This article was first published in the June 2011 UK edition of Accounting and Business magazine.
So you want to float a company? These are challenging times in which to bring a firm to the public markets. In the first quarter of 2011 only 14 companies floated on the London Stock Exchange’s Main Market and its junior cousin, AIM.
Yet there is always appetite from investors for the ‘right type of company’, says Tim Surridge, head of transaction services at KPMG. ‘In the right type of company, the markets are looking for a clear equity growth story, a strong, experienced and well-regarded management team, and clarity over use of the proceeds.’
But he warns: ‘The days of raising money for a war chest to spend on something in the future are long gone.’
James Ferguson, a partner in the capital markets team at Deloitte, believes there are three keys to a successful float. ‘You must have a great story which investors can believe and buy into, a strong management team with proven expertise that investors are confident will deliver, and a valuation that is sensible and which investors are prepared to pay.’
There are a number of clear reasons why a company might want to float, argues Marc Fecher, a partner at Kingston Smith and chairman of ACCA’s Corporate Sector Network Panel. These include the desire to raise new capital, to spread share ownership wider and improve share liquidity, to raise the company’s profile and prestige, to fund a development plan or to facilitate an exit strategy for owners.
But he warns that not all directors who want to see their companies go public are ready for the move. ‘It could be that their company’s size, sector and development plans don’t give them enough growth to make it sensible.’
And Glenn Collins, head of technical advisory at ACCA UK, says that directors need to consider the implications of going public carefully. ‘A flotation can, if successful, provide new capital but you must think about whether it’s the best way to attract this new capital – can it be sourced by other means? Do you need the host of new investors that a flotation could bring? Would you be better served with a single new investor?
‘Are you prepared for the costs, both legal and professional, and, possibly more important, are you prepared to lose some control over the business? If this is a business you have built from nothing can you cope with not being in full control?
‘Finally, are the staff, particularly other directors, prepared to change the way they work to fit in with the corporate structure that a listed company demands?’
What are the options?
If your answer to all these questions is ‘yes’, what are the options? In the UK, there are three: Plus; AIM; and the London Stock Exchange’s Main Market.
Most of the 160 companies listed on Plus are small ones with turnovers ranging upwards from £750,000. The most famous is Arsenal Holdings, which owns the Premiership football club, whose market capitalisation is around £725m.
The advantage Plus has over the Main Market and AIM is that the costs of a flotation are much lower – usually between 5% to 10% of the funds raised. Few spend more than £200,000 floating on Plus, and most much less. That is because most of the flotations on Plus are by private placement – where shares are offered to a limited number of buyers – rather than an open initial public offering (IPO).
AIM, the Alternative Investment Market, has floated more than 3,000 companies since it was founded in 1995. AIM is generally targeted at smaller firms, although companies listed range in market capitalisation up to the £1bn region.
Although AIM delivers the benefits of a public market, it does so with a lighter regulatory touch. For example, there is no minimum market cap, no requirement to produce a trading record before listing, no fixed proportion of shares to be in public hands, and directors don’t need to seek the approval of shareholders for most transactions, except for a reverse takeover or a disposal as a result of a complete change of business.
The London Stock Exchange’s Main Market is the senior trading market – and the market from which the FTSE 100 and FTSE 250 are drawn. It is a market for major listings, such as the recent Glencore, the commodities-trading giant, valued at around £36bn at the time of its flotation.
Companies seeking a Main Market listing must have at least three years’ trading history, place at least 25% of the stock in the public’s hands, and have their prospectus per-vetted by the United Kingdom Listing Authority. When you’ve chosen your market, the next step is to form a flotation team. If you’re floating on Plus, your team should be headed by an approved Plus Corporate Adviser – typically an investment banker, accountant or lawyer – who will act as sponsor to your float.
Find a Nomad
If you plan to float on AIM, you will need to appoint a Nomad – a nominated adviser – which will advise you on the rules and regulations you will need to observe in order to float. The Nomad will continue regulatory oversight of the company after flotation.
