News - Midlands
It's time for the latest meeting with your financial adviser to discuss strategies and exits for your business. You hesitatingly venture the words "quoted company". He gives you a guarded look and starts talking about "indigestion in the pipeline and a glut of placings in recent months". You look confused and vaguely wonder whether it's something to do with all those long, boozy lunches stockbrokers are rumoured to take. "Milk of magnesia?" you suggest.
The more helpful financial adviser will then start explaining how there was a rush of initial public offerings (IPOs) at the end of 2004, which has left investors and brokers needing time to tidy up their portfolios. Quality will prevail and a good company, with a well-prepared business plan and excellent corporate governance, can always find its way to market.
The pipeline for more IPOs this year is, indeed, bulging. "Compared to this time last year, we're seeing quadruple the number of corporates interested in exploring the option of a float," says Ian Beswick, director of corporate finance at Tenon in Nottingham. "The benefits of being on the market have never been better publicised."
Entry figures for the UK markets are relatively resilient, but the number of IPOs by Midlands companies so far this year has dipped below the national trend. According to research by KPMG, the alternative investment market (AIM), which reported a record March, has had 148 new entrants to the end of May, raising a total of £31.25bn.
Using Insider's definition of the Midlands region, there has been only one local listing on the main market, by Tamworth-based Foseco, which returned to the market after 15 years as a private company. On AIM there have been two new entrants: IT hardware company Sarantel, based in Northamptonshire, which floated in March and Staffordshire's EG, an IT services and software company, which entered the market in June.
Nick Maslen, from securities house KBC Peel Hunt in Birmingham, says that this turnout is very low when compared with the size of the region. "It reflects the history of the Midlands. Companies with an engineering and industrial background are not those that are floating," he says. "We're mostly seeing technology-related businesses and natural resources."
Charles Bond, partner at law firm Cobbetts, laments the low numbers of Midlands companies heading to the public markets. "There's a recognised deficit of deals done locally," he says. "Part of that is down to educating the business community to see AIM as a good vehicle for exit or profile raising. It's also about raising awareness that there are people in Birmingham and the Midlands who can do this work."
EG's managing director and founder, Elizabeth Gooch, chose to float to raise funds for expansion. "We had two choices: an individual investor, such as a business angel or a venture capitalist (VC), or a flotation," she says. "My preference was for a flotation, because you have a range of other stakeholders rather than just one pulling or pushing the business. We work mostly for the financial services sector and found that you get more press as a listed company."
She says that the heightened publicity gained even leading up to the float has helped to generate new business enquiries. Arranged by Brewin Dolphin, the deal raised £33.5m and gave EG a market capitalisation of £312.2m.
The popularity of AIM continues to grow as the market hits its tenth birthday. Baker Tilly, AIM accountant of the year for the third year running, says that AIM is the most successful small to medium cap market in the world, in research conducted in conjunction with law firm Faegre & Benson. The market has come of age as its popularity broadens to appeal to later stage and medium cap companies and it receives the full range of institutional support.
Companies such as Birmingham-based engineer Dowding & Mills, which moved from the main market to AIM in January, may now be talked of as having moved "across" rather than "down" to the more junior market.
"AIM is the market of choice for the majority of companies," says Maslen at KBC. "A few years ago you might have planned to float on AIM and then move up, but these days companies stay on AIM. If you reach a certain size and want certain overseas shareholders you would expect to go onto the official list."
The renaissance of Ofex as a viable market for small cap companies has offered another option for those businesses that could feel lost in the growing and increasingly regulated AIM. As AIM swells and nomads (nominated advisers) seek out IPOs of over £35m, there is an opportunity for Ofex to become the natural destination for floats below £35m. (Continued p50)
Ofex asked MRI Moores Rowland to undertake independent research into companies that have moved from Ofex onto AIM in the past three years. It concluded that the companies had all moved at the right time and that Ofex had provided a useful stepping stone. Nemone Wynn-Evans, head of business development at Ofex, warns that as AIM becomes more diverse and more regulated, a smaller company may benefit from a higher profile on Ofex. "Don't go to AIM too early because you will be a small in fish in a large pond," she says.
For the indecisive or cautious client, advisers are increasingly encouraging dual or triple processes where preparation for a flotation is run alongside the search for a trade or private equity buyer.
Charles Cattaneo, partner at KPMG in Birmingham, says that parallel processes are increasing because the IPO market is open again after a lull and because AIM opens the way for so-called accelerated IPOs (AIPOs), whereby existing shareholders can achieve a total exit. A dual process can act as a form of insurance in case the markets crash. "The parallel process provides an insurance policy. You may not always get an IPO away," says Cattaneo.
But Beswick at Tenon never runs a dual process with a management team when an IPO is suitable for the business. "If we are talking to people about a float, it will be the strategic option of best fit," he says.
"A float is not a process to go into lightly because it needs significant time investment from management. You wouldn't do that unless you had a clear understanding of the benefits that an IPO brought you.
A trade sale and a float have two very different goals, although for a VC the two can be the same thing."
Effectively running two deals at once sounds like a costly process, in both management time and fees, despite the same due diligence. "While running both options simultaneously takes some of the risk out of getting the business away, it is expensive in terms of costs and it creates real pressure for the management team," says Matt Carter, a partner in Ernst & Young's transaction advisory services.
"I would think carefully before recommending such a dual-track approach."
Bulging pipelines, dual processes and a choice of markets may sound confusing, but for businesses considering a float, these are signs of a healthy market ready to accept new blood.
