Embarking on a listing is one of the key decisions that a company’s board can take. To ensure a successful transaction, the board needs to select the timing, the advisers, the location of the listing and the non executive directors for effective governance.
In this newsletter we will explore the factors required to turn a company into a public entity and to ensure that life in the limelight acts as a stimulus to growth in shareholder value. We will then look at a case study of a successful flotation on the AIM market in London of Gilat Satcom, an international satellite voice and data supplier, based on the views of David Dwek, who was appointed to its board as a non executive director at the time of flotation.
Reasons for a Flotation
A flotation is a key milestone in the development of a business, even though there are alternatives which include private equity and bank financing. In the appropriate circumstances, the advantages of a public listing far outweigh the associated regulatory and related costs. These are:
- Access to capital. Growing companies are often constrained from rapidly raising funds in the private markets. Once a company is listed, funds can be raised efficiently from investors through rights issues and equity placings as there is a deep pool of funds available from both institutional and private investors. In addition, a diverse investor base allows a public company to broaden its funding sources through the domestic and international bond and hybrid security markets.
- Exit Opportunities. A stock market listing provides transparency to the valuation of a business. It also provides the necessary liquidity as a minimum requirement of around 25% of the outstanding share capital is often required to be in public hands. This allows shareholders, including employees with share options, to sell their shares at the appropriate time. On initial flotation, management and shareholders are normally “locked-in” for a 6-12 month period to ensure their commitment to enhance shareholder value.
- A Currency for Acquisitions. The transparency afforded to a publicly listed company on the valuation of their business allows the use of shares in exchange for a target company. Alternatively, funds may be raised through a sale of equity to investors to fund a cash based acquisition.
- Improved Profile. The increased profile and regulatory requirements provide companies with a stamp of approval, enhancing the perception of financial stability of the business, leading to improved relations with customers and suppliers, as well as attracting and retaining key management.
Becoming a public company requires more rigorous regulatory and governance procedures as well as enhanced financial reporting requirements. A company will also be in the public eye and the directors’ actions will be under scrutiny. However, the increased professionalism of the business through efficient systems and control procedures provides a solid base for the future growth of the business.
Choice of Market
When considering the listing location for a flotation, there are a number of factors to take into consideration:
- Domestic vs International. Initial consideration is often given to the domestic market; however, with the globalisation of the international capital markets there are strong opportunities for internationally oriented firms to float their shares on foreign markets. London and New York remain the most active markets for such listings. Russian and Israeli companies in the energy, mining and technology sectors have been actively seeking listings on the London market this year and Chinese companies, due to their large size, in New York. Following flotation, maintaining active and on-going investor relations is crucial to develop investor interest and to avoid the “orphan stock” scenario.
- Regulatory Requirements and Market Capitalisation. Heightened regulatory requirements, have substantially increased the costs of maintaining a listing. In the US, the Sarbanes Oxley legislation has led to an increase in on-going costs from an average of $1.8m to $3m per annum. This, combined with the investor and analyst requirement for liquid stocks, implies that a minimum market capitalisation of $150-200m is required prior to a flotation. A main listing on the London Stock Exchange requires a similar market capitalisation and a target £50m capital raising to generate sufficient investor interest. There are, however, alternate options for international companies such as pursuing a domestic followed by an international listing.
- Small to Medium Sized Companies. The London Alternative Investment Market (AIM) is an attractive option for companies with a capitalisation less than $100m. There are also less onerous reporting and regulatory requirements than for a US SEC Registration or for primary London listing. Overall, the market has gained in depth and liquidity with over 1000 domestic and international companies listed on AIM since the market’s inception in 1995. All major UK institutions now invest in AIM with around 35% of the market institutionally invested. Investors have become increasingly comfortable with the market as the directors of listed companies have to take full responsibility for information and the timing of disclosure. Nevertheless, with smaller market capitalisations and, consequently, lower liquidity, there is often higher volatility in the share prices of the companies traded, particularly of the smaller companies. Raising equity finance, particularly following the initial listing is, however, a rapid process for companies with attractive growth prospects. In general, the AIM market can be viewed as a stepping stone for a company and an intermediate financing vehicle prior to a move to a larger exchange, or to an exit of the business.
With the increased regulatory and reporting requirements, irrespective of the market chosen, the decision to float must be based on a realistic assessment of the company, its growth prospects and whether the alternative options of private equity and bank finance may be more appropriate.
Factors leading to success
There are a number of ways that will ensure a company has a successful public market experience:
- Sufficient management depth. Running a public company from the regulatory perspective and reporting to the investors requires an experienced management team. Companies need to strengthen their board of directors and to ensure that there is sufficient quality in the management team to deliver the business plan.
- Business Plan. The goal of investors is to realise a growth in shareholder value through capital gains and dividends. The relative performance of a company within its sector will also be closely followed. A clearly executed plan based on either organic and/or acquisition growth is necessary and the performance of the management team will be judged against the targets set. Managing investors’ expectations is a challenge, but is crucial for success.
- Managing investors. Consistent investor relations are crucial in order to maintain interest in a company following a flotation, particularly for an international company. Regular news flow and meetings with investors is essential. This is particularly the case when there is a downturn in the fortunes of a company. A clearly argued strategy on how to rectify the situation can often lead to investors purchasing further shares. This requires a significant time commitment of the senior management, but will be worthwhile, especially when further financing is required.
Case Study: Gilat Satcom Limited
Gilat Satcom is an Israeli based international provider of broadband and voice satellite services, particularly in emerging markets. The company has grown rapidly and profitably over the past two years and in early 2005 merged with its largest local competitor. This has provided a revenue base in 2004 of around $28m and profit of $2m.
In the past, SEC Registration and a quotation on NASDAQ would have been the preferred route for the company. However, following the enactment of the Sarbanes Oxley legislation in the US, the regulatory requirements on public companies increased significantly requiring Gilat Satcom to reach a market capitalisation of $150-200m for the US markets to be sufficiently attractive for investors.
The directors, therefore, had to decide on the advantages of a domestic listing on the Tel Aviv Exchange, or an international listing on AIM in London. For a company with significant international business, AIM offered access to large institutional investors and the liquidity of the market for future fundraisings.
Gilat Satcom took the decision earlier this year to pursue an AIM listing. Domestic and international financial and legal advisors were appointed and the fund raising was completed in a four month period. The due diligence process was rigorous and the prospectus issued was very detailed with a full verification process of all the statements. A research report was prepared for the investors and the senior management of the company was involved in an extensive two week roadshow in the UK and Europe where they met with a large number of institutional investors. The company floated around 22% of its share capital and raised $8m in August 2005.
To satisfy investor requirements, two UK based non-executive Directors were appointed: David Dwek was appointed to the Board in mid August 2005.
In 2008 a controlling share of the business was sold to a major local telecom investor and operator. The business was subsequently de-listed from the AIM market as the free float of shares was too ,ow to maintain sufficient liquidity in the secondary market.
Conclusion
Under current equity market conditions it is once again attractive for companies to consider a flotation of their shares. For a fast growing company requiring their equity to grow organically, or via acquisition, a listing can provide the necessary platform to achieve their objectives.
Given the current regulatory and market capitalisation requirements, the choice of market for a listing is important. In addition, deciding when to float is crucial. There are alternative sources of finance which should be carefully considered by the board of directors prior to flotation. The right decisions at this crucial stage in a company’s development will lead to success.
The views expressed in this newsletter are those of DC Dwek Corporate Finance Limited and are provided for information purposes only.
DC Dwek Corporate Finance 