take the right steps to get the

most value out o their market debut.

Turning guides into roadmaps

But while guides are oten invaluable in

providing tips and insights to intrepid

travelers, one oten has to rely on theexperience o people who have traveled

the road beore and know rst hand how to avoid the pitalls and take

advantage o the opportunities.

Given KPMGs extensive global

network o member rms, our deep

industry insight and our experiencein the capital markets, we believe we

are uniquely qualied to guide IPO

candidates saely along the journey.

We encourage you to contact your

local member rm to nd out how ourproessionals can help your company

cut through the complexities o an

IPO and help you reach your ultimate

destination.

Manred Hannich

Global Leader

KPMG Accounting andAdvisory Services

Linda Main

Capital Markets Partner

2011 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.

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In this edition, we take a closer

look at the pre-IPO process and

shine a spotlight on a number o key

considerations or IPO candidates

approaching this business change.


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Table o

3 9 13


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contentsChoosing the right exchange 2

Doing the pre-IPO readiness assessment 6

Closing the gap 12

10 steps to a hazard ree pre-IPO journey 15


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2 | Getting ready or the IPO journey

Choosing the rightexchange

Every journey needs a destination

One o the most important decisions an IPO

candidate will make is what exchange to list

their shares on. Indeed, this decision will largely

determine what the IPO roadmap will look like and

what the company needs to prepare in order to

reach its destination.

There is no ormula or selecting the right exchange.

Rather executives must consider the pros and cons

o each market to determine the best path orwardto achieve their unique goals.

It is not a decision to be taken lightly. The choice

o market will likely have deep implications on

organizational structure and processes and

may require some heavy liting to meet the

expectations o the market.

And while achieving the highest valuation or your

IPO is certainly a core consideration, there are also a

number o other key actors that in our experience

must also be taken into account.

Compliance creates complexity

Some o the most important considerations

acing IPO candidates relate to market

regulations. At the outset, companies must

understand the complex web o regulations

that govern each exchange and gauge their

organizations ability to meet compliance

standards. This will oten infuence the choice ooreign exchanges or IPO candidates who may

preer to list in jurisdictions where the regulatory

burden is less onerous or in domestic markets

that they better understand.

But higher regulation and compliancerequirements also oer a number o benets to

listed companies. Regulation generally has a direct

impact on investor condence, and oten results

in a more transparent set o rules or market

participants. Stronger regulation also tends to

mean higher reporting and disclosure standards,

which is generally welcomed by all participants.


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Getting ready or the IPO journey | 3

However, there is a general trend amongst regulators

around the world towards aligning their market

regulations to provide a more consistent set o rulesand reduce the temptation or private companies

to list on less transparent or poorly regulated

exchanges. As a result, the infuence o regulation

on the choice o market may eventually become less

important or IPO candidates as markets align.

In good company

While it may seem counter-intuitive to ollowyour competitors, there are signicant benets to

selecting an exchange that has a high concentration

o your industry peers. In part, this is because

markets with industry concentrations tend to

benet rom highly-experienced analysts who have

deep insight into the specic industry and sector.

As a result, valuations generally tend to be higherin comparison to other markets where investors

may not understand your business, and as a result

will oten apply a discount to compensate or the

perceived risk.

Industry concentrations also tend to encouragean ecosystem o service providers (such as

underwriters, lawyers, auditors and business

advisors) to develop around certain exchanges.

This means that IPO candidates are more likely to

nd critical IPO partners with specic experience

in their industry within these markets.


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Gauging investor appetite

The liquidity o a capital market will have a direct

impact on the initial valuation o a company. Simply

put, in markets with low liquidity, investors are either

not willing or not able to ree up capital to purchase

new shares. In turn, this orces the initial valuation

down in order to increase subscription rates. In muchthe same way, companies that conduct their initial

oering in markets with low levels o trading volume

also tend to see lower initial valuations than may beexpected in more active markets. As a result, the

current liquidity and volume o a market must be a

key consideration when choosing an exchange.

Investor appetite is also important. Some markets

(like the NASDAQ) tend to have a airly high

appetite or initial oerings, whereas others may

be more wary about placing bets on a new and in

their minds unproven entity. But investor appetite

can also be notoriously ckle and oten telescopedon to a handul o hot sectors (recent hot topicsinclude social media sites and emerging market

companies), so IPO candidates would be well

advised not to place their bets solely on what is

currently hot in the market.

