By all accounts 1996 was another boom year for the UK’s corporate finance industry. A cornucopia of large and often complex deals netted the City’s brokers and bankers a record u1.1bn in fees for mergers, acquisitions and flotations. As a result the casual observers could be forgiven for thinking that they had stepped back in time to the late 1980s when the streets of the Square Mile appeared to flow with champagne. However the last year’s bumper performance has merely served as an elegant disguise for major changes in the way that corporate financiers are doing business.
For many years stockbrokers and merchant bankers were the epitome of producer interests. Companies requiring their services had little scope or incentive to negotiate fees: cartel-style price fixing made sure of that. As a result they became a one-stop shop for plcs requiring help on M&A projects, new issues and loan syndication.
But the 1980s and the 1990s have seen a move away from the exclusive use of one bank or broker to handle a client’s business. Companies have begun picking their advisers on the basis of their skills to handle a particular task. Traditional City houses could no longer expect to act for their clients every time with the result that the hallowed relationships, such as those formalised in Crawford’s Directory of City Connections, have gradually counted for less and less. Client loyalty, once the bedrock of the system, has become a thing of the past.
More worrying for the traditional bankers and brokers, companies are looking round for alternative suppliers. Not only have the last few years seen the rise of the in-house advisers and specialist boutique corporate finance brokers but also the move by the Big Six accounting firms into the field.
According to figures supplied by Acquisitions Monthly (table 1), the top 20 corporate financiers by deal value remain dominated by the traditional merchant banks but now include three of the “Big Six” (KPMG, Price Waterhouse and Arthur Andersen), two of which were unplaced last year. However for sheer volume of deals, accountancy firms predominate (table 2).
Since the Alternative Investment Market (AiM) market started just over 18 months ago accounting firms have been able to apply to join the approved list of nominated advisers. The Big Six plus Grant Thornton are on the list. But they still have a lot to learn about taking on some of the tasks that have been carried out by stockbrokers and merchant banks for decades.
Apocryphal this view may be, but just try finding out who handles queries about AiM within an accounting firm. Telephone a stockbroker and the caller is put straight through to corporate finance. Almost without exception a similar query to any of the accounting majors results in the caller being told: “We have no department of that name. Who do you want to speak to?”
The question arises in any caller’s mind: Are the Big Six really serious about AiM? Theoretically they are well placed to grab the nominated adviser work adding to other work such as reporting accountant. They already have strong continuing business relationships with clients. They may already act as auditors or tax advisers. Ernst & Young, for instance, needed no introduction of in the case of Digital Animations. This computer games publisher joined AiM in July 1996. “They were our auditors when we were first established,” explained sales and marketing director Catriona Paton.
“We did not plan to look externally for an adviser when moving towards a flotation. We remain happy with their work as nominated adviser on an on-going basis.”
Fountain Forestry, a timber management company, contacted smaller merchant banks and brokers when thinking about flotation. Chairman Barry Gamble said he mentioned this almost in passing to a Coopers & Lybrand audit partner who suggested getting in touch with London Coopers personnel who could help. A “beauty parade” was organised. “The approach of Coopers was so analytical, so measured, and so transparent and removed the mystery of the process,” he said. Selecting Coopers was an easy choice to make, he added. With Coopers on board as nominated adviser, reporting accountants and auditors, the process was easier “because it was all in-house”.
With such glowing references as these traditional City broking houses have good reason to be worried about accountants scooping up all the nominated adviser work they want. Yet the number of companies they have acted for as nominated adviser is tiny. Out of the 250 companies that have joined AiM to date less than 20 appointed accounting firms as nominated adviser.
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Neill Clerk Capital would appear the most likely loser if the accountants got their act together. It is the most prominent nominated adviser on AiM, acting for 28 companies.
“Losing out to accountants as nominated adviser has not been our experience at all,” commented Jane Waddell, a director of Neill Clerk Capital.
“Perhaps it is the integrated stockbrokers offering both nominated adviser and stockbroker services that have the most to lose. ”
Robin Dunham, head of corporate finance at stockbrokers Charles Stanley believes it is too early to assess the accounting firms’ success of picking up extra work through AiM. However, he concedes: “the accounting firms have a huge advantage. All companies have to have auditors and so the accounting firms already have existing working relationships with companies likely to join AiM.”
While he thinks they are good at putting the prospectus and other documents together “they are naive on how the stockmarket works. They don’t produce placees, which is where the broker comes in.”
Another stockbroker, who did not want to be identified, commented: “It is difficult to see what the accountant nominated advisers are adding.
