De-listing stigma begins to lift

The move has always prompted institutional and other shareholders to ask of the company: ‘What do they know that we don’t?’. But while many might still view de-listing with suspicious side glances, checks and balances by independent advisers have now been put in place to mitigate against concerns, and help ensure no deception arises.

Nowadays cynicism has been replaced with a clearer picture of why public quoted companies turn their backs on markets and return to the private finance fold.

John Cole, partner in private equity at Ernst & Young, says: ‘There’s a much greater acceptability to move capital around than before.’

The month has seen Hamleys and JJB Sports, two successful listed companies, consider management buyout proposals, with Reed Executive also revealing it wants to go private. The moves have all brought the issue to the fore once again.

Cole, says: ‘There’s a perception that it’s not really helping (being listed), no one wants to buy shares, you can’t raise capital and you’re also subject to teenage scribblers, as someone described it.’

Markets have, however, matured and corporate finance experts say they will continue to do so to the extent that de-listing to restructure a company or otherwise, and vice versa, will become the norm.

Cole, says: ‘We’ll see more flexibility in the future even if we do have better markets. Listing won’t be a lifetime event. Companies will be able to go from public to private and back again with more flexibility. Nothing is forever.’

There are many reasons why companies chose to de-list, with some perhaps less valid than others, such as avoiding a barrage of difficult questions from shareholders. The prime reason is that management, particularly in smaller quoted companies, feel disappointed with their treatment by the markets.

Alex White, corporate finance expert at BDO, says: ‘With the whole tech boom, unproven business models were being valued higher and the market was neglecting older solid business models. ‘Some of those companies were putting out good results but not getting the value on their share price. Management teams and shareholders become frustrated by it all.’

Research from mid-tier firm BDO highlights these feelings among smaller listed companies.

Half, or 51%, of listed small cap management teams will consider a return to private ownership in the next few years. Two-thirds criticise the City’s undervaluation of small caps, and eight in 10, or 83%, feel they are failing to attract enough institutional or analyst interest, according to BDO’s findings.

And there is another factor contributing to the number of companies, particularly smaller quoted ones, de-listing or considering de-listing from UK stock exchanges – the impact of European directives.

Concern is such that the Quoted Companies Alliance, a representative body of smaller listed companies, organised an event recently to discuss whether the alternative investment market, known as AIM, has a future.

In the first two months of this year 16 companies listed on AIM while 15 de-listed. If this weak trend continues at the same pace this year it will paint an even more gloomy picture than last year, when 160 companies floated on AIM, while a little over half that figure, 85, de-listed.

Nevertheless AIM continues to be Europe’s fastest growing exchange. Last year 40% of all IPOs in the European Union were on AIM.

But the new pre-vetting rules that companies must undergo if they wish to float on AIM will mean extra costs and extra time, something that few management teams have in spades, especially those in smaller companies.

This is just one of the many issues that companies are having to deal with. John Pierce, chief executive at QCA, says: ‘There are lots of additional pressures that will hit the corporate community – Higgs’ corporate governance, international accounting standards and the harmonisation of them and, of course, the new Companies Act when that is finished. Not to mention getting caught up in the dreadful cycle of US quarterly reporting.

‘I hope this is just a blip. But if EC action does reduce the special nature of AIM as a market, it’ll mean more cost and more delays, so the whole system will become more cumbersome. Unless a company can command a market cap of £200m, they won’t come (to market). I hope that’s a doomsday scenario but all the signs are there,’ says Pierce.

His view is further backed up by research produced last month by mid-tier firm Grant Thornton. The firm says that greater economic and political uncertainty has caused AIM to suffer a 50% drop in the number of new issues in the first three months of 2003, compared to the last three months of 2002, and a fall of 43% compared to the same time last year.

The market has also suffered a decline in the amount of money raised for new companies, according to Grant Thornton.

Philip Secrett, corporate finance partner at the firm, says: ‘Economic and political uncertainty, largely due to the events in Iraq, have caused greater volatility on AIM which is undoubtedly forcing companies to adopt a “wait and see” approach when planning a proposed flotation.’

The chancellor’s restraint in last week Budget in not introducing a plethora of new initiatives will be welcomed by business, which badly needs a period of stability.

But given the relatively parlous state of the UK’s public finances, tax rises definitely should not be ruled out for this year. Add to that the fact that the world economic situation is increasingly difficult, and if the government wishes to remain true to its pledge of making Britain the most attractive place for entrepreneurs, it’ll have to work harder to ensure liquidity returns to the marketplace.

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Open since 1995, AIM is the London Stock Exchange’s global market for smaller, growing companies. More than 850 companies have been admitted, raising more than $10b in the process.

There are no specific suitability criteria for companies to qualify for AIM. But under AIM rules, all companies must produce an admission document making certain disclosures about such matters as their directors’ backgrounds, their promoters, business activities and financial positions. All AIM companies are required to have a nominated adviser (or nomad) responsible for warranting to the exchange that a particular company is ‘appropriate’ for AIM. Normally once a company has been on AIM for two years it is able to seek admittance to the main market.

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