"When it comes to undertaking an IPO, preparation is unquestionably the key to success in both the short term and the long term," said Maria Pinelli, Americas Director, Strategic Growth Markets, Ernst & Young LLP. "Part of being prepared is to understand what the market responds well to so that you can determine if you are, indeed, ready. The companies in our study, for instance, didn't just go public; they were immediately listed in the Russell 2000, which has been hitting record highs this year."
"This creates enormous pressure for companies to achieve exceptional performance," continued Pinelli. "Our analysis of this unique group of companies found some interesting common ground among successful IPOs. Some of these insights could be useful as companies prepare to come to market by helping anticipate how the market might react to their offering."
Among the group of 110 companies, key findings of the study include:
Despite Youthful Energy, Age Has Its Beauty
- Only 11% of the companies analyzed went public in their first two years of operations. Though the average time companies waited between their founding and their IPO was 14 - 15 years, that number is affected by the oldest firm, started in 1937. The median year of founding for this group of 110 companies is 1998 - making them generally 8 or 9 years old.
- Size accompanies age, as shown by the annual revenue of companies launched before 1995, which averages $703,000. Annual revenue for younger companies was only $190,000 on average.
- Though young companies may achieve strong growth, age also tends to reduce the risk of poor performance. Among younger companies (founded in 1995 or later), the losses after 90 days of IPO trading could reach -51.7%. Yet for older companies (born before 1995), the first 90 days of IPO trading losses did not go below -20.5%.
It's Hip to Be Global
- More than a third (39%) of the 110 companies that make up this Class of '06/'07 have global operations, a statistic belying the theory that only large, publicly held companies are concerned about global issues and the global marketplace.
- Furthermore, global operations seem to contribute to stronger performance. Among the 43% of IPOs that outperformed the Russell 2000 Index as of June 30, 43% had global operations.
Institutional Investor Interest
- Across the total group, 70% of the IPOs had fewer than 80 institutional investors (20% have from 20 to 39 investors; 21% have from 40 to 59 investors; 28% have from 60 to 79 investors).
- In terms of performance, 38% of outperformers have over 80 institutional investors while 24% of underperformers have over 80. Yet more than three-quarters (77%) of companies with fewer than 40 institutional investors underperform the Russell 2000 Index. In fact, they underperform more than twice as often as they outperform.
Transactions Help
- Though many may expect that planning to acquire another company or a large stake in another company can distract management from performing well immediately after IPO, trading premiums weren't hurt, and in fact could be helped. According to the study, 77% of the measured companies that conducted a transaction after IPO were trading at a premium as of the end of June. This compares favorably to the companies that did not conduct a transaction, for which 55% were trading at a premium.
IPO CEO Snapshot: CEO Isn't a Woman
- When it comes to gender, IPO CEOs in this group are overwhelmingly male. In fact, only 2% of the CEOs in this study were women.
- Experience isn't always a sign of success. The average age for both outperformers and underperformers was 50 - 54 years old. However, while 13% of outperformers were under 40, only 8% of underperformers were under 40. Among older CEOs, 15% of outperformers were 60 or older, while 20% of underperformers had reached that age.
- You get what you pay for. While 66% of IPOs that outperform the overall Russell 2000 Index offer their CEO a total compensation of $1 million or more, only 48% of the underperformers offer that level. And while 2% of the outperformers pay less than $500,000, 17% of the underperformers pay less than $500,000. Though total compensation may be swayed by market performance, the annual salaries of CEOs follow the same trend.
- Higher education also accompanies higher performance. Among outperformers, 71% of CEOs held a higher degree than a Bachelor's, compared to 61% of underperformers.
Trading Premiums and Corporate Operations
The potential trading premium of the January 2006 - June 2007 timeframe may have been affected by the strong overall markets. For example, companies that went public in 2006 have a significantly higher average gain in the first quarter than IPO companies in 2007. However, the group shows some consistent performance patterns, including:
- On Day 1 of going public, 55% traded at a premium, with 11% of companies trading more than 10% higher than the original price.
- Ninety days later, 60% traded at a premium to the original sale price, and 42% were trading more than 10% higher.
- As of June 2007, 60% were still above the original price set, with nearly half (48%) trading above the original price by 10% or more.
Bad News Is ... .Bad
- A single negative news item (whether it's about the individual company, or weakness due to market conditions), can have a significant impact on a young public company. While 47% of companies that did not have negative news were able to beat the Russell 2000 Benchmark, only 32% of companies that issued "bad news" could reach that mark.
- Of those that issued "bad news" since Day 1 of going public, 25% saw a trading loss of more than 25%. Only 5% of companies that didn't face "bad news" saw more than a 25% trading loss.