They are not commercial at all. They have no interest in the cash raising exercise or how the shares perform after flotation. They do not see that as their responsibility at all. The days when it was necessary to have a separate sponsor and broker in order to get a fair price for the company have gone. Now the leading institutional investors on AiM decide what the price should be. You do the deal at the best possible price.”
If accountants are confining their work to just form filling in the flotation process this explains why casual telephone enquirers get such short shrift.
Whatever their qualms about working with potential rivals, stockbrokers are likely to keep on friendly terms with accountants as the work of bringing a company to market can be shared.
Putting the case for the accountants, David Elms at KPMG commented that using a separate nominated adviser ensures independence. Also “accountancy firms can readily provide other services such as tax and consulting advice.
In effect act as a ‘one stop shop’ – accountants have a lot of experience of dealing with smaller companies.”
Coopers’ Mark Speller agrees: “We are the natural advisers to small and medium sized fast growing companies.” Some of these make excellent AiM prospects.
It is easy to see why accountants are attracted to AiM. Auditing – the bread and butter work of most large practices – is fiercely competitive.
Margins are slim. Acting as reporting accountant, nominated adviser or general financial adviser can be more lucrative. AiM is in a fast growth phase and has been an outstanding success since formation. The market has raised just under #1bn and the number of companies that joined has soared to 250. These have a combined market capitalisation of over #5.1bn.
Shares have done well on the whole. Of the companies listed on AiM at the end of 1996 almost 60% were trading above their flotation prices.
A little over a third are below their debut price – some considerably below – while the rest are more or less unchanged. The record of those companies brought to AiM by accountant nominated advisers is marginally worse. Of the 16 companies brought to AiM by accounting firms acting as nominated advisers, half are above their flotation price, five are down, while the other three are roughly evens.
However overall, this is not a bad record for an embryonic market. Cirqual, the engineering company where high profile entrepreneur Tony Gartland is chairman, was the first to move up from AiM to a full listing just prior to Christmas. More companies are expected to follow Cirqual onto the main market.
AiM’s early attraction to would-be entrants was the relatively low cost of joining compared with a full listing. However, since AiM set up shop in June 1995 flotation fees for AiM have crept up. However, having a separate nominated adviser and broker does not appear to make the total fee greater.
“I doubt if total AiM flotation fees would have been any different in our case,” said Barry Gamble of Fountain Forestry. It used Coopers as nominated adviser and Charles Stanley as nominated broker rather than going to an integrated stockbroking house to fulfil both functions.
“At the outset we did a few for #50,000” working in tandem with stockbrokers confirmed Ms Waddell of Neill Clerk. Low fees applied to companies with an existing track record such as smaller Business Expansion Scheme companies and Rule 4.2 transfers.
Nowadays even established companies can’t expect to see much change out of #300,000 in professional and other fees. According to Jeff Ward of BDO Stoy Hayward speaking at an IBC conference just before Christmas, an established company raising, say, #3m could expect to pay anything from #225,000 to #360,000 – ie 8.5% to 12% of the amount raised. The nominated adviser and broker would charge between #140,000 and #180,000; solicitors – (generally two firms) from #50,000 to #75,000; another #50,000 to #75,000 would go to reporting accountants, with sundries, such as public relations and printing, another #15,000 to #30,000.
While AiM is no longer a cheap market to join, shares in a good number of AiM companies gain tax breaks making the market highly attractive to certain investors. Venture capital trusts provide a useful source of funds for new AiM joiners. Logically VCTs should be the first port of call for any company seeking to join AiM that meet the tax reliefs criteria – a fact sometimes missed by nominated advisers and brokers. VCTs can invest #100,000 to #1m in new shares issued in an AiM flotation provided the latter is registered in the UK and substantially UK-based and has gross assets under #10m prior to flotation and less than u11m after. Companies operating substantially in non qualifying trades such as property renting and financial activities are excluded from this relief as are companies based outside the UK.
Private individuals too can be another source of funding for AiM companies as reinvestment relief is on offer for many shares. However it is surprising some nominated advisers and brokers are caught off guard when asked: “Do these shares qualify for reinvestment relief?” One stockbroker commented when asked: ” I’m a corporate financier not a tax expert.” This response is curious since knowing the tax status can actually help sell the shares.
Even accounting firms acting as nominated advisers can be caught out by this simple question, although Grant Thornton sets a good example for others. Graeme Thom of Grant Thornton asks his tax department to examine whether tax breaks apply at an early stage before an AiM prospect starts to make their flotation presentations.
Chancellor Kenneth Clarke has made it easier. During last November’s Budget he announced a clearance procedure companies can go through with the inland revenue to find out whether the shares will qualify for the respective tax breaks. A number of private client stockbrokers maintain lists of companies whose shares qualify for reinvestment relief.
