Andy Makeham is chief executive of K3 Business Technology Group, an enterprise software firm that’s successfully diversified into retail and distribution markets by building on a strong standing in manufacturing. It had a record year in 2005, with sales tripling to a record £22 million on the strength of savvy acquisitions.
Reversing is less than ideal
Coming to the stock exchange by way of a reverse takeover of another company really isn’t the ideal route for a number of reasons. We joined AIM through a reverse takeover of a troubled hardware distributor in March 2001 – RAP Group technically bought K3 from a Swedish group.
It seemed like a good way to become a listed company but contrary to my expectations, I found that you just don’t get any publicity and you also inherit all of the sins of the company you reverse into. K3 has a calendar year and nobody understood the first year’s accounts since they reflected three months of RAP losses and all our profits, leaving the City totally confused. Then, of course, K3 had a great second year, but that was no good either because there were no comparatives, so the Square Mile brigade didn’t understand those numbers either. Only in year three did all of this start to wash out and eventually the market cottoned on. If I’d known all of this, I would have brought K3 to market through an initial public offering, rather than reversing into an existing listed company.
Have a private investor strategy in place
Once we had come to market, we spent a lot of our time trying to get institutional backing, as our brokers were urging us to do this. I have since realised that private investors are key for small cap companies and are very influential in moving share prices. Once we were on AIM, I got swept up in the whole stock exchange thing and, if I were to do it again, I’d have that private investor strategy in place earlier. We are trying to address that side now.
Software firms can struggle for bank borrowing
As a software company, it can prove hard to get bank borrowing for acquisitions because banks think in terms of traditional assets rather than intangibles. We have no assets as such, only the goodwill on our balance sheet from any acquisitions that we make, so the difficulty has been that we’ve nothing to borrow against except our revenue streams, and even then the banks are swiftly quizzing us about the type of revenues we have. I wish I’d known this before, but we’ve spent a lot of time getting our message across and we now have a great relationship with our current bankers, who have provided us with a £1.7 million facility for acquisitions.
AIM deals drag on for twice as long
I have discovered that as a quoted company it takes twice as long to complete acquisitions as it does in the private marketplace. We have effected three deals on AIM so far – retail and distribution software solutions businesses K3 Landsteinar and K3 Elucid were bought in 2004, and we acquired Information Engineering Group in June 2005 – and they have all taken 18 months or so, not the six months that I was used to in the private sphere. As well as the whole banking scenario, you have sets of advisers (lawyers, brokers and so on) to deal with and most importantly of all, you have to persuade the vendor to take deferred consideration or some of your shares.
Servicing the City is a full-time job
Having previously only run companies in the private arena, I’ve been amazed by the amount of time it takes me to service the City and keep our shareholders informed and happy. It really is a full-time job, and not the one I signed up for! Thankfully, I have a great set of operational managing directors that run the various divisions for me and, all joking aside, being a public company is great and we are doing well. But it’s true to say that listed life is more complicated than I first thought it would be.