If you intend to float on the Main Market, you must appoint a sponsor, usually an investment banker. The sponsor guides and co-ordinates the work of the team of professional advisers and the firm’s own directors as they work towards the flotation.
Depending on the size and complexity of the float, you will also need a bookrunner – usually the main underwriter, who will syndicate the offering with other investment banks – lawyers (in the case of a Main Market float, one for your company, another for the sponsor and/or bookrunner), accountant, financial PR consultant, remuneration consultant, registrar and (for a large flotation) financial printer.
The keys to making this team of advisers work well together are proper planning, sensible timetables and good communication, says Ferguson.
‘You must have good chemistry between all the team members because it is a very tense process,’ adds Fecher.
But while it is vital to have good external advisers – especially those who have had experience of flotations in your industry area – success will heavily depend on how you manage the process within your own company.
‘You must find a full-time project manager from within the company – somebody who can devote 150% of their time to the project,’ says Ferguson. In a smaller company, that is likely to be a senior person – usually the financial director, with support from the chief executive. In a large company, it could be a manager just below board level. ‘The board has wider responsibilities running the business from day to day,’ Ferguson adds.
IPO team support
Surridge says successful flotations often have a senior IPO team that supports the process. ‘They inform the organisation about the flotation so people in the company’s more middle and junior levels, who are going to do all the heavy lifting, understand that the company is at one in this process.’
Senior managers must not let the float distract them from the usual daily business. Ferguson says: ‘You need a broad enough management team with enough bandwidth for them to cope.’
Surridge says he worked as an adviser on a flotation last year where a senior member of the in-house finance team was deliberately not involved. ‘They kept a safe pair of hands in the finance team so that there was no danger of significant finance work being neglected while the FD and chief executive juggled with the float.’
But having a successful flotation is not just about managing the process. ‘One of the most important things is to do the hard work at the start to articulate the value you’re offering investors,’ says Surridge.
Peter Bartram, journalist
Peter Simmonds FCCA, chief executive and finance director of dotDigital Group, which provides digital marketing services, should know about floating a company. He’s done it twice.
The first time was when dotDigital floated on Plus Quoted in 2009, with a market capitalisation of more than £11m. The second was when it moved up from Plus to AIM in March this year, by which time the company’s market capitalisation had reached £21m.
Yet Simmonds and his fellow directors thought of floating the company when they were given the chance to reverse into an existing ‘cash shell’, West End Ventures, already quoted on Plus. ‘It was an out-of-the-blue approach,’ Simmonds says. ‘But there were compelling arguments for moving on to Plus.’
Those arguments included the ability to raise more money, create a formal share-option scheme for staff, with those shares valued on a public market, and realise some of the value the founders had created in the business.
Simmonds admits reversing into West End Ventures – which then changed its name to dotDigital – was more attractive than starting the float process from scratch. ‘We were being given an off-the-shelf route to being a public company,’ he says.
Even so, both entities had to go through rigorous due diligence processes. Simmonds reckons the whole float process took around five months from the initial discussions until the shares started trading. Much of the discussion centred around the amount of dilution the owners were prepared to accept when the company went public.
The company’s directors decided it might be time to move up to AIM in late summer last year. Simmonds says: ‘We’d made an acquisition with shares as part of the consideration, and having Plus paper was less attractive than it would have been had we been quoted on AIM.’
Simmonds and his colleagues also felt moving up to a larger market would make it more attractive to institutional investors. The directors spent December 2010 interviewing potential advisers and finalised the appointments on Christmas Eve. ‘We then had two months’ hard slog to get all the work done so that we could achieve our timetable and get our admission document in at the start of March, with admission by the end of the month,’ says Simmonds.
One lesson from dotDigital’s experience is preparation; its accounts were already prepared to International Financial Reporting Standards and the board operated, as far as applicable, within the Financial Reporting Council’s Corporate Governance Code.
Even so, directors and advisers had to go through a comprehensive due diligence exercise before admission. Simmonds says the whole AIM admission process cost just over £100,000.‘The biggest single risk for any company that’s considering floating is taking your eye off running the day-to-day business,’ warns Simmonds. ‘The important thing for us now is to continue being a commercial success.’