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AIM listing: achieving your aims?

Is delisting from AIM an admission of failure or a sensible business decision? Noble's Bruce McLaren asseses the issues

You are the FD of a successful business. You have been delivering in line
with forecasts and everything looks positive for the future. There is only one
problem; the share price of your AIM-listed company is going nowhere fast, and
since your remuneration is heavily reliant on the performance of your company’s
shares, you, your fellow management and other shareholders are not reaping the
benefits of the company’s strong performance.

AIM is a burgeoning market which has by many accounts come of age. At 13
years old it has raised almost £24bn for more than 2,200 companies to date.

It is now a recognised source of low-cost capital to companies from around
the world that would otherwise have to raise money from venture capital or
business angels.

But AIM is not simply a smaller version of the LSE’s main market. It has an
entirely different set of characteristics. For example, high levels of liquidity
for AIM companies can be considered a privilege rather than a right, and the
same can be said for research coverage.

The fact is that while AIM performs a vital role, it is unlikely to be
suitable for everyone. In many cases delisting could be the best option for
employees and shareholders alike and need not be viewed in a negative light.
Research detailed in our recent publication The anatomy of AIM
underlines the fact that a healthy turnover of companies is required to maintain
the dynamism of a growth market.

As AIM has grown in recent years ­ the number of listed companies has more
than doubled since 2003 ­ the number of delisting companies has remained
consistently in the 12% to 16% range.

Companies with good reasons to be on AIM include: those with a need for
capital that are mature enough to raise this through AIM directly from
institutions; those that are able to use their listing as an acquisition
currency; and those that are large enough where liquidity is available.

These companies are in the right place. As such, they will be researched,
analysed, followed and supported ­ often creating a virtuous spiral of success.

Many companies, however, find themselves in a quoted environment where the
original rationale for being quoted is no longer relevant. Or the company may
have come to the market too early, buoyed by the availability of VCT capital.
This is not to say there is anything wrong with the company itself. But if the
company doesn’t need quoted facilities then the quoted market doesn’t need the
company. Such a company is consequently often overlooked. It might deliver as
expected and appear to be going from strength to strength but it may not be
followed by the market ­ which means zero momentum for its shares.

A fund manager invested in such a business could congratulate himself for
having picked a good stock, and be certain in his belief that the market will
ultimately spot what he has seen all along. But it is more likely that he will
be frustrated with the flat share price that doggedly refuses to move.

After all, stockpicking is about trying to make money and being right
sometimes just isn’t enough. In these situations rational investors will relish
a situation where cash becomes available to take them out of an illiquid
flat-lining stock, such as a take-private offer.

We do not see delisting in these circumstances as an admission of failure. In
fact, we view it as the correct action of a responsible management team
positioning their business in the capital markets, much as they position their
products or services in their own markets.

Quoted companies are, after all, only a subset of all companies and many of
the largest companies are in private hands. Public to private actions need to be
recognised as a natural process within a market such as AIM that focuses on
young and growth companies.

As a fund-managing shareholder we welcome the decision to delist where it has
been properly thought out and can be clearly justified as the most beneficial
course of action for investors. Creating a liquidity event is generally good
news for investors and so long as the deal is presented at a fair value everyone
involved will be happy.

The anatomy of aim

The following edited extracts are taken from The anatomy of AIM ©
2008 Noble & Company:

The role of dividends in AIM, perhaps more than in most markets, is crucial.
Research included in The anatomy of AIM shows that in four out of the past five
years a dividend yield at the start of the year has coincided with subsequent
outperformance. The role of dividends as a gauge of the health of a company and
the confidence of its management in the future is of vital importance in a
market where detailed and historic fundamental data can be in short supply.

However, given a slowdown in economic growth both at home and abroad this
year, there appears a distinct likelihood that earnings and, therefore, dividend
payouts, will come under pressure over the coming months, even without an
outright descent into recession.

Against a backdrop of deteriorating corporate profits news, we believe
companies that can maintain their dividend payout levels will have the potential
to command a premium within the market.

Noble’s analysis found that as a result of the credit squeeze there is a
likely increase in investor appetite for companies that can generate organic
growth. This, in turn, is likely to be reflected in an upsurge in M&A
activity amongst AIM-listed companies.

As markets rise or fall, M&A activity tends to follow in their wake. In
the case of the AIM All-Share, a revival in UK M&A activity during 2002
appears to have been a leading indicator for the market’s subsequent return to
favour following the post-2000 bear market declines.

Being home to a number of more organically growth-driven and less
credit-dependent companies may put AIM among the first ports of call when
corporate predators, on the look-out for growth potential, eventually re-emerge.
Expect to see acquisitors from both the UK and abroad go fishing in the pool of
relatively low-priced assets on markets such as AIM.

Bruce McLaren is chief investment officer at Noble

For more on AIM click here

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