IPO study says it’s worth it

A study out this week titled “IPOs for Technology, Media & Telecoms (TMT) companies: a comparative study of the UK and US” has founded that TMT companies that have floated on the UK or US stock exchanges found the process significantly disruptive to their business but ultimately worth the effort. A London City law firm Taylor Joynson Garrett and London Business School compiled the report.

The study questioned company directors on business issues pre-, during, and post the IPO process. It found that 89 per cent of TMT companies felt they had benefited from going public, with 73 per cent finding it had increased staff loyalty.

Over 82 per cent of companies stated that the process disrupted the business and they were then asked what their advice would be to companies considering an IPO. Four themes emerged. Firstly, 32 per cent of companies said plan and prepare for the process thoroughly. Secondly, 25 per cent suggested special care in selecting professional advisers. Thirdly, 22 per cent said to ensure a robust business plan is built around consistent performance and clear objectives. And finally, 19 per cent advised considering the implications of the process and ensure adequate resource and infrastructure exists.

Other findings include the following. Pre-IPO most found gaining access to investors when raising funds the hardest challenge although more US companies found this difficult than UK companies (33 per cent versus 22 per cent). And the second most difficult obstacle to gaining access to funds was satisfying legal due diligence.

Post-IPO companies were attracted by the possibility of seeing their share price rise with 53 per cent saying the biggest disadvantage of an IPO was volatile stock valuations. Also differences in the attitude to the market listed on were discernible with 53 per cent of AIM listed companies finding IPO more disruptive compared to 38 per cent of those who listed on techMARK, and 18 per cent of those that listed on NASDAQ. 43 per cent of UK companies claimed that stock exchange regulations restricted their entrepreneurial spirit whereas only 25 per cent of US companies said the same.

Findings on employee share plans noted that 50 per cent of UK companies found the Government’s treatment of employee incentive share plans discouraging, in contrast to only 9 per cent in the US.

On shareholder structure immediately pre-IPO: Venture capitalists owned double the equity in the US compared to the UK, remaining the biggest shareholder at 31 per cent while in the UK the founders remain the main shareholders at 38 per cent. This was thought to be due to the relative maturity of the US companies in their financing cycle when they go public.

On intangible assets: As would be expected with companies in the knowledge based sectors, both US and UK companies indicated a high percentage proportion of their market cap was represented by intangible assets on average some 79 per cent. This highlights the importance of protecting the intellectual property of these companies.

On shareholder structure: UK founders kept larger stakes than their US counterparts (35 per cent versus 27 per cent), although the study notes to assess the eventual personal wealth of the founders, it is worth keeping in mind the larger market cap of the US than the UK. US companies’ IPO price was on average 20 times bigger than their UK counterparts (GBP2.2 billion versus GBP104 million).

Co-founder of Amadeus Capital Partners and author of the foreword to the report, Dr Hermann Hauser, said: “The report serves as a useful and timely benchmark in today’s rapidly developing market, enabling TMT companies to measure themselves against their peers, as well as the companies’ intermediaries namely investors, accountants and banks to observe current trends. It provides a valuable insight to what decisions TMT company directors are making when faced with the challenges of taking their often fledgling companies public. Overall, it is encouraging to see that the experiences are deemed worthwhile with the notable majority of TMT companies stating they benefited from going public.”