Delivering on the promise

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It is often said that when a company comes to the stock market through an initial public offering (IPO) it is the beginning of the journey and not the end. After months of intense preparation with accountants, lawyers, bankers, brokers and PR advisers, the management team can be forgiven for thinking the latter.

However, having committed their capital, institutional investors expect the management team to ‘play the game’ and ‘get on the front foot’, to work hard and smart to deliver sustainable growth and rising dividends.

In their pursuit of this, the management team need to be aware of the City’s unspoken rules and firmly-held expectations, but there is no pre-prepared manual or guide book on how to deal with fund managers, research analysts or even the press. Instead, management must learn on the job and from hard-won experience.

So have you just IPO’ed your business? In an attempt to de-mystify the stock market, and to shed some light on the so-called mystique of the City, here are my 10 rules of the road:

1 We’re all in this together

• Shareholders, management, employees and advisers are all accountable
• There is an ‘unspoken contract’ between providers of capital and users of capital
• One chance to get it right and build a growing business and reputation

2 Expectations management

• Outperforming expectations, outperforms the market
• Always under-promise and over-deliver on the numbers
• The CFO should keep a ‘cookie jar’ – always have something in reserve

3 Goldilocks scenario

• Not too hot/not too cold, but just right
• Sustainable growth – not too fast/not too slow
• Don’t shoot the lights out – better solid and predictable

4 How to achieve growth?

• By a combination of acquisitional and organic growth
• Not just a paper machine, paying for goodwill
• Complemented by organic growth, stealing market share

5 Tough love

• A ‘City darling’ when meeting expectations (or just beating them)
• Punishment severe if the market repeatedly disappointed
• Future delivery/access to capital becomes harder or impossible

6 Regulation makes it harder

• Before ‘Big Bang’, house brokers gently reduced expectations
• Now, trading statements lead to knee-jerk share price reactions
• Resulting in derating as well as absolute fall in share price

7 Hedge funds v Long-only funds

• New masters of the universe
• Shorting stocks and causing more volatility
• Gearing up the fund and churning it

8 Value will always out

• Short term driven by supply and demand
• Long term driven by quality and value
• But, long term is made up of the short term.

9 What does history teach us?

• That it doesn’t teach us anything!
• Human nature does not change – fear and greed
• The cycle is dead. Long live the cycle!
• Avoid operational and financial gearing – toxic combination

10 What’s best – the Holy Grail?

• Management that consistently delivers on the promise
• Admired brands with strong market positions and sustainable growth
• Robust cash flow and rising dividend pay-outs.

Lorna Tilbian is executive plc director and head of media at Numis Securities