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Entrepreneurs Panel

Tony Caldeira
Richard O'Sullivan
Michael Oliver
Brian Hay
David Pollock
Julie Meyer
Charlie Mullins
Jennie Johnson
Steve Purdham
Debbie Pierce
Jeremy Roberts
Laura Tenison

AIM flotation

Senior entrepreneurs discuss the pitfalls of listing on the junior market

When EN decided to host a panel debate aimed at entrepreneurs thinking of listing on the Alternative Investment Market, we decided – alongside specialist corporate finance advisors from BDO Stoy Hayward and legal firm Pannone – to draft in some wise heads to let entrepreneurs know exactly the type of opportunities and obstacles that awaited them. We also had the London Stock Exchange’s man in the North, Mark Fahy, to keep them in check.

However, the plan to invite a business that has been weighing up a potential listing may not have been the cleverest move. After listening to our entrepreneurs swap horror stories about market ignorance, “teenage scribblers” or “evil” market makers, the colour drained from his face. Read on to find out why.

Mike Fahy, EN (chair): Mark, give us a brief introduction to the Alternative Investment Market (AIM), its origins and how it has evolved over the years?

Mark Fahy, London Stock Exchange: AIM first appeared in 1995 as a successor to the Unlisted Securities Market, which effectively ended up imploding on itself. It started off, and predominantly still is, as a growth market for smaller companies. In the last 12 years, though, we’ve seen AIM undergo a huge amount of change and it has now become the leading international growth companies market by some distance. We now have 1,700 companies on there – 1,000 of whom have joined in the past three years.

The way it works is very unique in global terms. It’s run via a NOMAD model, which is very British and is run on principles-based regulations. That way, we can balance the abilities of entrepreneurs with a structure that give investors comfort.

Mike F: What type of companies are most suited to AIM?

Julien Rye, BDO Stoy Hayward: It depends on what the owner of the business wants. If they’re looking to extract as much money as possible they should look at something else. They might get a bit of money out early on, but they will then be tied in for two years.

Peter Terry, BDO Stoy Hayward: I think there is a misperception that AIM is an exit route when in reality it’s a means of raising capital and potentially staging an exit over a few years.

Mike F: Surfcontrol is a good example of the type of firm for which AIM was invented – a fast-growing, cash-hungry technology business. How difficult was the listing process for you, Steve, and did it do the job required?

Steve Purdham, former Surfcontrol CEO: It was a nightmare. We started the process in the market’s early days in 1996 and it took us two years to get it away.

AIM provides access to capital, but it does so quite expensively. It was definitely the right move for Surfcontrol, but only because we had no other choice!

Mike F: Do you think you were prepared well enough in advance?

SP: No. You’ve got no idea what you’re letting yourself in for. It’s like having kids – everybody tells you the nightmares they had, but you never really know until you do it yourself.

Mike F: So how long does it take to secure a listing, and how much management time does it take up?

Roger Butterworth, CEO of Expansys: We did it in a mad rush because we were desperate for money. We first met the brokers on 13 December 2005 and I think we were on the market by around 20 April 2006.

Peter T: That’s probably about as quick as you can do it.

Andy Makeham, CEO of K3 Group: At K3 we came to market via a reverse takeover, and if ever you want a lesson of how not to handle it, we’re probably it. We had a good technology business and reversed it into the remains of an industrial products company, so we inherited the sins of that previous firm. It had made losses which took three years to wash out from our figures, so until then we couldn’t go on the acquisition trail.

Then we had the joy of being a sub-scale, £8 million turnover company. Talk about being below the radar! I wouldn’t do a reversal again because you don’t get the benefits of an IPO, you haven’t marketed your shares and nobody knows who you are.

RB: How much of that was the brokers’ fault?

AM: Who was going to broker a tiny company like us? When we came to market we knew it would be tough and we took a bad decision with the reversal, but we knew we wouldn’t attract much attention.

The industrial products company had been using a wellknown London broker. It charged an absolute fortune but gave us a shit service. It was awful, so we moved to another firm down in Bristol. We thought, if we’re going to get a crap service then at least let’s do it on the cheap.

SP: Another thing that advisors don’t warn you about are the “windows”. One of the reasons it took us two years to list is that we’d get to where we needed to be and suddenly this “window” would close and the advisors would back off like their arses were on fire. You also have to bear in mind that things like Wimbledon and Henley Regatta get in the way, which sounds ridiculous but these City boys disappear when they’re on so you can’t market your shares.

Mike F: Looking back, would you have done things differently?

SP: Not at all. Pre-float, we were a little British business with a £5 million turnover and 20 per cent net profits, but we were in the land of the living dead – we had a VC on board and were going nowhere.

We had to push our story and get the message out. AIM didn’t make that happen – we still had to do it – but it ignited new possibilities. We did loads of things we could never have done as a small company in Congleton.

AM: The first lesson I learned is about forecasts. In a private company they’re interesting, but don’t really matter.

As a public company, your forecast is a binding promise and you have to hit them or you’re dead. As a small-cap technology company, if you miss one and get into profit warning territory you may as well pack up and go home, because it takes years to recover.

Peter T: Why is that any different to having a venture capitalist on board? Aren’t they just as target driven?

SP: It’s totally different. With a VC you can have a rational discussion, but the problem with public markets is that you have this herd instinct. If one of them takes fright, the rest go with it. VCs will either trust you or they won’t, but if they do they’ll give you the time you need to get back on track.

Mike F: Can I ask some of the others why you chose AIM as a fundraising route rather than bringing in venture capital?

