Flotation

Should I float on AIM?

May 07 issue
 

If you’re committed to faster growth, you should seriously consider a float on AIM. Robert Tyerman speaks to leading advisers who can show you the way – and raise significant sums for you in the process

Taking the public route and going head-to-head with the City is a dream for many entrepreneurs. Aside from the potential financial rewards, it will be a rigorous test of your business acumen.

The Alternative Investment Market (AIM) continues to be the junior stock market of choice for ambitious companies from the UK and from around the world.

A total of 362 companies joined AIM in 2006, raising £9.4 billion. To put this figure in context, £10 billion was raised in the five years to December 2005. Of the aforementioned new issues, 281 were admitted following a fundraising and 81 joined via an introduction. These figures include 31 companies that transferred from the Official List of the London Stock Exchange, compared to 40 in 2005.

AIMing high
AIMing high
The average fundraising in 2006 was £33.47 million, a notable difference to the average of £16.78 million in 2005 and £4.64 million in 2001. The benefits of choosing the AIM route include significant tax breaks for investors and shareholders and cash-rich institutional investors (now in control of 56.7 per cent of AIM shares, as opposed to 35.2 per cent in 2005).

A freer spirit
While the regulations for listing on AIM have tightened, it remains closer to the spirit of the buccaneering entrepreneur than other markets, particularly in the US where the Sarbanes-Oxley Act continues to produce high compliance costs for CEOs and FDs. On AIM, one of the new requirements for its 1,645 companies is that you must have a website with good corporate information. It’s in stark contrast to the US where you can receive a hefty fine, bad PR or a prison sentence for a faulty compliance statement on internal controls.

In addition, AIM is a cheaper option when you put it next to going public on the Official List (you will spend between 8 and 12 per cent of the money you hope to raise on your nominated adviser, broker, accountant and lawyer). What is clear is that, whatever your reasons for considering a float, you can save time, money and anguish by studying the views of some of the most successful and experienced professionals advising companies on floating.

Among the winners of the 2007 Growth Company Awards (run by Growth Company Investor, a sister publication of Business XL) are four firms well versed in steering companies onto the stockmarket. They have clear ideas about the steps you must take if you want to tap the investing public.

Simon Hayes, chief executive officer of KBC Peel Hunt, which won AIM Adviser of the Year, says that you must establish the motives for going public: ‘If you see flotation as an exit, don’t do it. You mustn’t go in with the attitude: “What is the maximum I can realise here and now?” That’s a massive turn-off for investors.’

Rick Thompson, head of corporate finance at AIM Broker of the Year Charles Stanley, agrees: ‘If you want to cash in, go for a trade sale rather than a float.’

Selling it right
There are exceptions to this rule, says Thompson: ‘If you want to exit and pass the business on to dynamic young managers in a growth phase, that is a different proposition. Sometimes, if a dominant shareholder wants to retain good managers, he could consider backing a management buy-out, which could then be followed by a float.’

GCI awards
GCI awards

Chris Searle, corporate finance partner at BDO Stoy Hayward, which grabbed AIM Accountant of the Year and has handled more AIM floats since 2004 than any of its peers, has this advice: ‘If you want to grow your business, then it makes sense to consider a float and not think of selling more than a small part of your stake.

‘You should get the chance to sell some more later, when the company’s growth should have increased the price. If possible, you should have a good growth story to tell over the past three years and going forward too.’

Adam Hart, Hayes’ colleague at KBC Peel Hunt and chairman of the AIM Advisory Group, spells it out: ‘We are looking for management teams that see a float as supercharging their business with a useful dose of capital and corporate rigour.

‘Going public should provide an opportunity to run your business better. Any company coming to market should be thinking about acquisitions and funding for growth.’

As with anything in business, forward planning is crucial, notwithstanding AIM’s lighter regulatory touch. Thompson says, in terms of financial controls and corporate governance, it can take from 18 months to two years to put in place the changes necessary to make a private company suitable for flotation.

Hart observes: ‘Don’t just say: “We’ve had some good results, let’s float.” Sometimes private equity backers drive the process, but even then, management should not be passive.’

He suggests recruiting non-executive directors well ahead of flotation. Similarly, ‘shop around and pick your advisers with care. Don’t go down to the golf club and choose someone recommended there as “a jolly good chap”.’

Get it wrong and you will be punished. Recent losers in the AIM game include Chariot, the UK company behind new charities lottery Monday. Launched in April 2006, the lottery suffered disappointing sales and saw its share price crash nearly 100 per cent to 0.45p. Clearly some casualties will be bearing the brunt of downturns in their sectors, such as online gaming companies SportingBet and Leisure and Gaming, posting dips in share price of 89.72 per cent and 92.56 per cent respectively during the past 12 months.

When things go wrong
Business disasters outside your control can happen, but it makes sense when going public to have your wits about you. Thompson reflects that ‘some people are very naïve when coming to the City’, adding that some companies approach Charles Stanley through intermediaries that have lined their pockets with options or the like.

Fundamentally, if you do float, you need to fully appreciate that you will literally be in the public eye. Searle says: ‘You and your management team must be prepared for exposure to the glare of the public market, with results to announce every six months and anxieties over share price movements. You must have at least two non-executive directors on the board and you cannot run the company as a lifestyle business.’

Hart comments: ‘We often find a company with a very sound chief executive officer, but needing a stronger board. That can take time.’

Dirty laundry
During the flotation, it’s helpful to disclose any unpleasant findings to your advisers. ‘It’s better to know than not to be told,’ states Christopher Brockbank, a solicitor at AIM Lawyer of the Year Field Fisher Waterhouse. ‘There is nothing worse than questions, which the advisers know nothing about, being asked at a roadshow for a flotation.’

Provided the forward planning and preparation have been set in motion, Brockbank suggests it will take at least three months between ‘pressing the button’ on a float and completing it. Whether your timing coincides with the optimum point in the stockmarket cycle is another matter. For example, just now, according to Hart, ‘the market is changing. Later-stage companies may get an audience today, which earlier-stage companies would have got six to eight months ago.’

It’s a standard cry of the CEO of a public company to say they feel the stock is undervalued. However, the advisers are clear about the need for a realistic company value at flotation. Thompson states: ‘The stockmarket has not seen your business perform as a public company and to float you will need to accept a realistic discount to your quoted peer group.’

He suggests entrepreneurs should ‘work out what your own minimum price to earnings valuation is and don’t necessarily feel you must tell your broker what it is’. Things can
go wrong – ‘you might make a poor presentation or the stockmarket might wobble’ – and you should have thought in advance how to react and whether to persist at the lower end of a predetermined price range, or to pull out.

Taking pre-float investment money raises other issues. ‘It might be genuine private investment, with no assumption about a float,’ says Thompson. ‘But if it means people putting in money in January at £10 and getting out at £20 in May, it is ludicrous and can put pressure on you to float at the wrong price.’ A lock-in agreement, preventing pre-float backers from selling out within a minimum period, probably makes sense too.

If you are floating for the right reasons and have what it takes to successfully capture the imagination of the market, then it will surpass your expectations. Among the new issues last year, 14 per cent attracted between £20 million and £50 million, 7 per cent received between £50 million and a £100 million, and 8 per cent raised £100 million or more.

Evidently, the money is out there.

Click here to view the winners table for the Growth Company Awards 2007