For many Canadian executives and entrepreneurs, trading on the public market means achieving a financial goal – whether it's an acquisition, expansion or paying off debt. It often also provides owners and investors with an opportunity to cash out.
But going public has lost much of its appeal in the last two years, as the recession created a volatile and illiquid market that meant businesses couldn't get the same value that they could in previous years.
In 2008, IPOs saw a mere $682-million in total dollar value for all offerings made, compared with $3.5-billion in 2007, according to PricewaterhouseCooper's Canadian IPO Survey. The following year was a little healthier, reaching $1.82-billion. But four of the IPOs issued in 2009 accounted for 96 per cent of those funds, including Genworth MI Canada Inc. and Capital Power Corp.’s sizable offerings ($850-million and $500-million, respectively).
This year, companies have continued to face tough challenges in their efforts to go public. Most recently, the price of shares in Whistler Blackcomb Holdings Inc. dropped from to $12 from $15 in a deal scheduled to close Nov. 9. Lawrence Wilder, a securities lawyer with Cassels, Brock and Blackwell, said the sale will serve as an exit for private equity firm Fortress Investment Group, which owns Intrawest ULC, the ski resort's parent company.
Two weeks ago, SNC-Lavalin Group Inc. withdrew its IPO for TransAxio Highway Concession Inc., which operates Highway 407, a toll highway, in Ontario. Pierre Duhaime, president and CEO of SNC-Lavalin, cited poor market conditions.
Despite the uncertainty, the IPO market has continued to grow beyond last year's numbers. The TMX Group reported that between January and September of 2010, 80 IPOs (including exchange traded funds and other structured products) were issued on the TSX, raising $6.27-billion in financing. Compare that to just 36 offerings, which raised $2.9-billion, for the same time period a year earlier.
“Certainly, general economic conditions have played a role in the upswing of new listings,” said Ungad Chadda, the senior vice-president of the Toronto Stock Exchange. “Valuations and liquidity have improved dramatically compared to last year, so companies have been coming to market to take advantage of that.”
The process of going public can be a long one, which adds to the difficulty of predicting how the stock market will receive it. It can take as little as six months for companies whose financial statements, intellectual property and employee contracts are up to snuff, but most take about a year, said Roman Dubczak, the head of equity capital markets at the Canadian Imperial Bank of Commerce.
Once the underwriters – who price, buy and sell the shares – are on board, a company's managers will assemble a team of lawyers and auditors. A thorough review of the company's operations and three years of financial statements are crucial to gaining the confidence of investors and the regulatory securities commission. The more organized a company is, the more time and money they'll save in the long run.
“Some companies are incredibly well-prepared and come to you with detailed business plans and all of their affairs in order,” Mr. Wilder said. “That's an easy one, and consequently the cost is typically less. Most companies don't fall into that category.”
The auditors, lawyers and underwriters work together to write the preliminary prospectus, the marketing document that tells the company's story and its goals. Due diligence on this document is key, said Mr. Wilder. It could be subject to a number of revisions before it is finalized, with each session running between $200,000 and $500,000 in legal fees alone, he said. The company also has to apply to be placed on the appropriate stock exchange listing, and the securities commission (administrated provincially) requires a comprehensive regulatory review.
