How do I communicate with investors? Deal breakers & must dos for potential IPO candidates

Cologne, 19 March 2019 – Many companies tend to considerably underestimate the importance of communication before, during and after an IPO, although miscommunication is certainly one of the biggest deal breakers in the IPO process. Conversely, besides the business model and figures, trust is one of the key drivers for a successful IPO – and building trust is the main purpose of communication. We have compiled the five key aspects which potential IPO candidates should consider to build trust and to master the communication challenge in an IPO.

1. Sufficient lead time

Good communication does not happen by accident. Therefore the first thing IPO candidates should do is develop an effective communications strategy and establish professional structures within the company. Responsibilities should be clearly defined and allocated and the corresponding PR/IR roles should be installed. The aim should be to not only increase the company’s public visibility but also to build sustainable trust. And that takes time! You should by all means avoid the impression that you start talking to the financial community only now that you need their capital. This will definitely make investors suspicious. After all, real commitment to transparency is reflected in an existing communications track record that dates back long before the IPO. It is therefore never too early to start introducing professional communication practices and to build up your pre-IPO reputation.

2. The right timing – also when it comes to communication

IPO announcements are often marked by bad timing – or, in other words, by poor preparation. The large number of IPOs that were announced but never became reality at all or only on a much smaller scale is therefore not really surprising. But it usually does great damage to a company’s or brand’s reputation. Needless to say, there may be circumstances where an early announcement (e.g. in a dual-track process) makes sense; but you should never easily give up control and should make sure that valuable information is used in a strategically sensible manner, i.e. as part of your communications strategy. Ideally, your IPO plans should not be announced before you and your banks have sufficient demand from investors for the transaction.

3. A compelling equity story – for all

Deliver a compelling equity story that reconciles the conflict between regulatory requirements and the different needs of your target groups. The statutory requirements limit your communication scope not only in terms of time but also in terms of argumentation, as you may communicate only within the limits of the information published in the securities prospectus. At the same time, a single story must satisfy the needs of the different stakeholders within a very short space of time. Investors, for instance, are primarily interested in closing information gaps to optimize their decision-making process. This requires a great level of detail in your communication. Media representatives, on the other hand, are looking for a good story that attracts attention and generates readership. Satisfy these needs with target-group-specific measures, but never forget that the perfect equity story, divided into 3 to 5 core messages, catches investors’ imagination while at the same time meeting all regulatory requirements. The better and more credibly you place your core messages with your target groups, the closer you will come to a successful IPO. And last but not least: your equity story will be credible only if you can prove it.

4. A balanced valuation – for sustainable success

An IPO is the ideal form of corporate financing especially for successful growth companies, as risks are shared and the valuation reflects the future performance. But achieving a balanced valuation is extremely difficult, as the price building process is influenced by the conflicting interests of a company’s stakeholders. Existing shareholders aim for the highest possible valuation, while new investors and management want sufficient scope for future price gains, and the investment bank is looking for a valuation which maximizes its fees and attracts enough investors at the same time. You should therefore start at an early stage to test and define the valuation internally and externally. Please bear in mind that an IPO that achieves an extremely high valuation may very quickly turn out to be a Pyrrhic victory, as it entails a high burden for the subsequent capital market story. If you start with promises you cannot keep, you will quickly burn out in the capital market – unfortunately, this has happened all too often. If you are really interested in tapping the capital market in the long term, you should make sure your valuation is balanced and make no promises you cannot keep.

5. Fast, high-quality IR work – also after the IPO

The books are full, the first price has been fixed and the IPO has been completed successfully (see e.g. IPO at Euronext Amsterdam 2016). This is a milestone which opens a new chapter in the history of your company. Maintain the speed and quality of your communication also after the IPO so as to be able to make continuous use of your newly acquired access to the capital market. An IPO is above all a promise to your investors which you must keep permanently. Or, as the CEO of a DAX-listed enterprise recently said in an interview, “Trust is a series of promises kept.”

You will now continuously be challenged to satisfy the market’s information needs, manage expectations, fulfil your reporting duties, comply with the Market Abuse Regulation (MAR) and meet your guidance. This will require a lot of resources during the first months before you reach business as usual. Be prepared and install professional structures in your accounting, controlling and investor relations departments at an early stage. This will reduce the risk of making fatal mistakes right at the start. Bear in mind that you will never be able to win back an investor whom you have disappointed or even deceived.