OVERVIEW
At the close of 2018, more than $75 billion is expected to be raised through initial public offerings (IPOs) in the U.S. alone. European IPO markets have seen close to €26 billion raised through Q3. However, as big a year as 2018 has been for IPOs, 2019 could be even larger – with capital raised possibly reaching $100 billion.
IPOs can be an essential tool for raising capital and kick-starting an organization’s growth. In fact, in recent years, buoyant equity markets around the world have helped encourage companies to make their stock exchange debuts.
While IPOs can provide critical growth capital, they do not come without risks that must be considered in advance.
Chris Rafferty, chief operating officer, Aon’s U.S. Financial Services Group, states, “IPOs can be a very rewarding, and challenging, process for any IPO candidate. While completing an IPO is often viewed as the culmination of the process, the reality is that significant potential liability is just beginning, and companies will need to maximize their business assets and continue to attract talent.”
In Depth
Among 2018’s biggest IPOs are Elanco Animal Health at $1.74 billion, financial technology firm GreenSky at $1.01 billion, fashion retail platform Farfetch at $885 million, real estate services company Cushman & Wakefield at nearly $879.7 million and file-hosting service Dropbox at $869.4 million.
Technology and life sciences companies have become particularly attractive IPO candidates. Six San Francisco Bay Area technology companies – each valued at more than $10 billion – are expected to come to market with their IPOs in 2019. The largest is Uber, with the company saying it’s “on track” for a 2019 IPO. Uber rival Lyft is also expected to come to market next year.
Industry aside, as they head toward an IPO, all companies must consider the risks they might face during and after the listing.
Recognizing Litigation Risks, Minimizing The Exposure
A key risk companies might face is securities litigation, often over the accuracy of representations in the IPO prospectus. “As companies head toward an IPO, it’s critical that they provide full insight into their financials, their ability to execute on the deal’s valuation, their risk factors, as well as their litigation history,” said Kristin Kraeger, managing director at Aon.
A recent ruling in the U.S. has further increased the risks surrounding an IPO. In March, the U.S. Supreme Court ruled in Cyan, Inc. v. Beaver County Employees Retirement Fund that plaintiffs can bring securities litigation alleging prospectus misrepresentations in front of state courts as well as federal court.
For companies, the ruling potentially raises legal costs significantly. Among other things, companies now might have to defend cases in multiple jurisdictions. The Cyan decision – and the changed legal landscape especially as it relates to directors and officers (D&O) liability – is a key element during an IPO. “With so many changes in the legal landscape, the insurance market is changing daily. Structuring a D&O program for a company preparing for an IPO requires balancing capacity,” Kraeger said.
Another key risk is intellectual property litigation, ranging from patent litigation to ownership disputes. The six-year legal feud about whose idea started Facebook is a prime example of the potential costs of an ownership dispute. Moreover, one study from Boston University estimates that patent litigation can cost up to $60 billion per year. An IPO can increase the likelihood of experiencing such a lawsuit. Aon’s Jason Eaddy states, “An IPO can invite competitor lawsuits looking to prevent expansion and nonpracticing entities seeking to monetize their patent portfolios. And, the costs to an organization can easily run into the millions for any patent litigation.”
Fully Capitalizing On Your Intellectual Property
While an IPO might expose a company, understanding the true value of an organization’s intellectual property is essential to the overall valuation of the IPO. Even so, many companies still struggle to quantify the true value of their IP.
Since the 1970s, intangible assets, such as IP, have overtaken physical assets, such as plants and buildings. “Today, 85 percent of a company’s value is in its intangible assets,” said Lewis Lee, CEO of Aon’s Intellectual Property Solutions Group. “But the reality is many businesses don’t fully appreciate the asset class from opportunity and risk perspectives.”
Lee continued, “Intangible assets generally, and IP particularly, can be used strategically to create enterprise value, which is absolutely necessary as a company looks toward an IPO. In order to fully realize the highest valuation, IPO-bound companies need to implement IP-based value creation strategies as well as mitigate downside IP risk exposure through new risk transfer solutions.”
Retaining The Talent Right – Before And After The IPO
Companies preparing for an IPO must also make sure they’ve got the right leaders and talent programs in place to see them through the transaction – and that they can retain these leaders after they’ve gone to market.
According to Kyle Holm, pre-IPO practice leader at Radford, an Aon company, “Preparing talent and rewards programs for the transition from private to public is typically a year-long process, involving a complete reassessment of executive and director compensation programs, governance policies, equity strategy, annual incentive plans and the retention of critical talent.”
He adds, “Helping ensure your organization has competitive pre- and post-transaction executive and director compensation structures in place is especially critical. These programs allow companies to attract experienced board members.” When well executed, such programs can instill confidence in investors that the leadership team will be stable and is appropriately focused on the next phase of growth.
As for the broader employee population, clear and consistent communication is critical. All employees should be kept in the loop as shifts in the composition and delivery of pay occur.
Is It Worth The Risk?
The IPO market has been roaring over the past two years and is projected to increase in the year ahead. While stock market volatility might keep some companies from the IPO market, history has shown many companies are willing to brave volatile markets. Dropbox, for example, was among the companies bringing its IPO to market during a volatile period earlier this year.
Whatever the conditions, companies that take the key steps before coming to market will best position themselves to meet their IPO goals.
“For companies looking to tap the capital-raising opportunities the stock markets provide, IPOs can be a natural step,” said Rafferty. “Addressing the key considerations surrounding an IPO can help companies achieve success with their offering and as they proceed post-IPO.”
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