15 Largest Stock Exchanges by Market Capitalization (as o Dec 31, 2010)

Rank Economy Stock ExchangeMarket Capitalization

(USD Billions)

Trade Value

(USD Billions)

1 United States and Europe NYSE Euronext 15,970 19,813

2 United States and Europe NASDAQ OMX 4,931 13,4393 Japan Tokyo Stock Exchange 3,827 3,787

4 United Kingdom London Stock Exchange 3,613 2,741

5 China Shanghai Stock Exchange 2,717 4,496

6 Hong Kong Hong Kong Stock Exchange 2,711 1,496

7 Canada Toronto Stock Exchange 2,170 1,368

8 India Bombay Stock Exchange 1,631 258

9 India National Stock Exchange o India 1,596 801

10 Brazil BM&F Bovespa 1,545 868

11 Australia Australian Securities Exchange 1,454 1,062

12 Germany Deutsche Brse 1,429 1,628

13 China Shenzhen Stock Exchange 1,311 3,572

14 Switzerland SIX Swiss Exchange 1,229 788

15 Spain BME Spanish Exchanges 1,171 1,360

Source: World Bank Databank - http://data.worldbank.org, December 31, 2010

http://data.worldbank.org/http://data.worldbank.org/

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Those electing to list on exchanges outside o their

home country will also need to be cognizant o the

challenges they may ace in managing investors

in oreign or distant markets. Particularly in cases

where IPO candidates have no obvious or ormalbusiness links within the country in which they are

listing, executives may nd that managing the

day-to-day needs o investors quickly becomes a

rather time-consuming and complicated requirement.

And while economic downturns (such as theone experienced in 2008-2009) almost always

lead to a loss o liquidity in the market and are

thereore an inadvisable time to conduct an IPO

public oerings that are conducted in the early

part o economic recoveries tend to enjoy higher

valuations than at other times in the economic

cycle. This is generally because investors who

had sat on their capital during a downturn oten

return to the markets with large appetites or

IPOs and other new investments.

In it or the long-term

When selecting an exchange, IPO candidatesmust remember that listing on a public market is

a long-term strategy that has implications long

ater the IPO. As public companies expand, many

will need to return to the market at some point or

other to conduct subsequent oerings in order to

raise additional capital, so the long-term liquidity

o a market is oten equally as important as the

short-term.

IPO candidates will thereore want to examine the

historical data o the various exchanges to identiy

long-term volume and liquidity trends or both their

industry group and the wider market. And given that

the global nancial crisis eectively changed the

market dynamics or many exchanges, candidates

may want to pay particular attention to the strengtho the markets recovery in recent years.

Reducing risk and securing equity

Many IPO candidates, particularly those located in

emerging markets or less regulated jurisdictions,

oten select exchanges based on the level o

protection that is aorded to investors through

local regulation. By listing their companies in

oreign markets, pubic companies are able tosecure much o their equity under the legal

protection o their chosen jurisdiction. As a result,

many countries (particularly the Netherlands, theUK and the US) have seen a steady stream o

listings by oreign companies.

Conducting a dual listing

IPO candidates are not restricted to listing on a

single exchange (though listing on more than two

exchanges is generally thought to be unwise). For

the vast majority o companies, this oten means

listing on their own local exchange as well as one

o the more major exchanges. In this way they are

able to both build a local investor base and access

equity rom global investors in major markets. Manycompanies also choose to dual-list to increase their

prole in target markets, or to build credibility as a

global player.

But while dual-listing certainly delivers signicant

benets, it also adds a level o complexity andcost related to regulatory requirements and the

possible need to engage two sets o underwriters

and advisors. Executives must also be mindul o

the demands that dual-listing puts on companyocers, as investors in each market will expect

to see key nancial and executive ocers

within the market on a regular basis. Dual-listed

companies will likely also need to establish

an investor relations (IR) unction within each

market, staed by IR proessionals who cultivatestrong relationships with leading advisors and

communicate with major shareholders.

Whenselecting an

exchange, IPOcandidates

must rememberthat listing on

a public marketis a long-term

strategy that hasimplications long

ater the IPO. 2011 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent rms are aliated with KPMG International. KPMG International provides no client services. All rights reserved.

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Doing thepre-IPOreadiness

assessmentIs your organization ready to meet theexpectations o the market?

Investors expect IPO candidates to be market

ready. From systems and controls to accounting

standards and governance models, everything will

come under scrutiny as soon as you reach the ormal

IPO process. For most, a rigorous pre-IPO readiness

assessment is a vital rst step on the journey ahead.

