An IPO is a special kind of divestiture that involves floating the new business on the stock market, much as the founders of a start-up do. What are investors looking for in an IPO? And what makes the difference between success and failure?
When it comes to IPOs, investors are looking for clear strategies based on competitive advantage in the market, along with growing profitability that can be achieved through quantifiable targets for sales growth and efficiency improvements. Investors value a transparent organizational structure that has clear accountability and comprehensive reporting metrics. And they want consistency—sudden changes in the story arouse suspicion.
It takes time to build a compelling strategy and prepare the organization to exist independently. The process should begin well before the IPO announcement. The right conversations must happen among management, the board, and other relevant parties.
Some IPOs are wildly successful, and some fail spectacularly. What makes the difference between winning and losing on the market? A study of European IPOs over the course of a decade revealed several strategies that lead to success.
Unlike trade sales and IPOs, spin-offs distribute shares in the new entity directly to a company’s existing shareholders.
A company’s existing investors often find spin-offs highly attractive. In some jurisdictions, spin-offs have attractive tax advantages because they don’t generate any cash. Investors also benefit from the value created by the spin-off entity, and from the value the parent company creates by streamlining its business. But like any divestiture, it can be difficult to get a spin-off right. They are complex transactions that require seamless work involving dozens of senior executives.
How can a company ensure that its proposed spin-off will end up a success? There are four key steps: