Cass Business School and Credit Suisse released a study last week that looked at the performance of companies after conducting an initial public offering. The study included 1,500 companies that listed their shares in the UK between 1995 and 2008, and analysed their behaviour during the 1,000 days after listing.
On the face of it, the findings are blindingly obvious, but they do point to a bigger picture in which a public market listing has huge benefits if used well, despite the troubles in the IPO market at the moment.
The key finding was that many companies used their IPO as a launch pad for other deals and that those deals contributed greatly to the companies’ future growth. In total, 82% of the companies studied announced some form of takeover, secondary equity offering or divestiture within the first three years of life as a public company. Some 26% of companies undertook such deals in the first year.
Also those companies that did carry out a takeover, divestiture or equity offering outperformed their more passive peers on the exchange by 25% on the main board and by 28% on the secondary board, “challenging the long-standing view that IPOs destroy value”, wrote the authors of the report.
According to Anna Faelten, deputy director of Cass’s M&A research centre, the findings are the same if the companies analysed were based in the UK or overseas — and by extension that includes Asian companies listed in London.
Further endorsement of the IPO market comes from the finding that firms that listed in a downturn outperformed those that listed in a boom. And those that had a greater ratio of Ebitda to sales (and were therefore more mature) outperformed those that were less mature. In other words, now would be a very good time to list shares if you are an established company looking to buy your way to greatness.
“The IPO process can play a critical role in helping to enhance the trajectory of a company’s development strategy and growth,” said Nick Williams, head of equity capital markets for Europe, the Middle East and Africa at Credit Suisse in London. “This study is notable in that it demonstrates that IPOs provide a stepping stone to further corporate actions that can deliver relative outperformance and value creation for companies that are focused on growth.
“At a time of economic uncertainty, it is important to note the valuable and legitimate role that the capital markets and the IPO process can play as a way to encourage and nurture economic growth.”
What is clear is that those firms that decide to do an IPO in order to get growth currency are much better received than those that see it as a liquidity event for existing shareholders, even if both are selling new shares.
“Firms often come to the public market to pursue growth strategies, as seen by the high acquisition activity in the first year post-listing,” says Faelten. “We find that firms which are corporate events active significantly outperform their inactive counterparts. Hence, firms which use their IPO function as a gateway to pursue growth strategies are successful in adding value to their shareholders in the long term.”
The blindingly obvious finding, that companies which undertake an IPO are likely to pursue growth strategies, masks how successful these growth strategies can be. This shows that IPOs are an exercise in growth, and not just a fee-generation exercise for the bankers, but only if companies use the new listing appropriately.