To list or not to list '15 Oct 2013
Guy Rigby outlines the pros and cons of floating on a growth market like AIM for smaller companies
The UK’s AIM market has become the most successful growth market of its kind in the world; but what are the benefits of listing? On the other hand, why do some companies who've gone to all the trouble of listing on AIM end up de-listing and returning to their privately owned roots? Here are some of the pros and cons:
Listing creates a market valuation for the business and enables the opportunity to raise capital for expansion, as well as the possibility of realising some of your investment…
- Provides access to an acquisition currency and transparency around the value of the business. Listed companies often use their shares, as opposed to cash, to make acquisitions. This can be particularly useful when implementing a buy-and-build strategy when cash can be better utilised in other areas. “If you've got an objective valuation for your shares, a target company is going to know exactly what they're getting if you offer them shares in your business,” explains Dr Azhic Basirov, Head of Capital markets at Smith & Williamson. “The value is objectively calculated by the market. Unlike a private limited company, you don’t need to try to assess the relative value of two different businesses. If you've got a valuation that's objective it's very much easier for people to see exactly what they're getting.” Notwithstanding this, share prices do go down as well as up and some vendors will not accept payment in shares, although they may often form part of any purchase consideration.
- Encourages employee commitment by rewarding them with something of clear value. When there's no objective market valuation or ability to buy or sell shares, as is normally the case in a private company, it can be difficult for employees with shares or options to understand the value that they have been given. On the other hand, employees of listed companies who are given shares or options can see exactly what they are worth.
- Creates a heightened public profile and improves the ability to attract high calibre board members. “I knew from day one that, if we were going to build a successful banking technology firm, I needed to hire people much brighter than me,” comments Alastair Lukies of Monitise. “Most of my executive team are all on boards of banks and have run big payment systems. To get people of that calibre into your business, being listed really helps, because they see the listed status providing a genuinely liquid incentive plan.”
- Improves supplier, investor and customer confidence and improves your standing in the marketplace. This can help enormously if you’re trying to build a global business. Listed companies have to go through a rigorous due diligence process before they can join the AIM market. The checks and balances that are carried out can lead to increased confidence, resulting in better supplier credit terms, better relationships with customers and higher valuations from investors. “I would never have got VISA to buy 15% of my company if it was a private company,” adds Alastair Lukies. “Certainly not at the price I got. So because they knew that we had to govern ourselves in a transparent way it gave them the comfort that we run our company properly.”
- Accountability and scrutiny. Public companies are public property. As such they are expected to comply with the rules of the markets they populate. Companies on AIM have to use the services of a nominated adviser (known as a Nomad), a firm or company which has been approved by the London Stock Exchange, who effectively acts as the regulator of the business, managing its listing and ensuring its ongoing compliance.
- Undervaluation risk. Issuing shares is not only dilutive but shares can also lack liquidity. This can undermine fundraising and acquisition activity, because there is a lack of demand for the shares. In addition, a lack of demand normally translates into a low share price, so the use of shares as an acquisition currency may also lose its appeal. On the public markets, companies’ share prices are not only affected by their own performance, but by the performance of the market and the economy as a whole.
- Cost. The amount of management time and the significant costs associated with a flotation and ongoing listing should never be underestimated. From the process of flotation itself, which can take many months, to the time-consuming administration of regular and constant announcements (interim and final financial results, director dealings in shares, trading updates etc.) there is a lot of activity to manage. “It's quite hands on, labour intensive and time consuming,” says Dr Basirov. “So it’s not suitable for every business”.
If you would like to find out more about listing on a growth market like AIM contact Guy Rigby, Head of Entrepreneurial Services at Smith & Williamson, on 020 7131 8213 or email firstname.lastname@example.org.