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. Last Updated: 07/27/2016

Naked or Clothed? Going for an IPO, Only a Real Strategy Counts

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It is a common truism that every company needs a robust strategy for the first few years of being public, although exactly what constitutes a satisfactory strategy varies. Many companies have prospered in Russia over the past 15 years with no more than a "focus" on a business area. But at no time is a well-articulated strategy more useful than in the preparation and first years of being public. There are three main points:

• At what stages in and after the IPO process is the strategy required?

• What are the important elements of strategy to articulate?

• What are the benefits and what is the downside of being less well prepared?

In a simplified form, an IPO involves the following stages:

• Communicating with the investment banker (IB) and other service providers who support your going public

• Communicating with investors and other market players during the process

• Communicating with investors and the market after going public.

It may be obvious that articulating a clear strategy will help in communicating with investors before and after the IPO process. But it is not clear to many Russian companies that it is better to have a clear strategy before you start interacting with your IB. Last year, investment bankers and clients twice approached us to help prepare a strategy. In each case, they came to us because the company had failed to impress the bank with their prospects. While in each case, we were able to develop a robust strategy, some damage had been done.

The relationship with, and impression formed by the IB is a crucial one. Where the impression is favorable, the client retains more leverage in small decisions during the process, culminating in the big ones of timing and price. Also the bank will have a direct influence on the market according to the attitude it has formed.

A last reason for preparing the strategy at the beginning is that if it is developed later, possibly at the urging of the IB, it can be superficial. Last year a company asked us for a strategy saying, "It does not need to take too long, we just need the minimum necessary to go public!" No doubt they found another company willing to take their ruble!

So what are the essential elements of strategy that make it more than just window-dressing?

Every company going public will of course say what they will do, what results they expect, and what is special about their company. The question is whether this story stands up and impresses under scrutiny by market players during the IPO process; and can unite the company to overcome difficult market conditions that may arise in the following two years.

The IPO process requires management to present their company to audiences of investment managers, regulators, financial press, analysts and brokers. The IB will usually do its job and ensure that the reception is positive, so that the launch proceeds at a price according to conditions. But there is a huge difference in the degree of positive reaction obtained that comes from their evaluation of the quality of the strategy and of management. One of the ways they evaluate the management team is by the quality of the strategy they prepared!

Some audiences will be superficial in their questioning, often coming up with ill-considered questions, while others will be thorough. As one of our clients told us "The difference between a robust strategy and just a story, is that it provides the answer to all questions, we did not have to think on our feet and make up answers".

But it is after the IPO that really counts. Of course in favorable circumstances the company does well and investors are happy. About half the time things do not go according to plan. Then the question is whether the company is seen as "on course" or having to "change course". Markets are forgiving in adverse circumstances if the underlying strategy is robust. But they will desert a company, if it appears that they were "sold" an invalid story.

The key elements of a robust strategy include, not only what differentiates the company and what it will achieve but also:

* Competitive positioning in each segment, which is validated

* Market dynamics, i.e. allowing for new entrants, consolidation, internationalization

* Market scenarios which take account of most potential outcomes

* Sales and operations strategies which show that the anticipated results can be delivered

Our clients, who understand the real benefits of a sound strategy, do it for themselves, not for their IB, or the market. As one general director said, "the best arguments are the true ones; only if we have a good strategy can I be confident of persuading anyone else that we have one."