Hard selling a public offering

Hard selling a public offering

Till a few months ago, Vishal Retail Ltd was a retailer known mainly in the smaller cities where its discount stores are located. When the Delhi-based start-up, run by first generation entrepreneur Ram Aggarwal, decided to raise money from the stock market, it went head to head with property developer DLF Ltd, which was making one of the largest public issues in Indian history. Both issues opened on the same day, yet Vishal Retail’s Rs110 crore public offering was subscribed 81 times.

With more than Rs26,118 crore raised through public offerings (both IPOs and follow-on offers) in the quarter ending July 2007, India is now the world’s eighth largest IPO market. The Bombay Stock Exchange’s (BSE) benchmark index has risen about 133% in the past two years, from 6,679 on 1 January 2005 to 15,551 on 31 July 2007, making it easy for companies to raise money through the public markets to expand. And an entire finishing school-like network of communications specialists, merchant bankers, lawyers and publishers comes together to clip, prune and groom a company for its turn under the spotlight. The marketing campaign for a company includes brand building, advertising, media coverage, road shows and analyst meetings before the listing.

See graphic: Top 5 public issues in 2007

Companies could spend between 0.5% and 4% of the money they hope to raise from the IPO in marketing it. And with companies aggressively selling their equity, regulators are constantly tightening rules to ensure investors are not misled.

The marketing campaign for a company could start as much as six to nine months before even a draft red herring prospectus (DRHP)—a several hundred-page document explaining its business and its intention and reason for raising money publicly—is filed with the capital market watchdog, the Securities and Exchange Board of India (Sebi).

So, if an unheard of company is on every hoarding declaring it has been around for more than five decades or a celebrity starts endorsing it, or its management starts appearing in the media, it is almost certainly looking to go public. “We start working with some companies as many as six months before filing," says Vivek Suchanti, managing director, Concept PR, which, along with Adfactors, does most of the IPO marketing and advertising.

The regulator has now clamped down on such advertising, which builds brand awareness before the IPO’s tightly regulated process starts, by asking companies to flag all advertising with a disclaimer as soon as they announce their intention of going public.

How, then, is an IPO marketed? Typically, even while the company is deciding to go public, it hires a merchant banker, who is responsible for running the IPO process. Once the DRHP has been filed, it could take around a month for Sebi to approve the IPO.

The silent period

“Unless companies need early ads, we advise them to stay quiet at this stage. I told one such company to think of this like an arranged marriage. When the couples meet or are engaged, you may not want to talk about it to avoid the smear it may cause if the alliance falls through. It is only when you are completely ready that you announce the marriage," says S. Ramesh, chief operating officer, Kotak Mahindra Capital Co. Ltd, a domestic investment bank.

After Sebi and the Registrar of Companies (ROC) approve the company’s application, the frenzied and tightly regulated IPO process begins. This is when companies walk the tight rope of selling their issue to institutional and retail investors without saying anything that is not already in the DRHP.

“I usually tell companies to keep it subtle and simple," says Ramesh. “More than advertising, it is word of mouth from sub-brokers and opinion markers along with a strong public relations campaign that makes a difference," he adds.

Nearly all the advertising for an IPO is done by public relations companies. For instance, Adfactors and Concept did 23 of the 35 IPOs so far this year, according to Prime Database, a Delhi-based primary market tracker.

This means that while simple ads that stick to Sebi guidelines are splashed on hoardings, newspapers, television and radio, there is a parallel public relations exercise to get the company media coverage.

Media training

To prepare the company management for prime time, the communications agency picks a spokesperson. He or she and the rest of the top management are put through rigorous media training, which Concept calls the LOC—Line of Control. They are taped on camera, told where to look, what to wear, what to say to excite investors and what not to say to avoid the regulator’s attention.

Merchant bankers and communication specialists who do these training programmes often get pesky reporters and alpha investors to grill the management in mock press conferences.

Says S. Subramanian, who heads investment banking at Enam Financial Consultants: “I sometimes act as a reporter at these training sessions." Concept’s Suchanti says: “I would rather have the company spokesperson get angry or fumble during the mock session than during an actual press conference and analyst meet."

Word on the street

Recently, Sebi asked a company going public to issue an ad saying it had nothing to do with rumours on the street that it was going to be bought by a larger rival, suggesting a potential upside for the stock.

Regulators say they have to play a cat-and-mouse game, now that companies use everything they can to sell their issue.

Celebrities such as Sunil Gavaskar, Madhuri Dixit and Pooja Bhatt once appeared in creative and colourful ads promoting company IPOs; Sebi has now banned celebrities from endorsing public issues. Celebrities can still endorse a company’s products if they have been endorsing the product before the IPO process.

It is because of the relative lack of creativity and the extreme need for quick and intensive marketing that advertising agencies specializing in public relations dominate this market. IPO ads now account for Rs200 crore of the Rs16,000 crore advertising spend in India, according to Madan Bahal, partner, Adfactors Group.

In fact, IPO advertising is now among the top categories for business channels such as CNBC TV18 and its Hindi counterpart, CNBC Awaaz. However, marketers still use outdoor and print ads, with television and radio companies serving as reminder mediums. “IPO advertising attracts ad rates that are 25% higher than what a corporate advertisement would cost on the channel," says Anil Uniyal, national head-sales, CNBC Universe, the umbrella brand for CNBC TV18 and CNBC Awaaz.

IPO advertising is also one of the top categories for Radio Mirchi, a national network of FM radio stations, which holds frequent seminars to woo IPO advertisers.

For the Vishal IPO, the banker and communications agency picked traditional media. But the ace turned out to be the decision to market the IPO aggressively in the small cities where Vishal runs its colourful discount department stores. “Marketing an IPO is like guerrilla warfare," says Adfactor’s Chaturvedi.