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How to avoid the four common pitfalls of cross-border IPOs

George Chan

EY Global IPO Leader; EY Greater China Assurance COO

3 minute read 19 Jun 2024
Related topics
IPO
Private business

Cross-border listings offer great opportunity, but only if companies understand and overcome the unique challenges they present.

In brief

  • When international market conditions open windows of opportunity, IPO candidates need to consider more than just timing.
  • Collaboration, understanding regulations and navigating financial implications are integral factors in cross-border success.

When it comes to maximizing value for their initial public offerings (IPOs), businesses continue to look beyond borders. Stock exchanges worldwide are in a race to attract the next generation of innovative companies by offering relaxed regulations, advanced trading tools and broader, deeper investor pools. 

There are multiple benefits to pursuing cross-border exchanges, from access to greater liquidity and higher valuation levels, to expanding your business’s reach in targeted overseas markets, but these listings are not without their challenges. They can often be a complex web of regulatory, cultural, and financial intricacies. 

So, what hazards do you need to avoid, and what lessons should you learn before you make the leap?

EY professionals recently helped a client navigate cross-border complexities to launch an IPO and secondary listing in Asia and Europe, respectively. A successful outcome depended upon diligent planning, the strategic division of roles, and critically, constant and effective communication between the two regions. The experience gained in helping facilitate this and similar deals has helped us identify four common pitfalls to cross-border IPOs and the best ways to avoid them:

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1. Choosing the wrong market to maximize your growth

While exploring new markets can open opportunities to reap significant returns, going public in the wrong market can end up costing millions in foregone investments or even result in a failed IPO. Choosing the right destination is therefore vital.

 

From 2019-2023, 93% of global IPOs were undertaken in the “home” markets where the company was incorporated, largely because they were often more tightly linked to the environments of that country, such as the economy, culture, infrastructure, technology bases and taxes. 

 

These factors are equally as important when considering the viability of a proposed market to list in, but they are not the only aspects. Making the right destination choice necessitates weighing up the company’s strategic motivations and goals, as well as the preferences of shareholders and management; determining the targeted valuation levels and the likely investor demand; understanding the local listing rules and costs; and making sure you will meet the regulatory requirements and governance standards.

2. Failing to foster cross-cultural collaboration

Cross-border listings require strong cross-border communication. The more seamlessly you can coordinate with the local regulatory bodies, stock exchange, bankers or underwriters, lawyers, and potential investors, the better your odds of a successful cross-border listing. 

Flexibility is key; teams and advisors will need to meet tight deadlines while balancing time zones, holiday schedules, cultures and approaches. Due diligence is also a priority, particularly for the data security of confidential information and to ensure all regulatory bases are covered. 

3. Underestimating the complexities of international listing regulations

One of the first things companies considering a cross-border IPO must contemplate is the differences in regulations, procedures, and auditing rules. Increasingly complex and ever-changing international regulations require deep knowledge, but also flexibility to shift as requirements often do. Falling foul of these can be an exceedingly costly mistake, so due diligence is critical.

A clear and in-depth understanding of local regulations and listing requirements together with a clear understanding of the differences and comparative requirements is essential, especially if the overall environmental and culture are significantly different.

In the cross-border listing referenced earlier, the client faced differences in regulations, accounting standards and reporting dates, with two sets of regulators and specialist lawyers involved to iron out any legal and operational requirements. In this case, the EY team collaborated with the Asian and European regulators on the creation of a suite of new regulatory rules that would allow the client to list back in its European home country. 

4. Misjudging financial implications

Ahead of any listing, your company’s internal structures, such as legal, tax, organizational, units, management, accounting, and Investor Relations (IR) must be checked and prepared for the relevant requirements in the local market. 

Cross-border transactions also mean managing currency risks, so it is important to build in hedging strategies and backup plans. Similarly, understanding the tax implications is key to maximizing tax efficiency of any deal.

Clarifying complexity

Cross-border IPOs offer significant appeal for businesses. In Q3 2023 alone, they generated US$6.5b in proceeds, with US exchanges particularly attractive for foreign issuers. Indeed, the two largest Americas IPOs in Q1 2024 were cross-border deals by foreign issuers. However, failure to navigate the complexities involved in cross-border listings could end up costing you more than you bargained for. Market fit, cultural considerations and tax and regulatory frameworks can jeopardize the success of a listing if not carefully planned for. 

By understanding these potential pitfalls, you can plan your capital market strategy to maximize the upside.

Summary

Navigating the complexities of cross-border IPOs involves various key considerations. Businesses must choose the right market, considering factors like a company’s strategic motivations and goals, valuation purposes, costs and regulations, and shareholder and management preferences. Fostering cross-cultural collaboration is essential for seamless communication with potential investors. Understanding the intricacies of international regulations is crucial, requiring deep knowledge and flexibility. Businesses must correctly judge financial implications, including mitigating currency risks and structuring deals for optimal tax efficiency. 

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    About this article

    George Chan

    EY Global IPO Leader; EY Greater China Assurance COO

    Passionate about helping clients excel in this transformative age. Keen reader. Movie fan.
    Related topics
    IPO
    Private business

    EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.