It's tempting to think that the declining share prices of the region's quoted companies are part of the wider corporate malaise but figures show that the Midlands is performing more poorly than the average.
No hiding place
Time was when companies queued around the block to go public. An IPO was formal recognition of success, the commercial equivalent of a pilot's wings and something to be worn with pride. Andrew Macleod asks, what went wrong?
The grown up stock market is a tough place to be these days. Share prices are plummeting, cash-starved corporations are in siege mode and fire sales are on the increase as corporates seek to reduce gearing and shed under-performing subsidiaries at a single stroke.
Take-privates have been the trend for some time, and those that have taken that route are generally glad to have done so. More recently there has been a move to surrender a full listing in favour of the more lightly-regulated Alternative Investment Market (AIM).
The question on many lips now is whether there is any point to being a public company. To which the answer is yes or no - or maybe.
In a climate where even the largest companies are finding times hard - a recent survey by Ernst & Young showed that eight plcs in the East Midlands, West Midlands, and East Anglia issued profit warnings in the third quarter of the year - smaller quoted companies are living a precarious existence.
Mention SQCs - smaller quoted companies - and fund managers reach for their bargepoles. Their only interest seems to be the safe bet mega-plcs. But in today's world what constitutes a safe share? A couple of years ago this category would surely have included names like Marconi and HP Bulmer. Enough said?
If circumstances can change so dramatically for big names like those, little wonder that shares in many market'minnows are virtually untradable. The consequence, of course, is that their capital values are depressed, which is the start of a vicious circle.
The wheel turns like this: a small-cap firm sees an acquisition opportunity but has to move fast because the target is in administration.
Such chances often crop up on a now or never basis, but if the target's value is more than 25 per cent of the capital value of the company making the bid, the law says shareholders must be consulted.
In the case of a company with a low market value, thanks to indifference by fund managers, even relatively small acquisitions require shareholder approval.
Information packs have to be prepared by teams of advisers, materials printed, and mailed out to all shareholders. It takes time - usually long enough to ensure a rival bidder can nip in and steal the prize - and just as importantly, it costs a fortune.
So the chance to grow through acquisition is lost, and the company stagnates. This is perceived as a lack of dynamism by potential investors, and the share price can be marked down even further.
One chief executive cites similar circumstances as contributory factors to his decision to take his own company private.
"We sold a subsidiary last year and the fees and expenses alone cost upwards of £3300,000," he says. "Who picks up the bill at the end of the day? The shareholders. The reality is that very small public companies incur enormous costs whenever they buy or sell, because they have to follow Stock Exchange rules, and that is always very expensive.
"It's not necessarily in the shareholders' interests to have this enormous burden of cost, but on the other hand it is essential that they have all the information they need to make an informed judgement.
"Smaller companies just can't afford it."
In the rarified atmosphere of the City, however, everything is relative. So for "smaller companies" read "anything with a market capitalisation of less than £3150m," reportedly the minimum figure for which the big firms will heave themselves out of bed.
Meanwhile, out in the real world, there is always AIM. Or even the option of a public-to-private deal for management teams prepared to entertain the venture capitalists.
Many companies that have accepted cash from VCs with some trepidation have found the experience more agreeable than they expected. The trade-off is cash for expansion in return for a share of executive control.
On the plus side, a good choice of VC can result in another wise head on the board - and it invariably sits on the shoulders of someone with a strong track record in the sector.
Over in the minus column, however, is the fact that the market is now so poor that VCs aren't as willing as they once were to put their money at risk. Research by Deloitte and Touche and Barclays Private Equity shows that the VCs' ideal exit timeframe of three to five years is being seriously overshot.
No-one wants to press collect when the jackpot is half empty.
Recent times have also been witness to the rise of that even more threatening phenomenon - the active value investor who demands change in return for his money, and usually gets it.
These groups and individuals can seriously hit the pockets of directors - and increase value for shareholders - by making life hot for under-performing companies, typically those with low valuations whose shares may be trading at a discount to net assets.
A cosier route might be AIM, which offers many of the advantages of the stock market - most significantly the ability to raise funds relatively easily - but with much less onerous regulation.
The question of whether to down-grade or abandon a listing is still a hot topic in the Midlands, where plcs seem particularly prone to profit warnings.
Ian Best, restructuring partner with business advisers Ernst & Young, who supplied information from its Birmingham and Nottingham offices for the quarterly survey mentioned earlier, says he is surprised by the 50 per cent increase in warnings across the firm's central region. The national average increase over the same period was only 33 per cent.
