The article of Zoya Taranchenko, EBS consultant, was published in business magazine “& Strategy” (June 2006): “IPO offers standards of new business-models”
A company should achieve some long-term result with the help of its brain (top-management) and heart (company’s owners). Possibility of success in business is ensured by systematic work and ability to feel ‘a favorable situation’ for a hitchOnce the standard of “90-60-90” was formed on Paris catwalks, and now young ladies throughout the world attend gyms, keep to fashionable diets and let abundance of plastic surgeons earn money. We can argue for a long time about utility of spreading of information on beauty standards, but we can definitely state that appearance of a popular standard in society often leads to the work of its representatives aimed at making one’s own characteristics meet the characteristics of a positively offered standard.
Today IPO or Initial Public Offering of shares is definitely one of the most topical themes in Ukrainian and Russian business. Numerous articles in periodic publications and constant events held concerning this theme are evidence of this. On April 11-12 Second Annual Forum of General Directors was held in Ukraine and one of its main topics was IPO theme. On April 14 Second Russian IPO Congress was held in Moscow. National IPO Committee was formed on a voluntary basis in Kyiv; its members are acknowledged experts of Ukrainian and international business.
What makes IPO theme so topical today? Even in 2005 experts foretold IPO boom in Ukraine in the middle of 2006 which is very close now. Why so many companies think of perspective of doing shares on international exchanges? Numerous advantages of this business-move make it “fashionable”. It becomes a standard strategic solution of successful companies.
The company makes a decision on IPO entry and chooses with excitement the place where to put shares in. As ambitious experts and managers they choose Business schools with world-known name. IPO seems to be an image matter for Ukrainian companies, but it has many other advantages. These are they:
1. Enlargement of potential scale of investments. Access to much bigger (hundred times) than Ukrainian stock market. Moreover, international market is characterized by more effective organization, possesses much wider choice of tools and finance mechanisms that allow even small companies to receive necessary investments.
2. Non-loan and non-percentage financing. There is an opportunity to avoid outer debt burden due to additional financing for share financing doesn’t create outer arrears and saves from necessity to pay interest. But share capital formation in Ukraine is taxable that still confuses many Ukrainian businessmen who make decisions on IPO. Moreover, shares sold must be secured and share dividends must be paid. This fact counteracts rather common opinion about “free” finance forming with the help of IPO.
3. Higher market evaluation. The company gets much higher market evaluation in comparison with a Ukrainian one.
4. Creation of account business. Description of dynamic changes of business ownership structure occurs. The participants who are directly interested in owning a part of this company appear among owners. This fact allows current owners to change their share in this business and even quit it receiving worthy compensation.
5. Obtaining investments (in the form of share financing) keeping business control. There is an opportunity to save majority interest and at the same time gain large financing. Company’s share retail gives former full owners to control the course of business.
6. Rise of company’s status. There is an automatic rise of company’s status and trust rating (including a credit one).
7. Involvement of cheaper credit assets. There is an opportunity to involve borrowed current assets abroad that are much cheaper than in Ukraine.
8. Risk diversification. There is decrease of company’s owners’ risks due to shifting these risks into international sphere. Involvement of western capital decreases risks of the company, which is afraid of re-privatization processes.
All these advantages can be gained by the company that satisfied all the requirements necessary for IPO entry. We should say that they are rather strict and limit the number of Ukrainian companies-dreamers to some tens. Here are requirements in short:
1. Successful financial-economic activity, stable development of finance rates (turnover, assets), market share, account balance not burdened by huge credit arrears.
2. The rate of assets and/or annual turnover not less than $5-10mln (optimal is considered to be $25 million). And some experts think that there is no sense in putting shares into international market if 15-30% of authorized capital stock offered when IPO is conducted is less than $50-200 million.
3. Audit conducted according to international standards, and presence of report made according to international forms.
4. Attractive business sphere. The company should conduct its activity in the sphere of economy attractive for investors (it is necessary for high-tech companies to have a registered now-how).
5. Presence of vision and long-term definite and clear strategy of business development. There should also be skilled management that has been proving its competence for several past years of company’s activity.
6. Full clarity. Information concerning share-holders should be given and there also should be clear owners’ structure and structure of company’s management.
On one hand, these requirement can seem too strict, but on the other hand, if to examine them carefully, it will turn out that all of them (except point about company’s size) are characteristics of a successful civilized company, which possesses a strong development strategy and claims to have an international level of business management quality.
We can make a sad conclusion that very often companies think in a contrary way being guided by ‘logic vice versa’. Considering the size of the company to be the main one (though it doesn’t show the effectiveness or competitiveness of the company), the owners adjust all other factors to the stated requirements. However financial-economic development is difficult to be forged. That’s why companies that have such an intension are being eliminated before IPO entry. To shift activity accounts to the international standards time and money are needed.
