Scrutinise the prospectus first

IPO hopefuls may need up to two years to prepare for listing

“The due diligence process is prescribed. It’s imperative.”

KUCHING : Companies seeking a stock market listing may need up to two years of preparation, with governance shortcomings, compliance problems and deteriorating profits still capable of derailing an IPO along the way.

M&A Securities’ Head of Corporate Finance, Gary Ting said during an episode of ‘Beyond the Prospectus: IPO Is Not a Lottery Ticket’ by Do More and Aurum Digital said many founders underestimated the amount of work required before a company was ready for submission to the authorities.

“The misconception is usually the founders think that IPO exercise can be done in the shortest manner,” he said during the podcast with Stephanie Ng, Founder of Aurum Story, and Khoo Hsu Chuang, Co-Founder and Host of Do More Media.

Depending on a company’s readiness, Ting said extensive housekeeping might be required before the formal listing process could begin.

“It can take one to two years to do a complete housekeeping before we actually proceed with the submission to the authorities,” he said.

He said SME owners were not always familiar with the standards expected of a publicly listed company, ranging from factory compliance to having sufficient financial personnel and appropriate governance structures.

When assessing a prospective IPO candidate, Ting said he generally considered five areas: the company’s track record, business sustainability, whether it operated in a growing industry, the strength of its management team and governance.

Sustainability and governance were among the areas where companies were often least prepared.

“Governance is actually something, it can be related to non-compliances. You’re having a lot of legal suits.

“So these are the things that we have to try to mitigate and try to help the client to get around it,” he said.

Conflicts of interest and related-party transactions were also closely scrutinised during the IPO approval process.

“The authorities are quite strict on this one. When they’re approving your IPO, they have to make sure that there’s no conflict of interest.

“Don’t have so many related party transactions and whatnot,” Ting said.

He advised companies to resolve such matters before submitting their applications rather than attempt to deal with them once the formal process was under way.

“Clean up everything before you go for your application, your submission to the authorities,” he said.

Founders should therefore bring in a licensed adviser or investment bank early so potential obstacles could be identified and addressed in advance.

“Plan your journey. Identify all the issues. Identify all the non-compliances up front.

“So you have plenty of time to basically resolve all this,” he said.

The workload intensifies once the IPO exercise begins because the process involves not only advisers but also the company’s management and employees, who must continue running the business while supporting the listing exercise.

“It’s a lot of work actually, because when we are conducting these due diligence exercises, the client, from the company side, their team, their employees, not only have to do their daily work, they have to get involved in the IPO projects,” Ting said.

A financial controller, for example, might have to deal simultaneously with auditors, lawyers, researchers and other consultants involved in the exercise.

This made sufficient internal financial capacity particularly important for companies aspiring to list.

“You have one accountant, right, to handle the entire company, right? That’s not enough. You are a growing company. You’re going to be a public listed company.

“You need to have a very big accounting finance department, for example, because you have to do quarterly reporting,” he said.

Ting said some business owners remained reluctant to incur the additional staffing costs required to build that capability.

“A lot of the business owners, they don’t think about these kinds of things. They always want to save money in a sense,” he said.

Management quality was another important consideration when deciding whether a prospective IPO candidate was ready for the journey.

“To me, I think the key thing I want to look at is a very young, hungry CEO,” Ting said.

He stressed, however, that age alone was not decisive.

Ting cited a furniture company that was about four years old when he first encountered it and was led by a 29-year-old managing director.

He agreed to take on the project after considering the industry experience surrounding the young executive.

The managing director’s father had spent many years in the furniture industry, previously sold his own publicly listed company and subsequently funded his son’s venture. He also had established relationships with buyers in the industry.

“Well, even though the company is very young and this MD is very young, the father already laid the pathway for him because the father knows all the buyers of the furniture.

“So, on that point, I said, okay, I’ll take you on,” Ting said.

The company had since moved to the Main Market, he added.

However, clearing governance and management hurdles at the beginning did not guarantee that an IPO would reach completion.

Ting said deteriorating profitability during the listing process could force advisers to reconsider whether to proceed.

When IPO deals were called off, declining profit was usually the reason.

“Because the more the profit declines, your PE goes up and you become expensive. And we may not be able to sell the shares,” he said.

The deterioration might only become apparent several months after the exercise had begun.

“IPO is a very long process. It looks good at the onset, right? But after six months, after nine months, you can see that the profits are coming down.

“And maybe due to certain reasons that we can’t control,” Ting said.

The demands of preparing for a listing could also become overwhelming for founders even when financial performance was not the problem.

Ting recalled a prospective client who owned several warehouses and factories and became heavily stressed while trying to resolve permits and other compliance matters.

“He was so stressed until one night he had a nightmare.

“In his dream, actually a Buddha came to him and told him, ‘Hey, you better call it off, man’.”

The founder subsequently abandoned the IPO, Ting said.

Despite the burden involved, he stressed that the prescribed due-diligence process could not simply be shortened to accelerate a listing.

“The due diligence process is prescribed. It’s imperative.

“We can’t cut it short,” he said.

Ting said this placed principal advisers in a position where they had to help companies complete their listings while ensuring that regulatory requirements were met.

“On one hand, I’m helping companies to get listed, right? So pro-client, right?

“But at the same time, I have to make sure that they comply with all the rules and regulations. So I have to be in the middle,” he said.

He said leaning entirely towards regulatory compliance risked reducing the adviser’s function to a box-ticking exercise rather than providing substantive advice.

“If you are pro-regulator you are conducting a box ticking type of exercise.

“Means you are not providing advisory services,” Ting said.

For those interested to hear more about ‘The Real Price of Going Public feat @Aurum Story | Gary Ting’, the podcast is available at https://www.youtube.com/watch?v=DGRs1HzdkxA&t=913s