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What Should Matter in IPO Marketing?

With Companies eyeing to Wreck more Moolah from Primary Market, Marketing and Communication have become Critical aspects for every Public Issue

In the 1980s, 1990s, and even the early 2000s, all that a company need to do in India to spike up the hype about their organization was to simply announce an IPO. The very act of announcing a public offer used to result in over-hyped discussions about the impending IPO and a subsequent heated mad rush towards applying for the public issue. An IPO announcement – for the investors – was a sure shot god gifted method of making the regulatory bales of hay; and of course, the sun was supposed to shine on forever. The corollary to all this was that there was no particular killing need for any corporation to go overboard in attempting to hype up their IPO. In fact, hyping up an IPO was a sure way to generate cynicism and negative views from the public – about why the company needed to advertise so much in the first place? In essence, all that a company needed to do then was to release an excuse of an advertisement in one of the main newspapers, and leave application forms for the IPO in hundreds of thousands lying around banks and other investment hubs – and the deed was done; the IPO was oversubscribed.

And then the Sensex crashed; and again; and again. With volatility gripping the Sensex, and sense getting drilled into investors about the fact that IPOs need not always give returns, the Indian financial market was faced with a brand new situation. It wasn’t enough whether you were a top performing corporation, unless you were able to advertise your IPO with a post modern fervency, your IPO, more often than not, would end up at getting the short end of the stick by investors. In other words, for the first time, the importance of addressing the marketing issue in an IPO has started taking bigger relevance than the fundamentals of the IPO itself.

So what should be the marketing paradigm that IPOs should follow to ensure success in subscription? Empirical evidence does give some insight. The successful IPO of DLF in mid-2007, which raised $2.3 billion and the market euphoria that got generated over Reliance Power’s $3 billion IPO are critical learning chapters. As a matter of fact, the Reliance IPO received a record 5 million applications from retail investors, got oversubscribed by 73 times and generated a demand worth over $196 billion. It’s a different story altogether that the issue witnessed one of the worst listings on the bourses eroding 17.22% of the shareholders’ wealth on the very first day itself.

But then, the biggest take for any marketer in the financial domain was that despite not weighing heavy on fundamentals (the stock is currently trading at Rs.122.35 less than half of its issue price of Rs.281.25 adjusted for a bonus issue of 3 shares for every 5 shares held), the RPower public offer put the market on fire in terms of investor participation – and a structured marketing and communication strategy played the most critical role in the same.

Sudhir Gupta, Consulting Editor of BFM (Banking, Finance, Markets), comments, “An IPO can be successful in today’s times only if IPO managers understand that IPO marketing is much akin to marketing of a soon-to-be-released movie or an FMCG product. Just as companies market their products or services, IPOs too have to ensure a touch of brand marketing and a primal focus on the 4Ps of marketing.”

Gupta says that issuers have to realise that just like a company stimulates its customers to consume their product, they too need to stimulate prospective investors to consume their IPO. Gupta quotes the IPOs of Emaar MGF and Wockhardt, which despite hitting the market around the RPower IPO, failed to succeed in similar vein. Statistically, the correlation between IPO marketing and IPO success (even post listing) has been proven beyond doubt in America and Europe. A University of Mississippi paper on the Marketing of IPOs that studied IPOs over a period of seven years, comments that “the promotional efforts of investment bankers influences the valuation of an IPO, its initial returns, the wealth gains of inside shareholders, and the likelihood that an issuer will switch investment bankers for a subsequent seasoned equity offering.” A study by Università Commerciale Luigi Bocconi – Milano and The Pennsylvania State University representatives proves that “the larger the quantity of shares offered to retail investors, the higher [should be] the communication investment made by the IPO.” But then, how does the process work?

Road shows: Well, even well tanned consultants and advisory services provide only dated advice when one asks them. For example, Ernst & Young’s seminal research Funding for growth, Exploring options, IPO readiness, covers only a narrow aspect of road shows in IPO marketing. Interestingly, many other investment bankers toe the same traditional line of road shows refusing to consider the newer aspects of IPO marketing. Yes, road shows do matter. Besides the robust fundamentals and the blessings of the government, the success of the recent Coal India Ltd IPO bears a testimony to the public relations (PR) activities and road shows that CIL conducted prior to the opening of the issue. The merchant bankers to the IPO agree to the fact that the IPO received overwhelming response during its road shows. If the relevance of road shows is the first learning, then the second learning in this CIL example is the effective usage of public relations companies.

Hiring a PR manager: The real IPO process starts at press briefings and the ‘analysts call’ just a couple of days before the issue date. This highlights the communication strategy adopted by the companies coming up with an IPO. And herein comes the role of PR agencies and PR consultants, who of late have donned the mantle of communication experts. They have mastered the art of advising their clients on SEBI guidelines , compliance’s, PR activities, road shows, events, and even database management. Thus, PR is a must.

Get the film reviewed!: We’re referring to the broking community, their sub-brokers, and agents, who analyse upcoming IPOs. “IPO issuers should approach brokerage agencies to analyse their IPOs,” says an anlayst from Mumbai-based Ambit Capital, as brokerage firms serve as opinion makers and ensure subscription of the IPO, in the same way as film analysts serve as crowd pullers with their film reviews.

And of course, advertise well: As mentioned earlier, pre-IPO marketing spending helps reduce IPO underpricing and boosts IPO trading in the stock market (When Marketing Strategy First Meets Wall Street: Marketing Spendings and Firms’ Initial Public Offerings, University of Texas study). Consider the case of DLF, Reliance Power, NTPC, NHPC, JSW Energy or the most recent one Coal India. What is strikingly similar in all these public issues is the fact that their marketing and advertising efforts helped them discount the two enemies of IPOs – uncertainty and volatility. PSUs apparently do not need to spend as much in advertising as non-PSUs (see chart on previous page), but advertising, even they must.In short, just believing that the IPO will be obver subscribed because the project has excellent financial will ensure failure post haste. The lesson is simple – believe in marketing, believe in 4Ps.

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