Transitioning from a private company to a public entity through an Initial Public Offering (IPO) can be a monumental step for any business. The process entails opening up to public investment, which can bring a multitude of benefits but also comes with its own set of challenges.
In Australia, the allure of the Australian Securities Exchange (ASX) draws many companies to consider this significant move. This blog will delve into the rationale for opting for an IPO, the steps required to prepare for an IPO in Australia, and the advantages and disadvantages of going public. We will also highlight five Australian companies whose IPOs have seen remarkable success.
Why Companies Go Public
One of the primary reasons companies choose to go public is to raise substantial capital. This capital can be used for various purposes, including expanding operations, investing in new projects, or paying off existing debt. Being listed on the ASX can significantly boost a company’s profile, enhancing its reputation and credibility. This increased visibility can attract more customers, partners, and talented employees.
An IPO provides an opportunity for early investors and employees to sell their shares and realise returns on their investments. This liquidity can be a strong incentive for attracting and retaining talent. With the influx of new capital, companies can pursue growth opportunities more aggressively. This can include entering new markets, acquiring other businesses, or developing new products.
Preparing for an IPO in Australia
The road to an ASX IPO has some hurdles your company must negotiate before the bourse puts it on the board.
Board and Management Preparation
Ensure that your board of directors and management team are well-equipped to handle the responsibilities of a public company. This may involve adding independent directors with IPO experience.
Financial Audits and Compliance
Your financial statements will need to comply with Australian Accounting Standards and undergo rigorous audits. It is essential to have a clean financial history and robust accounting practices.
Engage Advisors
Hire a team of experienced advisors, including investment bankers, legal advisors, and auditors, to guide you through the IPO process. Their expertise will be critical in ensuring the successful transition from a private to a public company.
Prospectus Preparation
Develop a comprehensive prospectus that provides potential investors with detailed information about your company, its operations, financial performance, and future plans. This document is crucial for regulatory approval and investor confidence, and should be triple-checked before presented to ASIC for clearance. ASX rules also indicate that the IPO application must be filed at the ASX within a week after filing the prospectus with ASIC.
Familiarity with ASX requirements
Listing on the ASX mandates strict adherence to bourse rules and corporate governance standards. For instance, a company applying for the ASX IPO under an assets test must have over $1.5m in operational capital. Passing a profit test requires submitting proof that the company had aggregate profits of over $1m from continued trading over the past three years, plus $500k consolidated profits from the prior 12 months alone.
Roadshow and Marketing
Conduct a roadshow to present your company to potential investors. This involves a series of meetings and presentations to generate interest and secure investment commitments. Pooling sufficient numbers of investors will be vital as the ASX requires that a listed company must have over 300 shareholders within holdings worth at least $2000 each and are not connected with the company in any form.
Advantages and Disadvantages of Going Public
Advantages
The most immediate advantage is the ability to raise large amounts of capital, which can be pivotal for expansion and growth. A public listing can significantly enhance a company’s profile, making it more attractive to customers, partners, and employees. An IPO provides a market for existing shareholders to sell their shares, offering liquidity and potential profit. Public companies can offer stock options and other equity-based compensation to attract and retain top talent. Additionally, public companies can use their stock as currency for acquisitions, facilitating strategic growth.
Disadvantages
While going public may have a raft of benefits for a company if things were handled well, there are tradeoffs.
Public companies are subject to stringent regulatory requirements and ongoing compliance obligations, which can be costly and time-consuming. Founders and existing shareholders may lose some control over the company due to the influence of new shareholders and the board of directors.
Public companies are also under constant pressure to meet periodic earnings expectations, which can sometimes lead to short-term decision-making. The ASX, in particular, requires financial reports submitted every six months with an annual report expected – but that reporting is on a quarterly basis for companies cleared in the assets test or are operating in the mining and the energy exploration business.
Companies must disclose a significant amount of information, which can be advantageous to competitors. The IPO process itself can be expensive, involving underwriting fees, legal costs, and other expenses.
Successful Australian IPOs
Let’s have a look at some Australian companies that went public on the ASX and have been on an upward trajectory for the most part since their listing.
Afterpay (ASX: SQ2)
Afterpay’s IPO in 2016 raised $25 million. The company has since grown exponentially, becoming a leader in the buy-now-pay-later industry and attracting a significant acquisition offer from Square Inc now known as Block. The company originally traded as APT but changed to AFY before a brief delisting spell in 2022. Shares were put back on the bourse under the SQ2 ticker after the Bank of Spain cleared Block’s takeover of Afterpay.
WiseTech Global (ASX: WTC)
Listing in April 2016, WiseTech Global raised $168 million from offering stock at $3.35 each. The company’s innovative logistics software has driven strong growth, making it a major player in the global supply chain sector.
Xero (ASX: XRO)
Xero’s run as a public company began in June 2007 when it listed on the New Zealand Exchange (NZX) under a NZ$15m IPO. The accounting software provider dual-listed on the ASX in 2012. The company had since seen substantial growth, becoming a prominent name in the fintech industry. The growth eventually prompted Xero to delist from the NZX in 2018, a move which company EGM for investor relations Toby Langley said was necessary for Xero to achieve global visibility.
Prospa (ASX: PGL [delisted])
Prospa, a fintech company focused on small business lending, raised $109.6 million in its 2019 IPO, selling shares at $3.78 each to end up with $610m in market capitalisations. Despite market fluctuations, it has continued to grow and support small businesses across Australia. However, the company announced in February 2024 that it will go back private under a $74m purchase by Salter Brothers.
Zip Co (ASX: Z1P)
Zip Co, another key player in the buy-now-pay-later sector, listed on the ASX in 2015 under its original trading name of zipMoney Ltd or ZML. The company has expanded its services globally and maintained a strong market presence, although some sources claim it lost a number of investors in 2023 but have rebounded with $99m in market capitalisation.
Conclusion
Transitioning from a private company to a public entity through an IPO on the Australian Securities Exchange (ASX) offers both significant opportunities and challenges. While the ability to raise substantial capital, enhance corporate visibility, and provide liquidity for investors are key advantages, companies must also navigate stringent regulatory requirements, ongoing compliance, and potential loss of control. The success stories of Afterpay, WiseTech Global, and others demonstrate that, with proper preparation and a solid business strategy, an IPO can propel companies to new heights. However, it is crucial to weigh the benefits against the associated risks before embarking on this transformative journey.
DISCLAIMER: This article is for informational purposes only and does not replace official stock market advice. AVANTE PARTNERS has no relationships with any stock exchange and cannot offer guidance on which stocks to invest.
