By Xavier Kong
INITIAL public offerings (IPOs) have become more hype than substance, according to Bain & Company, which claims that two-thirds of companies that go through global IPOs underperform against their established peers.
This underperformance is apparently a global phenomenon that extends well beyond the technology sector. Taking data from all IPOs that have stayed public from 2010 through 2014, Bain & Co found that they underperformed against their established, publicly listed peers, often to a substantial degree.
“Post-IPO companies had an annual weighted average total shareholder return (TSR) that was eight percentage points lower in the five years after the IPO. The performance was particularly weak in India, Indonesia, Brazil and Russia,” noted the consultancy firm, adding that only IPOs from China and Switzerland were at par with their indices.
It was also shared that most of the 30 largest global IPOs underperformed, and the weakest sectors were retail and healthcare. The number of publicly held companies in the US has also fallen, according to the World Bank, with money instead flowing towards private equity.
However, despite this trend towards financing in private markets, IPOs still hold inherent value for certain companies.
"IPOs remain relevant for companies looking to raise substantial capital quickly to fulfil growth targets or gain credibility and recognition. Elite companies that outperform view the IPO as a beginning and a means to longer-term value creation rather than the end in itself,” says Hubert Shen, a partner with Bain & Co’s mergers and acquisitions practice, and co-author of the report “Reversing the Winner’s Curse of the IPO.”
Usman Akhtar, part of Bain & Co’s private equity practice based in Jakarta, adds that too many firms underestimate the demands of being a public company.
“To pull off a successful IPO requires more than just financial engineering: you need to have a solid strategy for your future and communicate this to new shareholders in a manner that makes them invest for the long-term,” he says.
Bain & Co’s research had also identified three key actions shared by the remaining third of IPOs that have not underperformed, stating that these companies have a long-term vision, know their shareholders and their wants, and tell the story of their strategy, emphasising strategic support that builds long-term value creation. – March 6, 2020