Pre-IPO readiness assessments are designed to

identiy the gaps between market expectations

and the current reality o the organization. It is not

easy. It requires executives to root out potential

weaknesses and turn a critical eye towards the

status quo in order to develop a clear picture o their

organizations capabilities.

But in return, executives will gain important insight

into the steps that may be required to achieve a

successul IPO and with that a detailed roadmapo their journey that includes timelines, expected

costs and milestones that must be achieved along

the way and that can be successully achieved within

the timerame allotted.

While the pre-IPO readiness assessment itsel rarely

takes more than a ew weeks to complete, many

companies nd that the issues that the assessment

identies oten take six to twelve months to address.

Thereore, pre-IPO readiness assessments should bestarted as early as possible in the process.

But clearly each market is unique and expectations willvary rom exchange to exchange and rom industry to

industry. So while the pre-IPO readiness assessment

will be dierent or each company, there are a numbero key areas that universally must be addressed.

Financial Standards

Can you meet the local accountingstandards demanded by the market?

Meeting the standards: Each exchange requireslisted companies to report their nancial results

within a pre-dened accounting standard (oten

IFRS, but occasionally local GAAP). And while

some private companies already ollow the

appropriate accounting standards, many nd that

the rigor and detail required by public markets

ar surpasses their existing capabilities. But

converting to a new or more robust accountingstandard is a massive project that oten stretches

nance departments to their limit. It is not a

project that can be let to the last minute or

worse rushed through during the nal stages o

the IPO process.

Can you provide comparable metrics toyour peers on key business indicators?

Integrated Reporting: Pre-IPO candidates willwant to scrutinize their competitors Annual

Reports and other public documents to gain a

clear picture o the types o data that are being

reported by their key competitors. So i, or

example, your industry group tends to report on

supply chain sustainability, the market will otenexpect to see similar data rom IPO candidates.

In some cases, this may require companies to

develop new processes by which to obtain

this data.


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Can your nancial system deliverthe right inormation to executives to

enable decision making?

Inorming the management: Financial systems

must also be adequate to deliver both up-to-dateresults to company management and insightul

commentary and context or non-executive directorswho are generally not involved in the day-to-day

operations o the company. And while there are

no hard and ast rules or what must be included in

management inormation reports, they must contain

enough detail and context to enable executives

to make act-based decisions, manage market

expectations and reduce overall business risks.

What story do you want your results

to tell the market?

Positioning the numbers: IPO candidates will

need to make some important judgments about

how they want to position their company in the

market and as a result how they will present their

nancial and integrated results. So, or example,

some companies will want to position themselves

as a multi-aceted and diversied organization

(and thereore will present their results by market

segment or business unit), while others will organizetheir results by geography in order to denote a

multinational organization with exposure to multiplemarkets. Regardless, the decisions made here will

greatly infuence the way that results are prepared.

It may also require the organization to rethink the

way it collects and consolidates their reports, which,

in turn, will infuence internal reporting as well. For

example, organizations ollowing IFRS 8 require

segmental analysis that closely aligns to how the

business is managed.

Do you have the right historicaldata and is it presented using

appropriate standards?

Creating a history: Investors considering an IPO

candidate will be keenly interested in comparing

the companys current and expected nancial

results against a consistent and clear benchmark

o past results. Indeed, many markets demand at

least three years o historical data; some preer

ve. But these reports must be presented using

appropriate international accounting standards,which oten mean that IPO candidates will needto reanalyze their historical data and restate their

results. In cases o a complex nancial history

specic Proorma-Financial Statements need to

be prepared presenting the IPO candidate in an

as-i ashion. Once again, this will take time and

signicant eort rom the nance department.

And since all public company nancial statements

must be properly audited, the restated results will

also need to be properly reviewed be a recognized

auditing rm.

Understanding trends: Analysts will be keen tounderstand the extent to which the historic results

have been infuenced by one o or non-recurring

items. Identiying and veriying these can be

surprisingly time-consuming.


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How does your equity story align toyour results?

Equity Story: Building a compelling equity story is

a key component o the pre-IPO process. It is at thisstage that executives would be wise to put careul

consideration towards its development throughout

the process to ensure that the story aligns with the

nancial reports and other key data.

Are your inancial systemssuicient to deliver consistent

and timely reports?

Testing the systems:With all o this in mind,

executives will need to thoroughly test their existing

nancial IT systems both centrally and in businessunits. Investors will expect the nancial system to

not only be robust, but also capable o delivering

consistent and timely inormation without errors.