Attractiveness of business sphere should be long-term but not situational. If the company is not involved in petroleum production or does not produce high-tech goods, it does not mean that its business sphere is not interesting for world investors. One of the most significant factors of sphere attractiveness is rate of market growth, that’s why majority of business spheres in Ukraine are prospective and attractive due to quick development of economic situation in the country.
Development strategy, skilled management and full clarity are weak points of Ukrainian business, maybe, because they are considered to be of no great importance. Most of Ukrainian businessmen cannot accustom to the fact that company’s share-holders and the company itself are different notions each of them having number of peculiarities and unique characteristics. This shows that many Ukrainian companies are absolutely not ready for obtaining and justifying the status of publicity necessary for international capital market entry.
One of the weakest points of Slavic national IPO entry process is reluctance to perceive that share capital has a number of peculiarities, moreover if it works on international exchanges. And this is not only notorious publicity which is still considered to be an offence of a “naked king”, but also so-called mixing of notions “company” and “owners”. Of course, it is not easy to get used to the fact that you can take everything yours with yourself to the grave, but even here it will not be possible to do everything you want to your possessions. Because share-holder’s possession is shares, but not company that now becomes an independent alive organism, even if a main owner keeps majority interest.
IPO is not only capital forming and gaining all concomitant advantages, but also great changes in management style that should now conform to an international level and international standards. But this does not mean shifting to international accounts standards and learning English by all workers of the company (from General Director to office-cleaner). This means changes in every worker’s consciousness. And this needs full readiness of the owners and top-management to accept these great changes. They will have to spread their understanding of changes necessity, moreover to break both the workers’ and their own resistance.
In other words we offer companies (especially small and medium ones) to accept all IPO requirements as the basis for development strategy and start its realization from the last points of the list given above ― “development strategy, skilled management” and “full clarity”. Such a strategy is successfully implemented by Polish companies; and Polish exchanges claim that their aim is to interest small and medium companies to work in IPO. We suppose that such a strategy of “inner business development” will be acceptable and positive for Ukraine now ― on its stage of development.
Prospective strategy
We will name basic elements of an offered strategy that will be conventionally called “Strategy of prospective orientation toward international capital attraction”. It should be mentioned here that the main goal of strategy of orientation toward international capital attraction is not only IPO entry. On the contrary, its basic matter is to create quality business changing its whole essence. The strategy implies that quality business of international level is characterized by numerous advantages, quick rise and consequently by necessity of financial development with the help of IPO. It should be mentioned that the strategy will include stages of company’s preparing for IPO entry, and also elements adopted for small and medium companies in the form of “to do list” divided into 8 basic packages.
First package “Strategy Forming and Following”
• The company develops its mission, vision, strategy and goals, looks through these documents, make amendments to them according to the changes of situation, and gives information on mission essence, strategies and goals to every worker.
• It takes measures on workers’ team uniting, strengthens workers’ corporative spirit.
• The company studies possibilities of research and development activities’ usage in the company’s work and necessity of making independent investigations, drawing decisions and their realization.
Second package “Company’s Activity Description”
• The company conducts investigations and finds partners that will accompany it in the process of its activity: juridical company, consulting company.
• The “Self Due Diligence” is conducted with the help of the chosen partners or on its own. Special attention must be paid to management, the company’s deals and agreements, juridical sphere in the company, financial and tax accountancy, business development scenarios, spheres and markets of the company’s influence.
• Results of the investigations held are confirmed by documents and information is renewed in the course of the company’s activity (for example, if the company purchases new productive assets information on this must be put into the description of the company’s activity).
• All remarkable event of the company’s life are fixed in documents.
Third package “Personnel Training”
• Personnel are taught professional skills regularly.
• Trainings for the company’s management are conducted; raising the level of their skills is done.
• The company involves outer specialist in the process of its activity evaluation and control.
• The changes are controlled. Personnel are involved in all important processes taking place in the company.
• Corporative culture is developed.
Forth package “Advancement and popularity ensuring”
• The company takes part in PR measures regularly, establishes relationships with mass media, organize PR-actions. In other words, the company takes all possible measures to become popular on the market of influence.
• A corporative web-site is created, developed and maintained for information about the company to be opened for international community.
Fifth package “Ensuring of financial stability and rise”
• There is financial management in the company that will ensure its solvency and make the company free from large credit arrears.
• The company examines possible diversification of business and makes investment in attractive, quickly developing business spheres, if it is not stated in the strategy.
• The company investigates possibilities of business development and realizes projects of activity expansion periodically.
• Profit distribution is strictly controlled.
