The once-coveted stock market listing isn’t always what it’s cracked up to be for some businesses, and frustrated board members are responsible for a recent upsurge in the number of de-listings and public-to-private transactions.
Entrepreneurs and opportunistic private equity houses are now opting to take private the businesses they once groomed for IPO. One reason is the state of the economy, which makes it difficult for many businesses to get what they want from the markets – money to fund their expansion plans.
As share prices languish, dwindling trades and loss of liquidity prompt the big question: are the significant costs and rigid regulation that accompany a listing worth the effort? Increasingly often, the answer is “No”.
Leaving the AIM market
It is also probably true to say that a sizeable percentage of the companies now seeking a route out of AIM should never have admitted in the first place, often having been taken to market purely as a sop to management vanity.
The stock markets themselves are coy about revealing the number of de-listings in any given year, and stress that not all of them are lost to the exchange forever.
Some, admittedly a handful, de-list from AIM in order to apply to the main market, and even those that are taken back into private hands could only remain there for a limited period before reapplying for admission. Take-privates and other de-listings now occur at least once a week, according to recent figures. Although the LSE is unable to provide detailed statistics relating to the number of drop-offs, another source reckons that there were more than 220 last year alone.
De-listings are not to be taken lightly. Apart from the large sums squandered in the process of obtaining a share quotation, small fortunes can also disappear in the extrication process.
Tim Oldridge, a partner in the financial institutions and marketing group with law firm Taylor Wessing, says the process can soak up 10-12 per cent of a company’s value, and just isn’t viable for a listed business with a market capitalisation of less than £15 million.
While a take-private can transform an ailing business, and make a few people very wealthy indeed if handled cleverly, it is widely accepted that shareholders rarely get true value.
In light of that, Oldridge was part of a Taylor Wessing team that recently put together a package of options dubbed ‘Take Private Lite,’ which aims to prune de-listing costs while giving shareholders a better deal than is usually the case.
By applying the guide’s rules Oldridge and his colleagues aim to slash the number of law firms involved from as many as five to just one, and banks from two to one. “Accountants, ditto,” says Oldridge, who points out that the guide vastly reduces the documentation needed.
Of course the London Stock Exchange is not taking all this lying down. LSE spokesman Patrick Humphris is understandably bullish about the benefits of a public quotation, which he insists carries a certain cachet as well as raising a company’s profile.
“The difference in cost between debt versus equity obviously changes in the economic cycle, but with credit tightening it should mean that equity becomes increasingly competitive compared to bank finance.
“The other thing to remember is that although many people think in terms of the initial funds they raise in an IPO, one of the main advantages of being on a public market is the ability to raise further funds,” says Humphris.
The issue of cachet is worth considering, he insists. “You are saying to the world that you are willing to adhere to some of the highest standards of corporate governance and disclosure.”
However, this is an argument that has recently failed to persuade companies like InTechnology, Prometheus Energy and Thomas Potts from taking a chance in the less regulated business environment outside the stock market.