Investor condence can be quickly shaken by the

restatement o results, so it is critically important

that the system is able to deliver quality reports on a

consistent basis.

Internal Controls

Do you have sucient controls tomeet local regulatory requirements?

Complying with regulation: In some jurisdictions,

regulations exist that require public companies to

document and monitor internal controls. Rules existin all major markets, although the specic controls

that are required vary rom industry to industry (or

example, the controls at a nancial services company

will include capital and liquidity controls. Dual listed

companies will need to adopt the requirements o

the more stringent o the two markets.

Are your IT systems sucient or therequirements o a public company?

Inormation Technology: IT systems must also

be evaluated as part o the pre-IPO assessment.And while the process generally ocuses on


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the nancial reporting systems and control

environments, other considerations must also be

raised. For example, does the organization have

a strong disaster recovery system in place, andare other mission critical systems sucient to

maintain business continuity?

Corporate Governance

Does your Board refect the

expectations o the local market?

Composition o the Board: While going public

oten requires companies to adjust the makeup

o their Board, the actual composition will largely

depend on the individual market. Some countries

(such as the Germany) expect public companies

to maintain both a supervisory Board and an

executive one. Others (such as the UK) require

companies to employ a single, unied Board.

Those that are considering dual-listing may need to

develop dierent Board structures depending on

which jurisdictions they plan to list in. As a result,many IPO candidates may nd that they need to

careully consider who sits on their Board and who

is asked to step down. Similarly, many markets

require the role o CEO and Chairman o the Board

to be separated, which may also lead to signicant

organizational changes. Even where CEOs are

allowed to hold the Chairmans seat, there is a

growing move to separate the roles to enhance

governance independence.

How will you select the propercandidates or your Board?

Selecting Board members: In most markets,

there are no ormal rules on who can become a

company director (though criminals and those

implicated in insider trading are oten banned

rom taking on this duty). However, it is oten

wise or IPO candidates to select members that

either have experience with public companies,

have deep insight into their business, or havea recognized reputation or air and considered

judgment. But dont be surprised i your ideal


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candidate rejects the oer; being a director o

a public company carries a certain level o risk

and liability that may not appeal to everyone.

In act, in a recent study by KPMG in the UK1

,nearly 50 percent o executives that had recently

conducted an IPO admitted that corporate

governance requirements had a greater thanexpected impact on the board o directors.

Is your management team properlystructured to meet market

expectations?

Management structure: IPO candidates will want

to ensure that their executive management issucient to meet market expectations and industry

norms. In part, this means making sure that your

executives have the right capabilities or their new

responsibilities. But it also requires companies

to examine the industry norms to ensure thatthe right unctions are properly represented. For

example, most oil companies see sustainability as a

C-Level role, meaning the market will likely expect

IPO candidates in this sector to appoint a Chie

Sustainability Ocer i they dont already have one.

Risk Management

Have you documented all o your risksand related risk mitigation plans?

Identiying the risks: Every company private or

public aces risks. However, public companies

(who have a responsibility to protect shareholder

value) are subject to much more ormal risk

management processes than private companies.

In most markets, public companies are required to

evaluate the major risks acing their organizationand develop an appropriate process to mitigate

those risks i possible. Many top listed companies

also include a summary o their most signicantrisks and mitigation plans within the body o their

Annual Reports to build investor condence and

demonstrate capability. But according to KPMGs

previous research1, 30 percent o executives that

had recently experienced an IPO had not been

through any ormal risk assessment at all.

Do you have a process or

communicating risk to the Board?

Communicating with the Board: In a public

company, the Board o Directors plays a key role in

reviewing, assessing and endorsing risk registers.

Thereore, it is critically important that pre-IPO

candidates ensure that their documentation is

sucient or the Board to be able to make inormed

decisions about the companys risk appetite.

Pre-IPO assessments will also review the process

by which the organization communicates changes

in risk to the Board.

1 Thinking about an IPO, KPMG in the UK


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Some investors also

tend to rown on the useo non-transparent tax

havens, which may alsotrigger an IPO candidate tomove the location o their

business.


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gapClosing the

Its time to get your companyinto shape. Get ready or someheavy liting.

Based on the results o the pre-IPO assessment,

most companies should now have a clear picture

o what changes will need to occur to bringtheir company up to the standards expected by

their chosen capital market(s). The next step isto turn those requirements into an achievable

plan. This will require a strong ocus on change

management approaches, an appreciation o what

can reasonably be achieved within the given time

rame and oten some external support to

reduce disruption and augment capabilities.