RB: We bought a couple of companies in the early part of the century – just after the dotcom crash – that had been absolutely shafted by the VCs, who took very short-term decisions based on movements in the market. I wouldn’t touch them with a bargepole.

Mike F: Patrick, you’ve not decided to float yet, have you?

Mark F: You’ve no chance now – you’ve scared the poor guy to death!

Patrick Dundon, finance director, Rethink Recruitment: No, but everything I’ve heard so far replicates the experiences that our founders have had. We haven’t ruled out venture capital and it would be an obvious route, but the board is not particularly warm to the idea. If we can use AIM to raise funds for expansion and get a decent valuation then obviously we’d be interested.

Philip Treanor, Pannone: What AIM does well, though, is to allow firms that have already listed to complete secondary fundraising quite easily – particularly for an acquisition.

Martin Robinson, chairman, Braemar Group: At Braemar, we listed via a reverse takeover and raised £1.5 million. That probably took four months to put together. Yet in one day in July this year we raised £1.3 million just by talking to a few people.

AM: We raised £2-3 million through a brief secondary funding to do an acquisition in March and it was really straightforward. We scheduled meetings with our 20 biggest investors and at the first one the guy turned around and said, “I’ll take the lot.”

Andrew Gosnay, Pannone: People do not quantify how much management time and effort is involved in the process, though – it’s not something you start and finish – you’re on that treadmill day-in, day-out.

AM: I joined this firm as managing director of a technology company but for the last seven years all I’ve done is run a public company. Thank God I’ve got good managers running the business for me, because I’ve had no time to do it.

AG: You need a communication strategy and to invest in better management with complementary skills. Hopefully, by listing you can introduce share schemes and other incentives to attract new talent.

SP: A listing does give you instant credibility. If you’re trying to do a deal, a public company has a higher perceived value and level of respectability.

RB: We’d been trying to buy a business unit from O2 for two years and they wouldn’t talk to us. Literally, they wouldn’t return my calls. Three weeks after we listed the guy phoned me and said “let’s talk”.

MR: Another company that I chair is a Preston-based chemicals firm called Plant Impact, which came to market last year. When it was owned by a VC, we had to push to get the product in front of potential customers – no-one would come to our stands at exhibitions. One year on and we now have companies from all over the world coming to us.

SP: It also gives you a tradable commodity in shares you can use when acquiring. If you tell people your firm is valued at, say, £35 million, they only need to pick up the paper to find out.

Colin White, finance director of Driver Hire: We’ve had a problem recently where we’ve seen our share price move by quite considerable amounts, but only because a number of very small shareholders want to sell and institutional investors aren’t interested in picking up tiny bundles of shares.

SP: I could never understand that. If somebody in Bognor Regis was going to sell £3,000 of shares, our price could end up dropping by something like ten per cent. Why somebody who owned £2 million of shares didn’t actually just say, “Oh, just give us ’em, for Christ’s sake,” because their £2 million could drop by £200,000 and they can wait nine months for them to come back, I don’t know.

MR: One thing you could do, and we’ve done it with Braemar, is to take a secondary quote on the PLUS market, which has helped to increase the liquidity of our shares. There’s no cost involved and the LSE knows we’ve done it. We’ve begged to differ on it, but having a secondary market for the shares has allowed those smaller transactions to go through PLUS where trading costs are lower.

Mark F: How many of you from the plc side looked at the investor relations side beyond the float process?

RB: I really liked Steve’s analogy about having a baby. A good friend of mine floated a business two or three years before we did and described it as like getting married. There’s a courtship process, a consummation and afterwards if you let it go stale it can become quite antagonistic.

AM: I’ll tell you a story about another tech company I know that is a steady Eddie, does a few small acquisitions and pays its dividends. It wanted to liven things up and made this big acquisition a few months ago. The share price beforehand was 50p, and afterwards it reached 50.5p.

They hadn’t done the groundwork to explain their strategy to investors, so all it did was confuse them. It was a great acquisition at a great price – I was dead impressed – but the share price was moribund. The City doesn’t like surprises.

RB: What, not even good ones?

SP: They prefer bad surprises because they can then justify a 20 per cent price drop, but good surprises are harder to quantify. For example, in the week that Surfcontrol signed a global distribution deal with Microsoft our share price went up by five per cent, yet when a tiny UK security firm announced it had signed a filtering deal with some ISPs our share price fell by ten per cent – even though it was our software they were using!

MR: At the end of the day, it comes down to the fact that there are more buyers than sellers, or more sellers than buyers.

SP: Exactly. And that’s the reason why I say market makers should be shot at birth. Nobody tells you about these evil people who decide to drop your share price by 20 per cent to scare people into selling, or put it up by ten per cent to shake sellers out.

Meanwhile, you’re left scratching you’re head and thinking, “What the hell is going on?”

Mike F: So is there any point in worrying about investor relations or your share price?

AM: I don’t do anything else. I’m getting ready for our next acquisition and putting all the ducks in a row. I’ve spent ages working on these teenage scribblers (financial journalists) and went to see them in Dublin – we
bought them plenty of Guinness so we thought they might start writing about us.

Once they did, the effect was amazing. When we’d previously released a strong set of results or completed an acquisition the share price barely moved, but when these guys wrote their piece it went up by 25 per cent. Then a couple of share tipping websites followed it up, and it carried on climbing.

JR: One quite interesting thing is the impact of chatrooms – I was involved with a biotech venture and there was a lot of debate going on in a chatroom from shareholders with relatively small stakes, but the share price movement on what was being said in there was amazing.

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