Deciding whether your company should go public is difficult enough. Deciding the means of flotation is even more complex. Sarah Perrin considers some of the options available to companies who decide to take the plunge.
Flotation is like marriage. If you aren't sure you're doing the right thing, don't do it. The build-up may be exciting, but the consequences are long-lasting. Much corporate soul-searching is needed before you reach the public company altar.
Companies start eyeing up flotation for any number of reasons: to raise funding for future growth, to increase public profile and credibility, to provide an exit for venture capitalists, to realise some share stock, or to provide share options for employees.
Floating is an obvious way to fulfil these goals, but it is not suitable for all. 'There are two types of businesses: those interested in wealth creation and lifestyle businesses. Lifestyle businesses shouldn't float,' says Graham Spooner, national head of corporate finance at accountants Kidsons Impey. And even those companies suitable for going public should think about the alternatives. For example, a company could go for a private placing, selling stock in the business to an institutional or trade investor.
Venture capitalists provide another option, particularly where a business needs early-stage or growth finance. Some have designed finance packages for certain types of companies. For example, the Step IT Up initiative launched last November by investment capital group 3i and Interregnum Venture Marketing targets 'best of breed' young IT companies and offers seed-equity finance plus a package of marketing and management help.
A less specific alternative is to join Ofex, the off-exchange unregulated trading facility run by market maker JP Jenkins. Ofex aims to woo companies looking for basic marketability for their shares, or seeking capital up to £1 million and keen to keep the tax benefits reserved for unlisted companies. There are over 170 companies on Ofex, and around £95 million has been raised by around 100 companies since its birth.
Ofex is a low-cost option, with a one-off application fee of £500 followed by an annual charge, currently £3,500. Its unregulated status also brings down the cost of advisers' fees. On the downside, the investor pool is relatively small, driven by individual private investors attracted by the tax incentives of unlisted investments, rather than institutions.
Although unregulated, a Code of Best Practice for Ofex companies was published in October. 'The Code is designed to give investors more confidence in the marketplace,' says Barry Hocken, marketing director of Newstrack, which provides a news service covering Ofex companies.
Some companies use Ofex as a stepping stone to the first flotation option, the Alternative Investment Market (AIM), the second-tier UK equity market founded in June 1995 which now has over 290 companies and a total market capitalisation of around £5.5 billion. Whereas companies going for a full London Stock Exchange float must have published accounts covering a three-year period and be able to prove continuity of management during that time, AIM companies don't. Nor do AIM companies need any minimum expected market capitalisation or minimum number of shares in issue.
The typical AIM company is small but growing. The majority are capitalised at between £5 million and £50 million. A typical AIM new issue company has a market cap of £11 million, is raising between £3 million and £5 million, and incurs costs of around £390,000. AIM is slightly cheaper than the official list because its regulations are lighter. For example, companies now have to disclose details of anyone who has received fees or shares worth £10,000 or more in the 12 months prior to joining AIM, and prospective companies have to make a public announcement at least 10 business days before they join the market.
Another advantage for AIM companies is that they attract investment from venture capital trusts, which are prohibited from investing in fully listed companies. If a company with a full listing makes a purchase worth over 25% of its size, then it has to get shareholder approval for the deal.
AIM companies have a much more generous size limit - 100%.
The AIM option isn't without its own specific disadvantages. Some institutions are prohibited from investing in companies that are not fully listed, cutting down the number of potential investors. Secondly, the reputation of AIM bobs about like a share price graph, which affects the reputation of the market's companies. 'There are a lot of institutions out there who still see AIM as higher risk than other markets,' says Nick Rodgers, a corporate finance director at Beeson Gregory.
This isn't a problem for everyone. A recent survey by Kidsons Impey found that 66% of the 242 respondents, all fast-growing unlisted companies with turnover between £1 million and £50 million, would consider an AIM float over the next five years. At the time of going to press, for example, Nottingham Forest FC was heading for AIM, planning to raise up to £5 million and with a likely market value of £30 million to £40 million. Forest was attracted by AIM's relatively simple joining requirements.