Best says: "The increased number of warnings is a concern, especially given that expectations for profits have fallen in the last year."
And warnings can seriously damage a firm's economic health, since they are invariably followed by a sharp fall in share prices.
During the third quarter of the year the share price of all companies that issued warnings was hit by an average 23 per cent fall on the day of the announcement.
The overall situation in the East Midlands is much the same as the West, according to Andrew Raca, head of the public company advisory team in E&Y's central region.
"Take-privates are being considered just as actively in the East Midlands as anywhere else," says Raca. "Typically they are traditional businesses with more tangible assets than technical companies, and therefore more scope to come off the market."
One example involved Armitage Brothers, a Nottingham-based pet products company which had a market capitalisation of around £35.5m, and an asset value of £311m.
When bid talks began around £31.5m was added to the company's value, but it was still an extremely good take-private prospect, says Raca, who takes a cautious view of public-to-private transactions because they are difficult to complete.
But he, too, is a supporter of AIM, although he says its identity has been diluted in recent years by the number of firms joining it from the main market.
His enthusiasm is shared by accountants Baker Tilly and corporate law firm Hobson Audley which have produced a joint report which reveals that Midlands companies have been slow to embrace AIM.
Their findings reflect badly on Midlands finance directors, who accounted for 75 per cent of the people canvassed in the survey.
According to Ian Bowland, corporate finance partner in the Birmingham office of Baker Tilly: "Of the Midlands companies questioned, only 6 per cent said they were very familiar with AIM, compared to 20 per cent of companies in London. Regrettably 34 per cent of companies in both regions said they had never heard of it."
It gets worse. Bowland says: "Another 34 per cent of companies in the Midlands admitted they were not very familiar with AIM, compared to just 18 per cent in London."
Depressingly, many of the firms in ignorance of AIM were in unloved sectors like manufacturing and engineering - precisely those industries that might be considered to have most to gain.
Companies that have already been admitted to AIM seem generally happy with the outcome, and expect to remain there for between three and six years, the report reveals. More than 95 per cent said they would consider AIM for a second round of funding.
But despite the benefits, only 4 per cent of potential AIM companies have had the alternative market recommended to them by their advisers.
"Professionals must work hard to ensure that the benefits of AIM are brought to their clients' attention," adds Bowland. "We can't expect the London Stock Exchange to shoulder this responsibility on its own."
Of course not all quoted companies are bitter about the stock market - even when they have seen its bad tempered side.
Take HP Bulmer, the Hereford-based cider maker. Its share price sank through the floor with a string of profit warnings. Chief executive Mike Hughes and finance director Alan Flockhart - both men with good track records in the drinks industry - fell on their swords as Bulmers set about putting Humpty together again.
The process could take some time, since the firm has completed a review of the business and concluded that internal profit forecasts will have to be slashed by £314.5m in the year to April 2003 - and that there may be a future knock-on effect.
The grieving process is still underway at Bulmers which lost more than three quarters of its value last year. But despite its problems the firm has no plans to either go private or move to AIM.
A spokesman says: "At the moment we are heavily involved in our turnaround process, but we have no plans to come off the stock market. We have been a listed company since 1970, and will remain so.
"Yes, we are going through some turbulent times, from which we will recover, but we do not intend to go private or to make any other move."
No doubt Nemone Wynn-Evans, Midlands manager of the London Stock Exchange, will be pleased to hear the Bulmer spokesman's sentiments. She believes the successes of the stock market have been obscured by some of its high profile disappointments - one of the more recent of which is the announcement by Harvey Nichols that it is being taken private by Hong Kong tycoon Dickson Poon.
Wynne-Evans is a woman who has facts at her fingertips, and the inclination to share them.
The number of IPOs on the LSE this year? Eighty-eight, of which 34 have been on the main market with the rest on AIM.
New issues in the Midlands? Eighteen, including six IPOs, raising a total of £3192.4m. They included Bright Futures Group, Lloyds British Testing, Cobra Bio-Manufacturing, and Image Scan Holdings.
On the main market the Midlands saw the successful launch of Punch Taverns.
But bald statistics don't tell the whole story, which is that IPOs in the UK account for 75 per cent of all floats in Western Europe. IPOs on the main market raised a total of £34.6 trillion, and on AIM another £3347m.
Wynn-Evans says: "These figures demonstrate that London is still open for business, and that the LSE's markets present an attractive option for companies looking to fund their future growth."
Maybe so, but there are still many companies who feel jittery about the stock market at present.