Indigestion remedies
It's time for the latest meeting with your financial adviser to discuss strategies and exits for your business. You hesitatingly venture the words "quoted company". He gives you a guarded look and starts talking about "indigestion in the pipeline and a glut of placings in recent months". You look confused and vaguely wonder whether it's something to do with all those long, boozy lunches stockbrokers are rumoured to take. "Milk of magnesia?" you suggest.
The more helpful financial adviser will then start explaining how there was a rush of initial public offerings (IPOs) at the end of 2004, which has left investors and brokers needing time to tidy up their portfolios. Quality will prevail and a good company, with a well-prepared business plan and excellent corporate governance, can always find its way to market.
The pipeline for more IPOs this year is, indeed, bulging. "Compared to this time last year, we're seeing quadruple the number of corporates interested in exploring the option of a float," says Ian Beswick, director of corporate finance at Tenon in Nottingham. "The benefits of being on the market have never been better publicised."
Entry figures for the UK markets are relatively resilient, but the number of IPOs by Midlands companies so far this year has dipped below the national trend. According to research by KPMG, the alternative investment market (AIM), which reported a record March, has had 148 new entrants to the end of May, raising a total of £31.25bn.
Using Insider's definition of the Midlands region, there has been only one local listing on the main market, by Tamworth-based Foseco, which returned to the market after 15 years as a private company. On AIM there have been two new entrants: IT hardware company Sarantel, based in Northamptonshire, which floated in March and Staffordshire's EG, an IT services and software company, which entered the market in June.
Nick Maslen, from securities house KBC Peel Hunt in Birmingham, says that this turnout is very low when compared with the size of the region. "It reflects the history of the Midlands. Companies with an engineering and industrial background are not those that are floating," he says. "We're mostly seeing technology-related businesses and natural resources."
Charles Bond, partner at law firm Cobbetts, laments the low numbers of Midlands companies heading to the public markets. "There's a recognised deficit of deals done locally," he says. "Part of that is down to educating the business community to see AIM as a good vehicle for exit or profile raising. It's also about raising awareness that there are people in Birmingham and the Midlands who can do this work."
EG's managing director and founder, Elizabeth Gooch, chose to float to raise funds for expansion. "We had two choices: an individual investor, such as a business angel or a venture capitalist (VC), or a flotation," she says. "My preference was for a flotation, because you have a range of other stakeholders rather than just one pulling or pushing the business. We work mostly for the financial services sector and found that you get more press as a listed company."
She says that the heightened publicity gained even leading up to the float has helped to generate new business enquiries. Arranged by Brewin Dolphin, the deal raised £33.5m and gave EG a market capitalisation of £312.2m.
The popularity of AIM continues to grow as the market hits its tenth birthday. Baker Tilly, AIM accountant of the year for the third year running, says that AIM is the most successful small to medium cap market in the world, in research conducted in conjunction with law firm Faegre & Benson. The market has come of age as its popularity broadens to appeal to later stage and medium cap companies and it receives the full range of institutional support.
Companies such as Birmingham-based engineer Dowding & Mills, which moved from the main market to AIM in January, may now be talked of as having moved "across" rather than "down" to the more junior market.
"AIM is the market of choice for the majority of companies," says Maslen at KBC. "A few years ago you might have planned to float on AIM and then move up, but these days companies stay on AIM. If you reach a certain size and want certain overseas shareholders you would expect to go onto the official list."
The renaissance of Ofex as a viable market for small cap companies has offered another option for those businesses that could feel lost in the growing and increasingly regulated AIM. As AIM swells and nomads (nominated advisers) seek out IPOs of over £35m, there is an opportunity for Ofex to become the natural destination for floats below £35m. (Continued p50)
Ofex asked MRI Moores Rowland to undertake independent research into companies that have moved from Ofex onto AIM in the past three years. It concluded that the companies had all moved at the right time and that Ofex had provided a useful stepping stone. Nemone Wynn-Evans, head of business development at Ofex, warns that as AIM becomes more diverse and more regulated, a smaller company may benefit from a higher profile on Ofex. "Don't go to AIM too early because you will be a small in fish in a large pond," she says.
For the indecisive or cautious client, advisers are increasingly encouraging dual or triple processes where preparation for a flotation is run alongside the search for a trade or private equity buyer.
Charles Cattaneo, partner at KPMG in Birmingham, says that parallel processes are increasing because the IPO market is open again after a lull and because AIM opens the way for so-called accelerated IPOs (AIPOs), whereby existing shareholders can achieve a total exit. A dual process can act as a form of insurance in case the markets crash. "The parallel process provides an insurance policy. You may not always get an IPO away," says Cattaneo.
But Beswick at Tenon never runs a dual process with a management team when an IPO is suitable for the business. "If we are talking to people about a float, it will be the strategic option of best fit," he says.
"A float is not a process to go into lightly because it needs significant time investment from management. You wouldn't do that unless you had a clear understanding of the benefits that an IPO brought you.
A trade sale and a float have two very different goals, although for a VC the two can be the same thing."
Effectively running two deals at once sounds like a costly process, in both management time and fees, despite the same due diligence. "While running both options simultaneously takes some of the risk out of getting the business away, it is expensive in terms of costs and it creates real pressure for the management team," says Matt Carter, a partner in Ernst & Young's transaction advisory services.
"I would think carefully before recommending such a dual-track approach."
Bulging pipelines, dual processes and a choice of markets may sound confusing, but for businesses considering a float, these are signs of a healthy market ready to accept new blood.