Not all investors, however, would favour AIM companies. Geoff Douglas, head of BZW's UK small-company research team sums up why companies would go for the full Stock Exchange listing rather than AIM: 'Credibility.' He says: 'If you are of a certain size and have satisfied the criteria set by the Official List, I would see no particular attraction in going for AIM.'
The main disadvantage of floating on the Stock Exchange proper is cost, a result of the tighter regulation. For example, where the total cost, including adviser fees, for joining Ofex could be around £100,000, and £250,000 upwards for AIM, a full listing could cost £500,000 to £750,000.
The official list is aimed at larger, established companies, with most commentators saying a suitable company should have a minimum market cap of around £20 million. But some smaller fish do find the benefits irresistible.
Helphire, a rapidly growing credit car hire company, wanted to raise cash essentially to fund further growth and repay debt. David Lindsay, finance director, says the company first looked at venture capital, 'but the venture capitalists wanted too much for too little'. Helphire then compared AIM with the full float option. 'There was about £100,000 difference in price, but the full float gave you greater status,' says Lindsay. 'Your shares are more marketable.' The company floated this March, raising £5.6 million with a post-float market value of just over £16 million.
Lindsay still believes the full listing was the right choice. 'Our shares were quoted at £1. Now they are at £2.25,' he says. 'It gave us all the capital we needed and we got a lot of publicity, which brought in a lot of business.' Its annual results after the float were ahead of forecast, at just over £1 million on turnover of £10 million.
Some smaller companies may have aspirations outside the domestic capital market. The most obvious choice is to go for the European Association of Securities Dealers Automatic Quotation (EASDAQ). Launched in September 1996, this Brussels-based pan-European electronic, quote-driven market had achieved total market capitalisation of $3.35 billion by September 1997. However there are just 15 companies on EASDAQ, though they are at the big end of the small-company range.
EASDAQ was started to support high-growth companies which didn't necessarily have a profit history. Target companies might specialise in biotechnology, telecoms or engineering technology but not the traditional long-established industries. Jeff Ward, corporate finance partner at BDO Stoy Hayward, describes a company suitable for EASDAQ: 'Fast growing, at a relatively early stage in its performance cycle, but with some European connection and looking to raise money in Europe.'
There are disadvantages. 'EASDAQ is a much more expensive market for you to join and stay on,' says Neil Austin, UK head of new issues at KPMG corporate finance. 'It's much more US style. It's very new, very small and unproven. It is more relevant for non-UK companies where they might not have a thriving home market.' Austin says companies should be looking to raise £15 million or more.
The main advantage of EASDAQ is that it provides significant access to overseas investors. 'You get a better distribution across national boundaries,' says Andrew Beeson, chief executive of Beeson Gregory and EASDAQ board member. 'You get more market makers than if you brought a medium-sized company to the London market.' Beeson admits that the general perception is that performance of EASDAQ so far has been 'a bit slow', but feels that is understandable. 'The market is new and so it takes time and a certain bravery among early candidates to come to it,' he says.
Debonair, the UK-based but European-wide airline, joined EASDAQ in July, raising £25 million. 'We wanted to establish ourselves as a pan-European airline,' says Franco Mancassola, founder chairman and chief executive.
'We didn't qualify for the official list because we didn't have the three-year trading history, but EASDAQ fulfilled all the requirements we were looking for. We now have a very diversified shareholder base including Germans, Austrians, Belgians, Italians and British investors. We are a high-growth company and we are seen as a company with great potential.' He is pleased with the way the float has gone. Shares started trading at £4.50, rose to around £8, but have now settled at a more realistic £6.50. 'It's been a good experience for us,' he says.
FOR AND AGAINST - FLOTATION OPTIONS AIM
+ less regulated than official list
+ no trading record required
+ tax breaks for investors
- reputation still questioned
- fewer institutional investors willing to invest
Full Stock Exchange listing
+ sound reputation
+ wide investor base, institutional and private
+ dominates UK investment market
+ higher company profile
- tighter regulation
- more expensive to join
+ pan-European investor base
- very new and untested market
- US-style regulation
- costly to join
+ no official regulation
+ cheap to join and stay on
+ tax breaks for investors
- fewer institutional investors, less liquidity.