Why AIM is still worth it for those who wait.
Only a very exceptional – or foolish – company would consider floating on AIM at the moment. But Peter Baber says the reasons for wanting to are still very apparent. It’s only a matter of waiting.
Last year was something of a threshold year for AIM. For the first time in its 13 year history, it raised more money from secondary issues – companies already quoted on the exchange looking to raise more money through it – than it did from companies making initial public offerings (IPOs) or floating. In total in 2007 £6.58bn was raised through flotations, compared with £9.6bn on further money. The previous year the figures were £9.94m and £5.73m respectively.
“IPOs really are a smaller part of the market now,” says Nick Emmerson, a partner at Eversheds in Leeds. “It used to be that you could split the ratio of money raised on the market through floats compared with money raised by secondary issues by 60 per cent to 40 per cent. Last year that ratio flipped.”
He and many other advisers see this as a sign of maturing in the market, a sign that an exchange that made its name by helping an ever-increasing range of exciting smaller companies make their first forays in winning extra money on the public market is now much more widely established and respected as a market that you can theoretically come back to time and again to raise more funds.
AIM in its early days was seen very much as a kind of launch pad for companies who would spend a few years on it before moving to the main market. But many advisers now will point out that you don’t really need to move up at all, unless you are a significantly large company with a turnover well into the hundreds of millions (a company like Spice, for example, which, as we shall see later in this guide, is planning to make that move in July 2008). “The success of AIM really is that it has become a market of choice,” says Mark Lister, senior partner at PKF’s Leeds office.
And the proof of that comes in the money. Richard Lindley, head of corporate finance at WH Ireland, points out that as much as 57 per cent of the money now invested in AIM comes from institutions – organisations that might traditionally have preferred the main market.
“AIM raised more last year for companies than either NASDAQ or the main New York stock exchange,” says Emmerson. “But AIM hasn’t had the misfortune of having Sarbanes Oxley raining down on it, in the way they have,” he adds, referring to the new accounting rules that have been introduced in the wake of the Enron scandal.
In fact, that lightness of touch is one thing that – in theory at least – should make AIM the most attractive of exchanges for new companies looking to test the water in the public markets. All advisers will tell you that, compared with the main London market, and particularly compared with anything in America, you are far less likely to be burdened with bureaucracy if you float on AIM. “There’s a much lighter touch,” says Lindley. “With AIM you don’t have the same kind of corporate governance requirements that you do on the main market. There are a set of guidelines from the Quoted Companies Association, but they are just that – guidelines – and they only cover such things as having a minimum of two non-executive directors plus separate audit, remuneration and nomination committees.”
Roger Esler, public markets partner at Deloitte, adds that more relaxed rules on getting approval for acquisitions also makes the exchange ideal for companies who are launching a buy-and-build campaign. “You really only have to make announcements about planned very large acquisitions or when it’s a reverse takeover,” he says.
Added to that there is the international dimension – and not just in terms of profile raising. In 2007 the London Stock Exchange merged with Borsa Italiana, its Italian counterpart and, according to northern regional manager Mark Fahy, more tie-ups with exchanges in Tokyo are planned too.
But you will have noticed a lot of hedging of bets here, with words like “theoretically” creeping in. Because the fact of the matter is that while these benefits are all very real, the current economic conditions mean you would be most unwise to attempt a float.
“The market has effectively been closed for the first quarter,” says Andy Baker, a partner at Baker Tilly, and the figures bear him out: £1.43bn was raised in the first two months of 2007, while this year the figure is £891m – and only £212m of it in IPOs.
“New money has been raised in specific sectors like oil and gas, which will continue to float successfully on AIM,” says Christian Mayo, a partner at KPMG. “However, companies in most other sectors will struggle to attain a suitable value, or indeed to successfully float, until some measure of calm has been restored to the equity markets.”
Anyone who doubts this only has to look at the case of Turner & Townsend, the Leeds-based consultancy that decided at the 11th hour earlier in 2008 not to float on the main market.
Esler says the very features of the current credit crunch make things worse for AIM in particular because, notwithstanding its many and improving benefits, it is still perceived by risk-averse investors as being higher risk than other exchanges. “On the wider macroeconomic scale,” he says, “institutions are having to make a lot of changes to their positions on derivatives, and that causes people to sell shares rather than buy them.”
In any case, floating a business in such a volatile market is never a good idea. “You could say that you can get away any good business in any circumstances,” says Emmerson, “but then you probably can sell anything for 5p.”
So does that mean AIM is no longer the land of milk and honey it was? Certainly Baker thinks the “gold rush” from 2004 to 2006 is definitely over. “AIM prices peaked in July 2007,” says Lister. “They were at levels that really were unsustainable, and we are unlikely to see them again.”
However, it’s not necessarily curtains for AIM. There is some dispute about exactly when normal conditions will return – some say the autumn of this year, some say not until half way through 2009. But everyone agrees that they will return. “Unlike other kinds of funding,” says Esler, “public markets do not take years to recover from any setback.”
So for those considering floating the message seems to be if you can afford to wait, do so, and in the meantime make sure your business is thoroughly prepared. Many advisers point out that, conditions being what they are, there is likely to be a queue of companies making presentations when markets do open up again. So you want to make sure you are at the head.