Following this recommendation one should take into account the fact that successful realization of shares with the help of IPO offers mono-branch business. That is why this point should not be regarded as a strict regulation for actions in case if a company is gong to put its shares to international exchanges. Diversification is needed if a company possesses a large planned time resource before IPO (4-6 or more years). It can be aimed at 1) realization of possibility of more effective profit utilization than investments in one’s own business and dividends’ payment (temporary highly remunerative investments); 2)realization of possibility of developing relatively new (innovational to some extend) business on Ukrainian market. Then it can be separated as a company that will claim to attract investments through IPO for it will be able to take from its mother-company management style, principles of openness and other factors that will open the way to international investment market.
Sixth package “Certification adhered to international standards”
• Workers are taught to conduct accounting in accordance to international standards.
• The company is certificated through the systems of international quality standards.
Seventh package “Risk Diversification”
• The company conducts diversification of risks concerned with dependence on groups of clients or suppliers. The base of clients and suppliers is developed.
• The company investigates activity risks, describes anti-risk measures, develops matrix of SWOT-analysis.
Eighth package “Ensuring of prospective of Capital Forming”
• If the company is not a joint-stock company, possibilities of reorganization of form of ownership should be examined and project of public company creation should be developed.
• The company studies business competitors and partners, possibilities of strategic alliances forming through alternate M&A-transactions for further IPO entry.
Following recommendations given in eight packages will help companies to come to international capital market without losses. They will be prepared, will not make sudden decisions, and will not be afraid of consequences of selling shares through IPO. To analysts’ point of view, the best way of conducting first public emission is to be prepared to IPO though conducting day-to-day activity waiting for a favourable situation “to pass to the offensive”.
There is one more interesting moment. How difficult realization of all requirements for companies tending to gain high-paid publicity seems to be, but still all companies having put their shares into exchange claim that IPO starts only from this moment. Here comes the beginning of daily work with investors, organization of publishing regular accountancy, maintenance of a corporative web-site, readiness for changes of shares’ quotation as a result of the factors not depending on the company, presence of independent representatives in committee of directors of the company, adherence to the rights of minority shareholders, fighting the resistances in the company, disclosure of events taking place in the company. All these are to be done not once and with some definite aims. At this moment begins painstaking process during which the company’s owners and management can often remember saying: “If you pledge, don't hedge”. This is just that stage where the company can prove that it is worth much, has potential and is not going to waste its so wanted investments, but will certainly enlarge them.
Here we can see two main IPO strategic aspects:
1. One should not consider the moment of international exchange entry to be a final victory and achievement of a strategic goal. This is only the beginning of the strategy.
2. It would be quite careless to direct one’s efforts toward short-term likes and needs of international market while conducting activity after having entered IPO. International market is aimed at long-term result. That is what the company should prepare for by means of its brain (management) and heart (owners).
The main advantage of the strategy of prospective orientation toward international capital attraction is shifting to international standards of business conducting and consequently the company’s becoming competitive on international market. This gives it an opportunity to compete for foreign investments, moreover, for foreign clients and partners.
There can appear quite a logical question: if we are not going to enter IPO in the next 2-3 years, why should we spend much money on measures to raise business to high standards?
There is no exact answer as there are no formulas in management. Of course, each company decides on its own on what level to work, what ambitious goals to have. But positive experience of both western and eastern companies shows that possibility of business breakthrough is ensured by systematic work and ability to feel ‘a favourable situation’ for a hitch. Moreover, the process of shifting to new activity standards gives the company series of competitive advantages that result from inner changes.
Hence, it is obvious that advantages of IPO entry are mainly gained by work of the company, but not purchased at the moment of company’s coming to international capital market. This is mentioned in famous Japanese system “Kaizen” which underlines the importance of continuous improvement. And practice shows that continuous improvement of activity should cover all its basic aspects. Individual system of Balanced ScoreCard (BSC) will be held for control and complex evaluation of state of the company having accepted the strategy of prospective orientation toward international capital attraction. This system can be built according to the strategy packages given above.
Changes implementation in most companies is conducted in accordance with a model of two cycles:
PDCA – Deming’s cycle (plan-do-check-act)
SDCA – Kaizen’s cycle (standardize-do-check-act)
If to combine these two cycles we get a model of control of improvement changes and processes on strategic, tactic and operational levels.
The main task for management of Ukrainian companies tending to receive international capital is to start evaluating their business in accordance with principals of BSC (“not only finances”) and reject opinions that were formed on the basis of static business states at some definite moment of the company’s activity. Ukrainian capitalists should perceive that successful business is a rush development and constant urge towards improvement, but not a means of earning money.
Hence, while implementing the strategy of prospective orientation toward international capital attraction, we offer to use BSC, based on the strategy packages given above, as an instrument of evaluation and constant control of business quality improvements, and also combination of Deming’s and Kaizen’s cycles as a means of continuous improvement of rates that were defined by the company and are basic ones for BSC.
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