Image, identity, and IPO success.

• Author: Roberts, Kenneth J.
• Position: Initial public offering

What attracts investors to an initial public offering? Most company executives planning an IPO focus on financial performance. The balance sheet, however, is but one of the important factors that together create perceptions which influence investment decisions.

This point was underscored dramatically in the 1995 Fortune survey of "America's Most Admired Companies." Declaring that "Reputation is increasingly seen as something more than the record of earnings growth rates," the survey measured eight key attributes. Among them are calibre of management, product and service quality, and innovativeness. The 10 companies with the best reputations -- Microsoft, Motorola, and Home Depot among them -- rewarded shareholders with an average total return of nearly 16% in 1994 -- a year in which the S&P came in at 1.3%. The bottom 10 companies recorded an average decline in total return of 38.2%.

"Leveraging Corporate Equity," a survey conducted by Fortune and Yankelovich Partners in 1994, found a direct correlation between corporate reputation and investment. Specifically, companies with a better reputation were more likely to attract buyers to their stock. Also, the higher-rated companies on average enjoyed a price/earnings ratio that was approximately four points higher than companies with less positive reputations.

How can management get maximum mileage from reputation in an IPO? The process starts with an understanding of terms like "image" and identity," which have become increasingly popular in the corporate lexicon.

Simply put, your image is what people think of you. Your identity is what you would like people to think of you.

Take Eli Lilly & Co. as an example. When Lilly decided to spin off several operating units in its Medical Devices and Diagnostics Division, it faced a dilemma. Although these units were leaders in their respective markets, the financial community identified them closely with Lilly.

For many investors, Lilly's image may incorporate notions of sound management, product innovation, quality, a deep health care orientation and other desirable attributes -- in addition to consistent financial performance. This image is the result of careful shaping through the corporate identity process.

A company's identity is everything that it does to define and communicate its business purpose, philosophy, strategy, and objectives. It is a powerful means by which a company can create, sustain, and improve shareholder value and market its...