Selecting the Right Investment Bank to Take Your Company Public
Taking a company public is a momentous milestone in the growth of a life science or healthcare company. Whether or not an initial public offering (IPO) is in your company’s future, the goal is always the same: increase the company’s value. And just like your marketing communications, you need to start with a cohesive strategy. Our guest contributor, Melody A. Carey, provides perspective on how to partner with an investment bank for an IPO.
The journey from a private start-up to a publicly traded corporation on Wall Street is a vast one. A private company needs time and resources to establish itself as an attractive, worthwhile investment before taking the big step of going public. Even if a company has experienced early success and is saving lives or changing the world for the better, the investment world is going to be focused on one thing: finances.
For investors to feel comfortable with the risks associated with taking a large position in your company’s stock, the company’s financials must be healthy and promising. That’s why, for a successful IPO, it is critical to partner with the right investment bank to execute your deal. Here are the core considerations for selecting the right bank.
Finding Your Niche
When searching for a bank, the three most important things to remember are: start early, know your area, and cast a wide net. First, because the process can take a while, start meeting with investment bankers at least 12 to 18 months in advance of the targeted IPO timeframe. The bankers will give you expert advice on how to complete a successful offering, and you may need that time to address any issues or concerns that they raise. By dealing with these in advance, the company will be well prepared for the investor scrutiny that accompanies the IPO process.
The type of bank you choose to work with is an important consideration. “Healthcare” is too broad of a term – you should look for banks that are active in your particular sector, such as specialty pharma, biotech, healthcare IT, tools and diagnostics, major pharma, medical devices, managed care, healthcare facilities, CMOs and CDMOs. When interviewing banks, you want to know their relevant experience and expertise in your specific area. Spend time researching the reputations of those banks and the deals they have successfully executed over the past four years in your specific niche, regardless of market conditions.
Once you’ve identified banks within your specialty area, meet with as many as possible to gain different perspectives on your proposed IPO. The bankers are going to estimate what your company is worth. It’s important to know the valuation range well ahead of going public, especially since there are steps you can take in advance to increase it, such as increasing revenue or winning larger clients.
You should come to these meetings with an open mind and an investor presentation that is both polished and substantive. Firms like ours, Rx Communications, are well versed in what bankers are looking for in an IPO candidate. We can help companies prepare their investor presentations and then also arrange introductory meetings with the right bankers.
Another key facet of IPO success is the relationship between the company and the sell-side analysts who write research reports on your industry. Whereas bankers do all the financing involved in putting a deal together, the sell-side analyst actually sells your stock to investors.
Therefore, it’s important to consider how a bank’s sell-side analyst is regarded among his or her peers in your specific niche. To get a strong sense of their experience, it helps to review prior offerings that they worked on, as well as recent reports on your peers that they follow. The research should provide you with some insight into how well the analyst understands a specific sector and how their views are aligned with your company’s business and fundamentals. Look for a research analyst who understands your company’s dynamics and has experience in your industry or subsector.
Because sell-side analysts can be very influential with investors, it is important for the analyst to hold a favorable view of your company. As soon as the deal process commences, the analyst is going to get in front of people and discuss its merits, and after the deal they’re going to continue writing research reports. If the sell-side analyst has concerns, they may not write favorably. They have a reputation to uphold and they are not going to tell their clients, who are major financial institutions, to buy your stock. The analyst has to believe in your company so they feel good about recommending it to their institutional clients. Therefore, look for a sell-side analyst who likes your company, because that will be key to the IPO’s success.
You can learn a lot by looking at what happens after a company goes public and its stock begins trading. If the stock declines the day after pricing and stays down, that’s a red flag. When selecting a bank, look at other IPOs it has completed and look at stock price performance of those deals immediately after pricing. The people who work in sales and trading are the ones who pick up the phone and talk to investors. If they don’t believe the company is a wise investment, they won’t sell it. It’s important for the sales and trading desks of the underwriting banks to support your stock.
Another consideration in after-market support is to select banks that sponsor investor-only healthcare conferences. You will likely be invited to speak, and this is a free and highly coveted way to continue to raise visibility throughout the year and meet with current or prospective investors on a one-on-one basis.
A final consideration is how you will partner with a bank beyond the IPO. Of course, partnering with a bank that is large and well-known portrays your IPO as a blue-chip deal, but if you are a small to mid-sized company, you should understand that those larger banks may not have as much time for you. Find the best fit for your company––in other words, choose a bank that provides the specific attention and resources that you need.
When bankers come in and work on your IPO, they spend a lot of time getting to know your company. Working with the same bankers after the IPO means they don’t have to start from the beginning in terms of due diligence. Choose bankers that you like and that you want to work with in the future, whether it be via a secondary offering or a strategic transaction such as merger or acquisition. It helps if the bankers have a great rapport with management and there is chemistry and trust between the groups.
There are many important considerations when selecting the right investment bank or banks to take your company public, but by following these tips you should feel more confident about selecting banks that represent the best fit.
Every life sciences and healthcare company, whether private or public, seeks to deliver more value to their shareholders. Even if you’re not yet ready to go public, understanding how the process works will help you prepare for future growth.
Melody A. Carey is president and chief executive officer of Rx Communications, a firm that has been providing award-winning communications counsel to life sciences and healthcare service companies since 2000.