Introduction
The decision to go-public is fundamentally a transformational event with a significant and pervasive impact on the overall operations of the company. Whilst going public provides the company with access to additional capital, it also exposes the company to additional compliance obligations expected of a public company and the requirement of new skill sets that may or may not be present within the current workforce. Careful consideration of these factors will assist management in creating a suitable plan
of action, thereby boosting the company’s chances of successfully achieving (and maintaining) its public company status. Companies that are considering going public should first critically assess how a public listing will benefit them and thereafter evaluate all possible means by which this could be achieved. The approach selected to go public (through an IPO/ reverse merger, etc.) should best reflect the strategic rationale behind the company’s decision to go-public. This publication is aimed at providing direction to companies going public using the IPO route, being the most common method to go- public.
The ‘what’ and ‘why’ of going public
Before we delve into the intricacies of an IPO, we will start with explaining the term, “IPO”. Essentially, an IPO is the process of offering the shares of a private company to the public for the first time.
Having established a basic premise of what constitutes an IPO (i.e., a means to go- public), we next consider the obvious question, why go-public? Whilst the decision to go-public brings several benefits to a company; it is not without its limitations.
Therefore, management should conduct a detailed evaluation of all pertinent facts and circumstances before reaching a decision to go-public, including choosing the most suitable approach that aligns with its corporate strategy. Some of the typical benefits and limitations of going public are outlined below:
Benefits
- Extensive financing opportunities
- Greater liquidity for shareholders
- Strengthens public image and/or brand
- Facilitation of M&A activities leveraging own securities as consideration
- Attractive proposition for employees – wealth creation
Limitations
- Loss of control and privacy
- Increased costs
- Greater oversight by regulators & other stakeholders
- Vulnerability to hostile takeovers
- Increased corporate governance responsibilities and cost of compliance
Selecting the right exchange
The decision on when and on which exchange to list your company is a long-term and important consideration in the development strategy of a company. Exchange stability, market liquidity, business opportunities, trading execution and regulatory compliance requirements are just some of the factors that should be considered in selecting the right exchange for going public. Companies can choose to list on the local exchange in their jurisdiction or elect to list on a foreign exchange of their choice. Companies selecting to list on foreign exchanges should also evaluate the impact of converting their financial statements from the locally applicable accounting standards to those applicable in
the jurisdiction of the foreign exchange. For example, companies in KSA considering listing in the New York Stock Exchange should be cognisant of the impact of converting their International Financial Reporting Standards (“IFRS”) and Saudi Organisation for Chartered and Professional Accountants (“SOCPA”) compliant financial statements
to U.S. GAAP as well as any other regulatory requirements that may be applicable to companies listing in that exchange, e.g., compliance with the Sarbanes Oxley Act.
The exchange selected for listing can not only influence valuation and liquidity, but can also provide non-financial benefits, such as enhancing the visibility, reputation and brand image of the company. Therefore, selecting the right exchange to go-public requires careful consideration of your goals and objectives, as well as the eligibility criteria and listing requirements of different exchanges.
For comparative purposes, below are the top 15 exchanges globally, based on market capitalisation as at 30 September 2023:
The Saudi Stock Exchange is not just one of the top global exchanges, but also the largest and most liquid in the MENA region. Some of the benefits of listing on the Saudi Stock Exchange are:
- KSA’s Vision 2030 Program has resulted in a major economic transformation aiming to diversify the economy, boost the private sector, and attract foreign investment.
- Listing on the Saudi Stock Exchange provides access to a thriving market in the MENA region with a large and diverse pool of investors. KSA also belongs to the G20 group and has strong economic and political ties with other countries in the Gulf Cooperation Council (“GCC”).
- KSA also provides appealing tax advantages and incentives for businesses, such as a low corporate income tax rate of 20%, no personal income tax, zero VAT on exports, and various exemptions and subsidies.
Listing in the Kingdom of Saudi Arabia
As mentioned earlier, Tadawul is one of the top global exchanges and the largest and most liquid in the MENA region. It offers businesses access to a deep pool of investment capital to support companies with their growth and unlock exciting new opportunities.
The Saudi Stock Exchange also offer issuers looking to join the market for the first time, a choice of transactions depending on their needs. Issuers can choose from:
- An IPO on the Tadawul or the Nomu; or
- Issuers can also choose to undertake a Direct Listing on Nomu without an offering. This route may suit companies which have already raised capital through other means and have a diverse set of investors who are looking for the benefits of a public market quotation to trade their shares.
For the purposes of this publication, we will focus on companies selecting to go for an IPO either on the Tadawul or the Nomu. Whilst Tadawul is the main and largest market of the Saudi Stock Exchange, Nomu provides an alternative platform for smaller companies to access capital with less restrictive listing rules, lower listing fees, and shorter settlement cycle than the Tadawul. Overall, with Nomu’s flexibility and lighter requirements as compared to Tadawul, it has quickly become an attractive proposition for smaller companies.
Commencing your IPO journey
An IPO is a complex process that can take several years in planning. In fact, it would not be incorrect to say that some companies begin their IPO journey 1-2 years before officially filing an application for intention to go public with the regulator. In our view, successful public companies often start operating as a public company well before actually becoming a public company to better prepare for the next phase.
Timing plays a very important factor that can affect the success of an IPO. The timing can influence the demand, supply, pricing, and listing of the company’s shares. A well- timed IPO can help the company raise more capital, achieve a higher valuation, and create a positive impression among investors. Therefore, companies should try to launch the IPO when the market is favorable or when the demand for the company’s products or services is high. This can help attract more investors and achieve a higher valuation for the company. Conversely, if the market is unfavorable or when the industry is facing challenges, the IPO may face difficulties in raising capital and may have to lower its price or postpone its launch altogether.
The company should also try to launch an IPO when the company has strong financial results and growth prospects. This can help showcase the company’s potential and justify its valuation. The market may be right, with liquidity abound, but your company may not be. The reverse could also very well be true. In our view, a company being ‘internally’ ready is equally important to the external factors noted earlier.
The IPO process can be categorized into the following phases:
- Phase 1: Pre IPO
- Phase 2: IPO Execution
- Phase 3: Post IPO
The pre-IPO phase is a transformational stage when the private company has decided to go public and thus needs to set up the groundwork for becoming public. It needs to assess its readiness in all the areas. It is imperative that at this stage, companies identify and select comparable companies for benchmarking purposes. The key here is to start early to ensure that the company gets enough time and resources to address any gaps identified and/or make the required improvements.
This phase is also commonly referred to as the “IPO Readiness Assessment”. Under this phase, a detailed evaluation of various factors is required to determine the company’s readiness for the IPO process. Some of the common factors that would be applicable to most companies include the following:
01. Accounting and regulatory reporting
02. Legal structure, ESG & Taxation
03. Enterprise Risk Management, Corporate Governance & Internal Controls
04. Treasury
05. Investor relations
Commencing your IPO journey
IPOs are time-consuming, expensive, and challenging. Achieving a successful IPO requires organisational collaboration across multiple workstreams and working collectively to prepare the company to operate as a public entity. Furthermore, the months before an IPO are a whirlwind of activity. Consequently, it might not be feasible for companies to manage the IPO process themselves without impacting their core business and therefore, the use of trusted advisors who understand the complexities of the IPO process cannot be overemphasised.
Our team at Uniqus has supported multiple clients across geographies with their respective IPO journeys and some common themes emerge in relation to what contributes to the success of an IPO:
- Going public is a significant shift for any company, and it demands the coordination of all its business units to pursue a common goal. Each business unit has a specific role and responsibility in the process, such as preparing the financial statements, ensuring compliance with legal and tax rules, developing the governance structure, crafting the company’s story, selecting the underwriters and analysts, providing input on the valuation, engaging with potential investors, and getting ready for the roadshow and the transition to being a public company. Therefore, it is critical that the business units come together with a shared vision and work as a cohesive team.
- To prepare for a successful IPO, the company should plan ahead and take the necessary steps to improve its readiness and attractiveness to prospective investors. This could involve starting the planning process around 12-24 months before the expected IPO date and conducting a thorough assessment of the current situation of the company including, an assessment of whether new skills are required within the workforce to cope with the deliverables of a public company. This will facilitate the identification of any gaps or weaknesses that may affect its valuation and developing a detailed action plan to address them. Any action plan formed should include specific tasks, timelines, and responsibilities for each workstream, and should aim to enhance the company’s potential and appeal to the investors.
- Whilst the industry performance and global outlook influence the appetite for IPOs, timing also plays an important factor that can affect the success of an IPO. A well-timed IPO can help the company raise more capital, achieve a higher valuation, and create a positive impression among investors. The company should launch the IPO when both internal and market conditions are favourable, i.e., there is high demand for its products or services, strong financial results, and growth prospects. It is equally important to ensure that the company is ready internally, to operate as a public company as well.
