Flotation: the pros and cons

A useful article from growthbusiness.co.uk

Flotation: the pros and cons

Article Date: Aug 18 2010

Flotation isn't for everyone

Thinking about an initial public offering (IPO) on AIM or another market? Catherine Feechan, a partner at law firm Brodies, looks at the arguments for and against.

Whilst there are some signs of life on AIM, activity remains sluggish. Eight companies listed in the first quarter of 2010 raising approximately £200 million and ten in the second quarter raising £133 million.

However, the rate of delisting is slowing more markedly. A total of 73 companies left the market in the fourth quarter of 2009, followed by 44 in the first three months of this year and 36 in the second quarter.

There is no doubt that raising money on the somewhat fragile public markets remains challenging but there is clear evidence now that cash is available for the right companies. But before making any decision on whether an IPO is the way forward, directors should think carefully about the advantages and disadvantages of listing on AIM in relation to their business.

Reasons for listing

1. A successful IPO will provide cash for the company's development plans and a public quote should also allow the company quickly to raise more cash as and when required.

2. A listing allows the company to offer publicly tradeable shares instead of cash when making acquisitions. Sellers will not usually accept shares in private companies as an alternative to cash as they cannot easily be disposed of.

3. Going through the IPO process will raise the company's profile amongst the public, competitors, suppliers and customers, and can enhance its reputation.

4. Staff can be incentivised by giving them share options. This can encourage employees to improve performance as the share price directly impacts on them.

5. The IPO process is rigorous and extensive diligence is carried out to ensure a company is appropriate for listing on an AIM. Investors, suppliers and customers will be reassured that the company has proper procedures, controls and systems in place and will be actively managed.

The drawbacks

1. The IPO process is intensive and a significant amount of management time will be diverted from running the business into completing that process. Management teams routinely underestimate how much work is involved, both during the IPO process and thereafter on investor relations and compliance to ensure the company's continued success.

2. The cost of an AIM IPO and the ongoing cost of listing may be excessive if the company is not raising very much cash (this is one reason why many companies are delisting). In addition to the fees payable, listed companies must have effective corporate governance in place and the costs of risk management and legal compliance can be significant.

3. Once a company is listed many external factors can impact its share price, none of which is controlled by the board - ash clouds, bad weather, economic issues. The share price is no longer controlled by the company.

4. The company is required to disclose information regularly which will be reviewed and acted upon by the markets. In addition, the board will be required to take into account the views of the new shareholders and there is a higher degree of visibility for directors with much greater scrutiny of their decisions.

5. The risk of litigation against the company and/or its directors is greatly increased. Listed companies are perceived as having deep pockets therefore suppliers, customers, employees or shareholders with grievances are more likely to take legal action.

Companies need to think carefully about whether an AIM listing is right for them and whether they can achieve an acceptable valuation. The markets are open once again but there is a split between successful IPOs which are over-subscribed and those that have to reduce the share price or fail to raise sufficient cash. Investors remain cautious but hopefully the momentum gained by the main market will be reflected in an increasing number of IPOs on AIM later in the year.