We’ll talk more about what this involves overleaf. But as you’ll see, it’s good practice anyway. And, as an extra incentive, when the markets do open up, one type of investor in particular will be looking for particularly juicy investments. Venture capital trusts get tax breaks if they invest in unquoted companies – and for the purposes of tax that includes AIM-quoted companies. What’s more, the size of company they are allowed to invest in has recently been reduced. “Even with all the turmoil,” says Lindley, “it is estimated that they still have some £500m to invest.”
Going for a float on AIM – when you decide to – takes careful planning. So there’s no reason not to start now, says Peter Baber.
To the outside world, any company floating on AIM is probably looking to raise money for itself, and not much else, right? Wrong.
“Accessibility to funding is still a key goal,” says Andy Baker, a partner at Baker Tilly, “but there are plenty of other reasons for going on the market.”
In particular there’s the added profile your company gets – both nationally and internationally. Many advisers say that, no matter how well you may have obeyed the rules on corporate governance as a private company, overseas suppliers and customers will only take you seriously when they can see what you are up to on a public market such as AIM.
As far as Mark Fahy, northern regional manager for the London Stock Exchange is concerned, there are three clear reasons for floating on AIM. “There are companies hoping to raise money at flotation and more importantly beyond flotation,” he says. “Then there are companies who are looking for liquidity, hoping to use their share price to give themselves a real value, and so benchmark whatever share options they might have issued. But there is also the added profile you get. Most companies underestimate that but it’s a huge benefit.”
You’ll notice that one benefit that absolutely isn’t included here is any desire for company directors to take money out of the company. There may be a small opportunity for doing that as part of the float, but any significant cash-out will be severely frowned upon. “Think very carefully about the reasons for floating,” says Mark Webster, head of the AIM sector group at PricewaterhouseCoopers in Yorkshire. “It should be a means to deliver the future plans of the company, not just an exit for current shareholders”
So, assuming you are still intent on going ahead later this year, what next? Planning well ahead seems to be the answer. Richard Lindley, head of corporate finance at WH Ireland, has an ideal timetable for organising a flotation that covers three months, although it assumes that before you even get to the first month you will have appointed your advisers, made financial forecasts and resolved any structural issues in the company.
Many other advisers reckon a timescale from start to finish would be more like 12 months. “While the actual flotation process itself generally takes under six months,” says Graham McConnell, associate director in transaction services at KPMG, “a further six should ideally be allowed for preparation. You need to be realistic. Almost half of our contacts tell us their IPO took longer than expected, largely due to underestimating.”
It’s this housekeeping – making sure you have non-executives on board, outlining the structure of the company – that really counts in preparing a flotation and it’s the kind of thing that companies that are hoping to float later this year can busy themselves with at relatively low cost until the current stock market uncertainties have sorted themselves out.
Once you have decided formally to float, Lindley’s three-month timetable has legal due diligence and accountant’s reports – probably two of the most expensive items in the float – going on for all three months. The admission document drafting and the agreement placing doesn’t start until the last two months and the investor roadshows – when you finally get to meet the people who could be investing in your company – only take place in the final month. At that time your appointed broker will also be “book building” or getting those companies who have expressed an interest to commit before the day your shares go public for the first time.
But many advisers say you will need to have a clear idea in your head about how you are going to present what you are trying to achieve well before then. Roger Esler, public markets partner at Deloitte, says, for example, that if you are going to be putting forward an acquisition strategy, it helps to be able to say exactly who you have in your sights. “It’s always that much harder raising an acquisition war chest if the targets are unclear,” he says. “But if you are already talking to a potential target it’s that much more interesting.”
Through all of this process – and afterwards from the moment you float – you will need to appoint two new kinds of professionals. The first is a nominated adviser or Nomad. This individual – who can, but does not have to be, your own broker – is responsible for making sure your company abides by AIM rules. Following a review of the market in 2006, AIM has tightened up its rules for Nomads quite considerably (and fined some such as Nabarro Wells to the tune of £250,000 for breaching rules), and as a result their numbers have thinned nationally from around 110 to something nearer 80. But Maurice Cowen, a partner at Cobbetts in Leeds, says it is precisely this self-policing that makes AIM so special. “It was a piece of genius in its creation that said poachers could act as gamekeepers,” he says.
He thinks, notwithstanding the clampdown, that such an arrangement gives businesses in the regional market more protection than companies who are centrally policed by an office down in London.
The other key professional in the process is your financial PR. Sarah Hollins, who runs Abchurch’s Leeds office, says she is usually appointed for a three-month window, during which she has to both hone up the company director’s presentation skills, and make sure the right messages get out about the company in the right media. Other work includes making sure an investor relations page on the company website is up and running, and ensuring “top-quality photography” to promote the company – again, far more important for profile-raising than people might think.
It is important to realise, however, that such professionals will be with you not only before and during the float, but after it as well. Because a key part of the success of any company that floats on AIM is maintaining your visibility. And you do that by continuing to present a good story. A common occurrence particularly for many smaller companies who float on AIM is that, once the initial euphoria of the float has died down, with it dies any interest in the company, and the share price drifts into the doldrums. Turnover may be up 30 per cent on AIM in the past year, but such a danger is still possible, and can only be overcome by carefully managed profile raising.
But Baker says that does not necessarily mean big companies always fare better on AIM. “The average size of a company that is quoted on AIM is £54m, which is probably smaller than people think,” he says.
“If you are a small business with a sexy story to tell there is no reason why you can’t be successful. It needs to be a damn good one, but if you do have one there is no reason, for example, why you can’t present it to an investor right now. They are hardly being inundated at the moment.”