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Summary: Steven Drake, PwC Middle East Partner and Capital Markets Leader and Mazen Boustany, Partner at Baker & McKenzie Habib Al Mulla, discuss what a business owner should consider when weighing up the decision to go public

New regulations being formulated by officials in the GCC and MENA capital markets are set to strengthen regional capital markets, according to a statement from advisory firm, EY, adding that procedures to strengthen capital markets and attract investment continue to be implemented; once general market sentiment improves, the backlog of IPO candidates will begin to emerge.

Once the going-public decision has been taken, business owners should be aware that going public is a once-in- a-lifetime transformational event for their companies, said Steven Drake, PwC Middle East Partner and Capital Markets Leader.

"It forever changes how the companies go about doing business, and changes the lives of their owners, employees, investors and other stakeholders. Therefore, great care should be taken to ensure diligent planning and preparation to pave the path for a successful IPO," he said.

Mazen Boustany, Partner at Baker & McKenzie Habib Al Mulla, said that an IPO constitutes a real paradigm shift for owners of companies as they will first need to put their finances in order, they will no longer be the sole decision makers and controllers in their businesses, and they will be subject to a lot of transparency a disclosures.

Drake added that while business owners cannot control market volatility, growth and timing, they can initiate planning sessions early in the process in order to more swiftly take advantage of favourable market conditions, which includes asking themselves why they want to take their businesses public. This answer will drive the IPO strategy, choice of stock exchange, timing and offering structure. As part of this exercise, business owners should also consider the type of investors they would like to attract, as this will also influence the choice of stock exchange and offering structure.

Even though going public is by no means a simple process, there are advantages for companies to do so, which include access to capital to fund business growth.

"These companies can use publicly traded shares as a currency for acquiring other businesses or to retire debt.

In addition, employee stock option plans, using publicly traded shares, are usually established to attract and retain key management and talent employees by encouraging their commitment and long term motivation. Listing successfully the business on the right market can also raise its international profile with investors and peers, as well as its brand awareness," said Drake.

On the other hand, shareholders will benefit from a number of protective regulations including transparency and disclosure regulations imposed by regulators and the markets, and they will also benefit from the protection of the regulators in the event of any abuse of the management of the business, said Boustany.

He added that an SME will have to improve its management structure if it decides to go public otherwise the regulators should not allow it to go public, and it will not be attractive to investors. Therefore a strong and robust corporate governance framework is a necessity prior to going public.

As the company prepares for an IPO, it must expand and enhance its management team and capabilities and ensure it has adequate experience and technical expertise relevant to the company's business and industry as well as adequate public company experience, said Drake, adding that the company should also prepare its management team to begin acting like and functioning as a public company, both internally and externally.

"In order to achieve this, companies assess their management teams' effectiveness and implement more effective management decision- making processes. In addition, companies run management training in relation to requirements applicable to public companies to facilitate more effective discussions during the management and board meetings," said Drake.

TRANSPARENCY

According to Drake, companies are usually required to submit two to three years of audited financial statements and interim reviewed financial statements; financial statements will have to be submitted annually as well as quarterly or semi-annually, within the reporting timelines, relevant for the market.

He added that as part of the listing document, a company will also need to disclose, amongst others, its corporate governance and risk management frameworks, risk factors affecting its business and prospects, related party transactions, material contracts and management team biographies.

Going public allows shareholders to partly exit and maintain control depending on the stake sold through IPO, and they can take comfort knowing that their businesses will continue in operation after their exit or partial exist, as a public company is expected to function on stand-alone basis independent of its founding shareholders, added Drake.

Boustany added that there are few risks for an investor in a public company as it should not be held liable for any aspect of the business once it has exited it; however it should obviously be aware of the pricing at which it exits compared to its initial investment.

Investors should note that they will certainly face significant IPO execution costs, such as fees relating to underwriting fees, legal and accounting advisors, and exchange listing fees.

Once the company becomes publicly owned, the owners become accountable to all of the company's shareholders and the company may be under constant pressure to balance short-term demands for growth with long-term strategies, said Drake, adding that in some markets, the company's existing shareholders cannot sell their shares during a specified time following the IPO, known as the 'lock- up' period.

Drake added that being a public company usually enhances the visibility of its shareholders and they also tend to achieve enhanced liquidity by having their shares listed on a stock exchange and may obtain greater shareholder value, as the value of public companies tends to be higher than that of comparable private companies due to increased liquidity, available information, and having readily ascertainable values. Shareholders may, over time and subject to certain restrictions, sell their stocks in the public markets. They could also use their publicly traded shares as collateral for securing personal loans or settling obligations.

Once the decision has been made to go public, there a number of requirements a business has to meet and steps to take to prepare.

"The company should consider its group structure and which entity or group of entities will be listed and any tax and accounting structuring issues. The selection of the IPO market is critical as this will determine the stock exchange listing and corporate governance requirements, tax regime and market practice for executing the IPO and acting as a public company," said Drake.

He added that the company should also assess its corporate governance arrangements (including board composition and committees) and any changes needed to comply with the regulatory requirements and relevant market practice. Assessment of existing systems and processes, including IT systems, financial reporting systems, management reporting, budgeting and forecasting processes as well as risk and compliance systems and controls is also needed to identify potential weaknesses/opportunities for improvement in advance of the IPO.

"Under a number of international regulations, a company must have an operating history of at least three years before being able to go public as going public must be a reward to the founders of the business that would like to cash out," said Boustany.

NEW COMMERCIAL COMPANIES LAW

The new Commercial Companies law issued in 2015 will allow businesses in the UAE to float as little as 30 per cent of their shares compared to the current level of 55 per cent, which Boustany said is a welcome development in line with international best practices as it allows the founders of businesses to retain control of their businesses, despite of offering a certain percentage of the shares to the public. The previous threshold of 55 per cent was detrimental to a lot of business owners and was preventing them from going public. He added this development could definitely bring a lot of business to the markets once the sentiment improves.

"This new law will enable family businesses and SMEs to access the UAE capital markets without having to give up control of their companies, while at the same time providing more comfort and transparency to potential investors. In the global sense, this change in the minimum floating threshold is more aligned with many of the world's largest exchanges, and will allow the UAE to become a stronger competitor with the global capital markets. In the long term, this may lead to more interest in IPOs in the UAE especially from the Middle East region," added Drake.

THIS NEW LAW WILL ENABLE FAMILY BUSINESSES AND SMES TO ACCESS THE UAE CAPITAL MARKETS WITHOUT HAVING TO GIVE UP CONTROL OF THEIR COMPANIES." -- STEVEN DRAKE, PWC MIDDLE EAST PARTNER AND CAPITAL MARKETS LEADER

PREPARE FOR THE IPO PROCESS

* Consider carefully the advantages and inconveniences of going public.

* Be ready for a lot of scrutiny, transparency, and making disclosures.

* Have a management team in place that does not include the business owner or the founder or any of their family circles.

* Have all the accounts in order.

* Have a strong and robust corporate governance framework in place.

Source: Mazen Boustany, Partner at Baker & McKenzie Habib Al Mulla

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Publication:financeME
Geographic Code:7UNIT
Date:Oct 31, 2016
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