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STOCK EXCHANGE GUIDE – The mother of all stock exchanges

The main market of the London Stock Exchange has long been a key source of capital for UK and overseas companies. As competition with exchanges in Europe and North America hots up, the pressure is on to keep at the forefront of the global capital marketplace.

Last year was a record-breaker for London, the world’s third largest stockmarket, with both the value and volume of equity business conducted on the exchange achieving new heights. UK equity turnover value rose 35% to #1 trillion, while international equity turnover value increased 67% to #1.74 trillion. New companies continued to join the main market, with 134 domestic companies and 40 overseas businesses obtaining a listing, including the first from China, Beijing Datang Power Generation.

Also last year, the exchange’s new electronic order book for FTSE-100 companies went live. The stock exchange board announced its plans to move to order-driven trading in January 1996, aiming to lower costs and increase transparency, speed and efficiency. The 18-month implementation project cost more than #20m. By March this year the number of companies handled through Stock Exchange Electronic Trading Service (SETS) had risen to 126, reflecting the addition of new entrants to the top 100 and the slipping down of others (Dixons for instance) which nevertheless remain on SETS.

The exchange has been consulting on whether to extend the new trading system to cover the next 250 companies, but such a move appears unlikely to happen soon. As with all respected markets, companies seeking admission to the London Stock Exchange have to demonstrate themselves worthy of a listing. For example, they should have an expected market capitalisation of over #700,000, at least 25% of their shares must be in public ownership and they should have a trading record of at least three years and be able to show continuity of management during that time. The rules are modified for certain companies, such as those involved in scientific research or mineral extraction, which may not be able to comply with the requirement for three years’ audited accounts. Companies’ listing particulars must give details such as trading history, financial record, management, business prospects, the securities to be listed and the terms of any fund-raising. Companies must appoint a sponsor approved by the exchange to handle the application, potentially a merchant or investment bank, broker, firm of solicitors or accountants.

Inevitably, there are fees to pay: for example, a #200 application fee, #5,000 document-vetting fee, plus admission fees based on a rising scale according to the market value of securities listed. Advisers’ fees come on top of this. For large UK companies, joining the main market is a fairly straightforward business decision. For medium-sized companies, whose market cap would position them at the lower end of the main list, the decision is less clear-cut. While being on the main list gives them maximum credibility, smaller companies will always be in the shadow of their larger brethren.

They run the risk of being overlooked by investors and recent history suggests that their shares may be undervalued. Ernst & Young corporate finance partner Clive Ward believes part of the problem stems from consolidation of investor funds. Those larger funds then prefer investing larger sums in larger companies. “An investment of #1m that equates to a 5% holding may be too big for them to feel comfortable,” says Ward.

“There are a lot of companies on the London stockmarket at the moment that shouldn’t be – they are not getting enough benefit to justify the inevitable costs that go with it,” says David Williamson, chief executive of Granville plc, the independent investment banking group. “These are companies at the small and medium end of the market.” Investors’ focus on the FTSE-100 is causing poor liquidity lower down the list, he says.

“As a result, the number of small companies that are going private again is on the increase.” Each company has to make its own decision as to whether increased credibility as a plc will outweigh any downside of being on the exchange – not least the reporting and regulatory requirements and associated costs, which could amount to approximately 9% of the total raised. There are no hard and fast rules. Some advisers say companies should have a minimum expected market cap of #20m before contemplating joining the main list. But companies falling under that threshold can do well, as did Helphire, a credit card hire company which successfully raised #5.6m last year while achieving a post-float market value that just bumped over #16m. The company was planning fast growth and believed its shares would be more marketable on the main list than on the Alternative Investment Market.

Companies that move up to the main list from AIM don’t necessarily do well. Network Technology, which makes printer servers, was an AIM high-flyer but has seen its share price fall 60%-70% since it moved to the full list. “There is a feeling that you can be becoming a small fish in a big pond,” says Andrew Griffiths, editor of the AIM Newsletter. “But there are those that have gone up and done well, such as IT recruiter Lorien, (coffee specialist) Whittard of Chelsea and Country Gardens.”

What is clear is that smaller companies have to be prepared to put a lot of effort into marketing themselves. They have to ensure they aren’t just getting carried away by the glamour of joining the exchange.

As for the exchange, it too is having to put in a lot of effort to keep up with world developments. In particular, preparations are underway for trading under Emu. It is proposing to provide a parallel order book for the most liquid stocks to enable trading in sterling or euros. This would allow an immediate switch to euros should the UK enter Emu at some stage.

Such continuing developments in the systems and services are essential to maintain the stock exchange’s role as the leading capital market in Europe, benefiting both investors and top companies.

London Stock Exchange Official List: Toad plc

Toad plc, the vehicle technology group, moved from AIM to the Official List of the London Stock Exchange in December 1996 via a placing and open offer of 9.6 million shares priced at 80p a share, raising around #7m net of expenses. Toad sits at the smaller end of the main list, with turnover for the year to March 1997 of #4.8m and assets of #3.4m. Nevertheless, the company joined the market with ambitions to expand its distribution network and invest in new vehicle technology products.

Life has not been all smooth running for Toad since it moved onto the main list. Group chief executive Charles Parker resigned soon after taking up his post in January 1997 and the company’s share price tumbled. This March it was sitting at around 27p. Nevertheless, Toad has continued to expand with major acquisitions in May and September last year.

Chief executive Kevin Gray bemoans the difficulty that small companies have in generating investor interest at the moment and warns that management teams have to put a lot of effort into promoting themselves. “You have to keep the City fully informed,” he says. “It takes a lot of time. Small companies coming onto the listed markets will find that difficult.” He advises companies considering such a move to take extensive advice, not only from professionals, but also from people in companies that have gone through the flotation process. “Get advice on what to expect and whether it’s the right thing to do,” he says. “That’s especially important for an owner-manager who wants to stay with the business and become a plc chief executive. There is a lot that goes with the territory. In a private company you can do what you want. In a plc, you can’t.”

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