Corporate financiers say that bringing companies to AiM is not as good as it once was. “A number of institutions have convinced themselves that it is riskier than full list,” commented Clive Carver of Butterfield Securities.
“There are a number of key investment funds you have to convince to get a flotation away. If the issue doesn’t appeal to them then the flotation is a non starter. ”
It is unsurprising, considering the number of companies that have come to AiM, there have been a few high profile disasters. A lot of these have been companies that gained enthusiastic following prior to their fall.
At one stage Firecrest was the star of AiM. It was famed for its incessant stream of press releases about the tiniest deals. “Another day, another press release” many people joked. Essentially an advertising and marketing company, Firecrest dipped its fingers in many pies. These ranged from theatrical productions to internet products. It was the claim that it could offer cheap long distance calls via the internet that fuelled its soaring share price. This was not a significant part of the business but mention of the internet was enough to make investors think that the potential could be enormous but make them blind to how far away it might be.
Firecrest sold the rights to another product – the Internet Transphone, a handset for use with a personal computer which allows credit cards to be used over the internet, for $10m to a newly formed US company Netex Communication. Not bad on the face of it. Firecrest took a 50% stake and the other half of the consideration was in cash. Closer inspection of the deal shows that only $2m was payable on completion.
Netex has no quote and the technology is unproven so there is no guarantee that Firecrest’s stake in Netex is really worth as much as $5m.
Despite its reputation for issuing press releases its chief executive Roy Capper was censured by the Stock Exchange last April when he took six months to reveal he had granted an option over 400,000 of his shares.
At one stage the shares reached 217p but by the time they were suspended they had fallen to 44.5p. That was in September 1996 when its nominated adviser resigned. Singer had taken over from Gerrard Vivian Gray. The AiM quotation was cancelled in October when Firecrest could not find a replacement. In December Super Phone International Inc launched an all share bid said to be worth 68.6p per Firecrest share. This value is based on Super Phone’s advisers valuation of its shares which are unquoted.
Super Phone has no business having closed its telephone directory service that it would not make pay. This is in effect a reverse takeover with Firecrest’s directors taking control of the company.
Accountants acting as nominated advisers for AiM companies have not been immune from disasters, especially in this area. Admittedly these have not been as embarrassing as some earlier examples as the problems were in the main due to conditions in the markets they trade in. KPMG was nominated adviser to First Information Group (FIG) when it raised #5.3m in February 1996. The shares were placed at 165p but they have slipped to 12p as FIG experienced difficulty in securing shelf space for its products in shops.
As a small company it did not have the muscle to persuade major retailers like WH Smith to put its CD-Roms in its shops. Even at the share price peak of 183p FIB was capitalised at less than #40m yet it had a board infrastructure that would have been more appropriate for a much larger company. In all it had 12 directors – including former Tomorrow’s World TV presenter Michael Rodd – at the time of its flotation. Executive director James Edmonds was entitled to a salary of #120,00 a year while FIG’s two joint chief executives and the president of its US subsidiary were each entitled to #75,000 a year plus benefits.
Last August FIG gave up developing its own CD-Rom products as a result of poor sales. This led to redundancies and the directors left on the board agreed to take pay cuts. FIG will concentrate on the less capital intensive publishing business under the FlagTower brand.
Coopers & Lybrand was nominated adviser to another multimedia company Systems Integrated Research (SIR). Its shares were floated at 115p in April 1996 when multimedia fever was at its height. They have since slumped to 17.5p. It did not manage to get its Enid Blyton’s Famous Five titles into the shops in time for Christmas.
SIR specialises in multimedia packages for schools but it wanted to try to break into the retail market. It has now changed its mind. The schools market is not easy either. There is no sign yet of increased spending by schools. It is trimming staff numbers by a third.
Price Waterhouse must also blush when attention turns to the share price performance of Geo-Interactive Media. It helped this Israeli-based internet software developer to AiM as nominated adviser, assisted by broker Panmure Gordon. Another casualty of lower values in media stocks is On-Line where Grant Thornton was nominated adviser.
While nominated advisers are not responsible for maintaining the share price these three instances hardly reflect well on the firms involved.
A review of nominated advisers and brokers currently underway by the Stock Exchange is likely to weed out the poorer operators. Would be AiM companies now have enough information to view before choosing a respective nominated adviser or broker. Accountants are still on a learning curve on the flotation process. They still have work to do to convince the better AiM prospects to take them on as nominated advisers.
David Porter is a freelance journalist.