IPO candidates also need to be pragmatic; not all

IPO processes are successul, so companies may

not want to initiate some o the more irrevocable

changes until they are urther along the IPO journey

and more secure in their prospects. As a result,

the pre-IPO period is oten best characterized as a

period o rigorous assessment and careul planning.

Develop your planAs we have seen in previous chapters, there are a

number o interdependent steps that must oten

be conducted in tandem in order to become IPO-

ready. Executives planning their pre-IPO strategy

will need to careully coordinate these steps toensure that later changes do not jeopardize work

that has come beore. For example, an adjustment

in the way the company positions itsel may

have ar-reaching implications or the methods o

collecting and reporting nancial results which in



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turn may require dierent controls. Each o theseinterdependencies must be careully thought out to

avoid expensive and time consuming changes later.

There are signicant risks to poor or hasty planning.

For one, many planners have unreasonable

expectations about what existing sta canreasonably achieve while still maintaining day-to-day

operations. Not only does this lead to high levels

o attrition (at a time when the company needs

all hands on deck), but may take ocus away rom

the core business which in the run up to an IPO

requires even more attention than ever. In other

cases, rushed changes have led to mistakes in the

system, orcing newly listed companies to restate

their results and thus destroy investor condence.

IPO candidates will thereore want to work with

their advisors to identiy those issues that are the

highest priority or the organization and that can

easibly be completed beore the IPO.

Nothing less than transormation

One o the biggest mistakes made by IPOcandidates comes rom viewing the IPO process

as a purely nancial transaction. Nothing could be

urther rom the truth. In act, the IPO process will

undamentally transorm the business and bring

wide scale change to the organizations people,processes and technology.



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Getting some helpThe pre-IPO phase is oten a complex stage or anycompany to undertake on its own, but identiying andretaining the right advisors can also be a challenge orthose new to the process. To start, IPO candidatesshould talk with their peers and existing advisors toidentiy an IPO Advisory team that ts their needs andculture. In our rms experience, it is also importantto select advisors with a global network, a multi-

disciplinary team and a strong reputation orsuccessully advising IPO candidates.

And o course, companies considering taking thejourney to an IPO can contact any o KPMGsmember rms across 150 countries. With deepexperience in the IPO process, rom pre-IPOreadiness tests through to post-IPO strategies,KPMG rms proessionals oer valuableand insightul advice that cuts through thecomplexity o the IPO process.


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10 stepsto a hazardree pre-IPOjourney


10

9

87

65

4

32

1Set your destinationknow whether an IPO is the right choice

or your company at this time

Identiy and select an IPO advisormake sure they have extensive experience and a holistic

perspective

Choose the right exchangemake sure you are listing on the most appropriate market or your

company and strategy

Conduct a pre-IPO readiness testfnd out what systems and processes must change beore you can start the

ormal IPO process

Develop a plan and timelineset a reasonable pace and consider bringing in experienced external support to

augment your team and ensure business continuity

Close the gapcreate and execute a plan that brings systems and processes in line with market

requirements and norms

Select your proessional advisorsrom lawyers to underwriters, these suppliers must be highly experienced with capital markets

Create an Investor Relations unctionthis will be your conduit to the investors and analysts

Prepare your fnancialsyou will need to go back three to our years to achieve the requirements or most markets

Formulate your equity storya strong equity story highlights the past success

and uture growth potential o an IPO candidate and

helps achieve a higher valuation


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Contact us

Manred Hannich

Global Leader

KPMG Accounting and

Advisory Services

T: +49 30 2068-4125

E:[email protected]

Linda Main

Capital Markets Partner

KPMG in the UK

T: +44 (0) 20 7311 8574E:[email protected]

kpmg.com

The inormation contained herein is o a general nature and is not intended to address the circumstances o any particular individual

or entity. Although we endeavor to provide accurate and timely inormation, there can be no guarantee that such inormation is

accurate as o the date it is received or that it will continue to be accurate in the uture. No one should act on such inormation

without appropriate proessional advice ater a thorough examination o the particular situation.

2011 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms o the KPMG network o independent

rms are aliated with KPMG International. KPMG International provides no client services. No member rm has any authority to

obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such

authority to obligate or bind any member rm. All rights reserved.

The KPMG name, logo and cutting through complexity are registered trademarks or trademarks o KPMG International.

Designed by Evalueserve.

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