Where should we list?
We are a mature, profitable, five-year-old firm that’s planning to list on OFEX in mid-2004 in order to raise a small amount of money (about £2m), but primarily to allow us to make paper acquisitions. My non-exec is now suggesting we should revisit these plans and consider an alternative, possibly venture capital or AIM, because shares in an OFEX company may not be attractive enough for our takeover targets. I have three questions. To what extent is he right about OFEX? Do companies value AIM shares over and above OFEX shares? And are we in the right climate to pursue an acquisition strategy funded purely by paper?
A. Clive Sanford of Wingrave Yeats writes:
AIM is the junior market of the London Stock Exchange (LSE) and, like the official list, it operates a competing market maker system where there may be more than one market maker in each security traded. Each AIM company must retain a nominated adviser and broker on an ongoing basis, who effectively has responsibility for the firm’s affairs on the market.
OFEX is operated by OFEX plc (itself listed on AIM). It requires a corporate adviser to submit an application – though they may not have an ongoing role. OFEX allows one market maker, or ‘specialist’ per security, which seeks to encourage liquidity.
These key differences tend to influence investors’ views of the two markets. Liquidity is recognised as being much reduced on OFEX and has a corresponding effect on valuation.
For companies other than those, that are merely seeking a quotation for their shares and not anticipating much trading in their shares, OFEX is regarded as a ‘nursery slope’ environment, often as a stepping stone to AIM and the official list. It’s certainly less costly, both to join and on an ongoing basis. It remains likely, however, that any vendor accepting paper in your company would generally prefer to receive AIM shares.
Making acquisitions is a risky business at any time and one needs to understand the rationale behind diluting the existing shareholders when there may be alternatives. Nevertheless, it’s common when ‘people businesses’ are involved, or there are key individuals who are needed to remain with the target business into the medium-term. This approach succeeds best when the personalities gel. There are, however, risks – what if the relationships don’t work?
From a vendor’s viewpoint, a shared vision for the future may underpin their interest in taking paper of any sort – ‘cash is king’ as a principle. Indeed, they may be prepared to accept even unquoted paper if there’s a clear business plan and strategy for the future.
Transaction structure is important. The use of an element of deferred consideration is common; this can be either fixed or variable, the latter typically linked to the future performance of the target. This carries the need to provide the vendor with appropriate protection through the ‘earnout’ period.
The climate is strong to finance good quality acquisitions by good quality companies. If there’s a solid rationale to involve paper in the transaction, then a vendor will need to support that strategy. To summarise he’s likely to prefer AIM paper to OFEX paper (to unquoted paper), but that’s likely to be a secondary decision to the cash/paper one.