KPMG has produced figures showing that IPOs have slumped to a new low, with companies like Yell, the yellow pages concern, and Focus Wickes, the DIY chain, getting cold feet at the last minute and shelving their plans.
Wynn-Evans admits that 36 companies have transferred to AIM from the main market, but points out that over the same period there were 54 IPOs on AIM, and that anyway movement between the markets is a healthy sign.
One of the prime reasons for a listing is, of course, the immediate access it gives to a huge reservoir of capital, but Wynn-Evans says there are other benefits, not least of which is the public profile given to a quoted company - especially one with ambitions in the area of mergers and acquisitions.
Ed Dawes, a partner with Birmingham law firm Wragge & Co, acknowledges the important role the Stock Exchange and AIM markets play in commercial life. He has a particular interest in smaller quoted companies, which he believes get a raw deal under the present system.
He is a fan of AIM, which he points out permits its member companies access to the same capital markets as its bigger sibling, but operates in a more relaxed way.
"Any small company on the main list that feels unloved by institutional investors, has low liquidity and a market cap well below its net assets should consider moving to AIM.
"These are precisely the circumstances that stifle entrepreneurialism," says Dawes, who served on the smaller quoted companies working group of the CBI, and contributed to the influential report, 'A Bigger Share', published last year.
Dawes admits, however, that there are exceptions. "There will always be firms like Victoria Carpets - smaller companies that are doing rather well on the main market."
Over at KPMG, Charles Cattaneo predicts that 2003 will be a quiet year, with most companies experiencing low growth. But there will be some deal activity, brought about by the need for companies to de-gear under pressure from funders.
One way of achieving this might be to de-merge an unwanted subsidiary and float it as a separate entity on AIM.
"You won't see many owner-managers looking to sell at this time," he says, adding that sellers' premiums are a thing of the past. He also forecasts an upsurge in foreign buyers trawling the waters for bargains.
For the foreseeable future in the UK, acquisitions will be less "wannabuy" and more "gottabuy".
"I think public-to-privates will continue, but they will fall into the difficult to fund category, and until the market improves, the prospect of raising equity on the stock market will remain difficult," he adds.
What emerges from a scrutiny of the marketplace is that a significant number of companies nationwide have engineered their own misfortune, whether it be black holes, rigged figures or inflated profit forecasts. Not surprising, then, that Europe has finally woken up to what's happening.
Resorting to its traditional response, it is pelting the problem with paper.
Coming to an office near you soon: the Transparency Directive, which aims to compel companies to adopt a more open approach to their dealings with investors: the Prospectus Directive, which will make companies file information in Brussels as well as the UK, increasing costs significantly; and the Company Law Review, which will impose a requirement on companies to include non-financial elements in their annual reports.
But PricewaterhouseCoopers corporate finance partner David Armfield reckons that most Midland firms are sanguine about their future on the stock market. Not all firms are unhappy with their lot - indeed those will strong balance sheets see the current climate as an opportunity to acquire businesses at reasonable multiples.
Aga Food Services is one example, says Armfield, pointing to the company's recent acquisitions, including two in France and one on the US.
"My guess is that over the past 12 months Aga has acquired as many as six businesses," he says. "It's not all bad news.
"Many people have reached the point where they have faced difficult market conditions for some time. They recognise that they can't put things on hold forever and are getting on with their lives."
Graphic Designs
It's easy to find companies on a downward curve, much harder to find ones heading upwards.
One could have sadly chosen a string of companies to fill the graphs on the left hand side of this column, while quite a search was required to find those that would fit on the right.
The reasons behind the share price collapse of so many Midlands companies in 2002 (beyond the general stock market malaise) are of course varied and particular to each company, but whatever the cause it doesn't make pretty reading.
As we discuss in our cover story, Bulmer's shares collapsed after five profit warnings in 11 months caused by over-ambitious expansion plans and overstated profits thrown in for good measure.
Brittanic has been hard hit by concerns over the financial health of the life assurance sector. It is also viewed as especially vulnerable due to its high exposure to equities with continued stock market declines having the effect of reducing its regulatory capital.
On the positive side Hill & Smith, driven by the talents of chief executive and Midlands turnaround specialist David Grove, has bucked the trend. Brought in to turn around the Black Country engineering group Grove oversaw the audacious acquisition of rival Ash & Lacy and has since carried out a number of well-received acquisitions in the past 12 months.
Edgbaston property company St Modwen also had a stunning year, capped by its £3111m sale and leaseback deal with French engineering group Alstom whereby St Modwen will acquire 8m sq ft of land. The City also liked a string of strategic partnerships the firm has forged with Midlands corporates over the past 12 months
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