- Latham & Watkins have put forward a list of
proposals aimed at improving the IPO process in
- Fewer companies are successfully completing IPOs
in Europe, with just 263 offerings in 2012;
- A key element of the proposals involves giving
investors additional access to management and time with the
- The proposed shake-up also questions whether
pre-deal research is a necessary feature of the IPO
- The attitude of Europes leading banks will
determine whether these changes are driven
Latham & Watkins have come up with five steps
detailing how to improve the European initial public offering
(IPO) model. The proposals are gaining traction with some
of Europes leading banks.
The roadmap suggests tweaking the current model, as
opposed to tearing it down and starting over again, as has been
suggested in some quarters.
Although there are many views on the causes of the
weakened state of Europes IPO model, it is clear that
fewer companies are successfully completing IPOs in Europe.
According to one PricewaterhouseCoopers survey, there were just
263 IPOs in Europe in 2012, raising 10.9
The changes are necessary because the current
model is too burdensome and yields too little results,
said Olof Clausson a partner at Latham & Watkins
London office and one of the lawyers behind the proposals.
There are too few IPOs, and those that do happen take too
long to execute.
Indeed, over the last decade, Europes IPO
process has become increasingly complex and time-consuming.
The amount of work involved for everyone is
far beyond what it was ten years ago and it hasnt
produced better results, he added.
The traditional approach, which is still the
mandated method in the US, is that the offering is marketed
based on the prospectus and the management slide show
presentation, known as the road show. Over time, in the
European model, additional marketing methods and documents have
been added to the process.
A European IPO today typically consists of three
separate work streams. These involve prospectus drafting and
related due diligence; preparing the analyst presentation,
interacting with the analysts and reviewing draft pre-deal
research; and delivering presentations as part of the investor
Claussons first proposal to
make the process more efficient is to give investors additional
access to management and time with the prospectus.
What were saying is we
like the US model where the preliminary prospectus is filed
with the SEC for between one and two months before the
road-show starts, said Clausson. It means that
investors can educate themselves in good time.
The idea of giving investors more
time with the prospectus could be achieved by sharing a near
final prospectus, known as a pink herring, with key
This system contrasts with the
European model where investors get the prospectus the day the
road show starts and have two weeks to decide whether the
investment makes sense.
The second element of the changes
involves rethinking attitudes towards pre-deal research. Even
post-Jobs [Jumpstart our Business Startups] Act, pre-deal
research is not a feature of IPOs in the US.
For the companys management,
preparing the analyst presentation, engaging with syndicate
analysts, and reviewing and commenting on the research reports
requires significant additional time on a European IPO.
If investors get the material
information earlier, do the benefits of pre-deal research
really justify the burdens involved, said Clausson.
Would it not be better to focus on getting investor
education and the prospectus to investors earlier, while
avoiding the cumbersome equity research process.
Reducing the size of underwriting
syndicates is also a central feature of the plans to
reinvigorate Europes moribund equity markets.
Our investment banking
clients suggest that, except in very large transactions or
unique situations, large syndicates are not required for
efficient and effective distribution, said the Latham
& Watkins partner.
Another aspect of the changes involves reducing the
free-float requirement for companies looking to list on
regulated markets. Many European stock exchanges now require
that at least 25% of the shares of a listed company be freely
The reasoning is that at a time when many
sponsor-owned portfolio companies may be valued below book, a
reduced free float requirement may facilitate exits. In such a
partial exit, control would be retained and a
strategic sale at a control premium may still be an option.
The final aspect of the proposals
is for owners, including sponsors, and IPO issuers to engage
counsel and auditors earlier in the process. When
underwriters are engaged and the IPO process is formally
initiated, it is not uncommon for a series of rather basic
structuring and procedural matters to cause substantial
delay, said Clausson.
This would allow the issuers
deal team to efficiently address matters such as the completion
of audits, the analysis and resolution of core corporate
governance issues and the preparation of substantial parts of
the prospectus, before the underwriters are selected or the
process begins in earnest.
The effect of this would be to
substantially reduce the amount of time between IPO kick-off
and launch, while allowing the underwriters more time to
conduct due diligence, develop the equity story and communicate
with investors, added the Latham & Watkins partners in
Who will make the
According to Clausson, the banks need to be the
drivers of this change. They need to have the strength
and the desire to say were going to make these changes
because the current structure isnt efficient, he
But its what happens with IPOs in the medium
term that will determine whether the changes go through.
If the market sees a few successful IPOs with
the old model people might continue along those lines,
said Clausson. But if we continue not to see successful
IPO executions I think the desire to find a new model will be
JOBS Act Quick Start http://www.iflr.com/IssueArticle/3175349/Supplements/JOBS-Act-Quick-Start-e-book.html?supplementListId=88098
How the US JOBS Act helped Man U
SEC IPO rules to provoke conflicts
of interest http://www.iflr.com/Article/3108337/SEC-IPO-rules-to-provoke-conflicts-of-interest.html