Taking the IPO leap

Saturday, 01 November 2008


    The past year certainly hasn’t been the best time to list on the stock exchange. Tony Featherstone chats to the directors of five companies that did take the plunge to find out how they fared.

    Taking the IPO leap

    Spare a thought for small companies that have listed this year. Initial public offers (IPOs) are hard at the best of times, let alone when global equity markets crumble.

    More than two-thirds of stocks that have floated in the past 12-months are trading below their issue prices. Some have more than halved in a few months. Only a handful of companies, mostly miners, have had good share price gains.

    Weak equity markets have seen many small companies postpone or cancel their listings or raise less capital than they hoped. At the start of September, only 16 companies were trying to float and some had been in the new float pipeline for several months.

    This has created difficult conditions for the CEOs and boards of recently listed companies. They have had to deal with the raft of requirements that come with listing on the Australian Securities Exchange (ASX), such as reporting rules, governance and continuous disclosure. In some cases, they have also had to deal with angry shareholders who have watched their investments tumble.

    With this in mind, Company Director spoke to five chairmen or managing directors of small companies to get their perspectives on floating. Some of the major issues they faced included the huge time and money costs of compliance and shareholder communications, and getting the working relationship between boards and management right in the early stages.

    The first company was Saunders International, a 51-year-old company that floated late last year. Saunders, which makes and maintains oil, mining and water tanks, is one of few floats still trading above its issue price. But listing has been a big change for what was a conservative private company.

    Not so successful was Soil Sub Technologies, a clean-technology company developing a soil substitute known as Nutrimex. Since listing in March, its share price has fallen from $1 to around 20 cents towards the end of October. And, shareholder communication has been a big issue for the Brisbane-based company.

    Genera Biosystems has also watched its share price sink from a 50 cent issue price to 16 cents in October. Dealing with compliance and reporting requirements were key issues for the small biotech company, which is developing a test to detect sexually transmitted diseases in women.

    Southern Cross Goldfields is one of many small explorers that have listed this year. Its 20 cent shares got as high as 37 cents but have since dropped below the issue price, on the back of a lower gold price and sinking market sentiment. Building a strong board that suits a tiny explorer has been a priority.

    Emerson Stewart Group, a mining services company, has had different challenges. It is a young, fast-growth professional services company that is developing the right infrastructure to sustain rapid growth. Its shares sagged from their 20 cent issue price to 16 cents towards the end of October.

    If there’s a common theme across such a diverse range of companies it is to focus on building the core business rather than worrying about short-term share price movements. Few small companies are finding it easy in this market, but the five featured below are working hard to get through difficult conditions.

    Here’s what their chairman or managing directors said about listing:

    Tim Burnett FAICD, chairman, Saunders International

    “It has been a challenging journey to go from a private company that has been in business for 51 years to a listed

    company. There are certainly more requirements in terms of corporate governance, more stringent audit and reporting requirements and the continuous disclosure rules. But we haven’t encountered anything we weren’t aware of before embarking on the decision to list. We set out to embrace being a listed company.

    “There are advantages and disadvantages of being listed. Many Saunders staff owned shares before we listed and are happy there is more liquidity if they want to buy or sell. But people can be more conscious of short-term things like the share price and short-term profitability. As a private company you can take a longer-term view.

    “We deliberately wanted a small board when we listed, so we recruited two non-executive directors to join, myself and Saunders managing director, John Power. We did a lot of preparation to become a listed company and we got our board processes in place well in advance. We also worked hard to make the to-be-listed company a stand-alone operation and not be intermingled with other parts of the group.

    “We found it a challenge and a time consuming process to secure the right non-executive directors to join us for the listing, but we are happy with how it worked out.

    “After we listed, John Power and I did the Australian Institute of Company Directors’ course, which has been extremely useful. In hindsight, it would have been better to do the course well before we listed because the IPO process is rigorous and there are so many corporate governance aspects that people who have previously run private companies aren’t familiar with.”

    Allen Bollands, managing director and executive director, Genera Biosystems

    “It’s a challenge running a listed company for the first time but certainly one I am enjoying very

    much. I’m mixing with people I’ve never dealt with before – stockbrokers, investment bankers and so on. Understanding how capital markets work and the role they play with companies such as Genera has been fascinating.

    “One issue that surprised me was the sheer cost of compliance and the time demands involved with listed companies. I don’t think people who have worked in private companies always realise this. The amount of time spent before, during and after the IPO on compliance issues is no trivial matter for small companies with limited resources.

    “I was fortunate that I had been involved in larger companies that had to deal with issues such as tight deadlines and continuous disclosure requirements. But many scientific guys who run biotech companies are used to working with looser timeframes. It can be quite a culture shock getting used to having to do what you’ve said you’re going to do.

    “We’ve been very conscious as a newly listed company to ensure we comply with all the rules and put the right policies and procedures in place. Genera has five people on the board who are reasonably hands-on. They are naturally focussed on issues such as the company’s cash flow position, an important issue for all small biotechs.

    “It takes time for management and the board to build a working relationship in small companies, but I’m pleased with how it is going at Genera. The share price has disappointed in the first few months, but most of our shareholders understand the business that we’re in, and operationally things have been going well.”

    James Callianiotis, marketing director, Soil Sub Technologies

    “The biggest issue when you go public is the sheer amount of shareholder communication involved. We have lots of shareholders and I make it a point to return every call. Dealing with stockbrokers and other investors also takes time. It can be frustrating because you can’t tell shareholders about some great developments because you have to file news through the correct channels via the ASX. There’s lot of really good things going on behind the scenes, but you have to respect the continuous disclosure rules.

    “I was a young, first-time managing director [Callianiotis is 38], so I was fortunate that the board around me has a lot of public company experience. We have a non-executive chairman, myself and five others on the board. The board meets every month and I speak regularly to each director. We’ve been able to build a very good working relationship in extremely difficult market circumstances. It’s certainly been a steep learning curve running a listed company, although not as daunting as I thought. The key is to make sure you have the right experience and skills on the board to cover for any gaps in the management team.

    “The fall in our share price has been disappointing, but I can honestly say myself and the board did what we believed was right with the IPO. The timing was terrible given that we floated in March when markets were almost in freefall. But market conditions are beyond our control and we’ve worked hard to tell shareholders that they need to take a long-term view to investing in this company. Listing has certainly given our company more credibility and is something I would recommend to other private companies. It’s made me very aware that everything we do now and in the future has to be for the sake of shareholders. Being a small company, you get to meet a lot of shareholders, which is a terrific motivation to keep growing the company and creating shareholder wealth.”

    Samantha Tough, chairman, Southern Cross Goldfields

    “Southern Cross lodged its prospectus in December 2007, just before the stock market crashed. Given the market conditions, it was difficult to secure a sponsoring broker and we had to organise the capital raising ourselves. This, it turns out, would work in our favour. Not only did we end up with a very loyal base of shareholders who understood the risk profile of early stage exploration, we were not subject to a broker being forced to cancel the capital raising due to the crash.

    “Post listing, the share price held up well, trading above its listing price for some time. It was slightly below the listing price in early September despite excellent drilling results, but that is a reflection of the current market.

    “I am a firm believer that young companies have to focus and deliver on their business objectives and not get too distracted by the share price, particularly in the current climate. If you deliver, the share price will eventually follow.

    “It hasn’t been easy since listing in March 2008. We did not raise quite as much as we hoped so we have to prioritise our spending which means adjusting our exploration program. A second capital raising is likely. Operationally, we are very happy with the company’s progress. Thanks to an excellent management team led by managing director Tony Truelove, we have quadrupled our resources.

    “We have four people on the board, of which I am probably the only truly independent director. In my view, this is sufficient for an early exploration company. Any spare money should go into the ground and geology generally. At the end of the day, the company’s ability to move beyond the exploration phase is dependent on finding a sufficiently sized discovery so all effort and funds should be directed to that end. At board level, the key in the exploration phase is to have directors who are hands on and can talk about the essence of the geology with shareholders.

    “As a director, my role on the board is to ensure that the governance requirements of a publicly listed company are being met, that accurate budgets are set and adhered to and that we are communicating our story as clearly as possible without overstating results.

    “As chairman, my role is to ensure the board is both robust and supportive of management efforts during what can be a frustrating time as you wait for the results of what the next drill hole will deliver.

    Steven Cole FAICD, chairman, Emerson Stewart Group

    “It can be difficult for fast-growth small companies that float. Often, the private company is run by a founder or major shareholder who has a lot of charisma and tries to run the board rather than working with directors. It can be a challenge to get entrepreneurs thinking more broadly about the company rather than their own interests.

    “Having said that, good entrepreneurs also realise they have an opportunity to ask questions of the board and have people challenge them. This can be confronting initially, but good founders know the benefit of having a board that is prepared to ask hard questions in the interests of all shareholders. And, they know there are more people there to support them on difficult management issues.

    “We were fortunate that we have a managing director, Dario Amara, who has terrific experience working in larger companies. We put together a board of five people and so far it is working very well. We’re very pleased with the culture that is being built at Emerson Stewart and the long-term plans.

    “Certainly, being a listed company has given us more credibility and standing in the market. Of course, there are always things you would do differently with every float, but generally it went smoothly for us.”

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