Every company would like to be an IBM or a Microsoft; every managing director, a Lou Gerstner or Bill Gates. And those in the channel are no exception.
Many dealers and distributors began as small companies with a handful of employees and modest premises. Some grew to be medium-sized companies and a few became large enough to be called corporations. At some stage, those companies that grew big enough had to decide if they were going to go public. A growing number of firms in the IT industry are exercising their option to become limited liability companies or public limited companies.
There are any number of reasons why a company should choose to go public and offer shares on the open market and share options to employees.
One of the main motivations is to raise additional revenue to finance expansion. Having the letters Ltd or plc after a company name also heightens an organisation?s profile in the eyes of customers and the market. Offering employees shares in the company at advantageous rates increases their sense of commitment to the organisation.
Although going public is superficially attractive, it is not always the best solution for a company looking at ways of finding an injection of capital. ?It is a complex issue. Going public is often considered the least attractive way of raising capital,? says Rob Wirszycz, director general of the Computing Services & Software Association (CSSA). He believes that many companies seeking to raise money prefer to do so by trade sale or by seeking investment from a venture capital company.
Some companies take the reverse view. Having initially been funded by venture capitalists, a company may go public to reduce its dependency on its financial backers. Other companies may seek alternative methods of expansion such as a merger or acquisition. Software house Data Sciences was looking to float on the Stock Exchange, but instead was taken over by IBM in 1996 for an, allegedly, princely sum. Similarly Hamilton Rentals, already a plc, was taken over last year by Compel. The two companies will remain separate entities but will co-operate where their interests coincide.
Wirszycz points out that there is a requirement for public companies to report half-yearly to shareholders as well as producing annual accounts. A company?s performance is therefore judged on a six-monthly basis rather than in an annual report. Two bad quarters can make investors nervous and can lead to them selling their stake in the company, thus reducing its worth.
?The City is somewhat unforgiving unless you have straight line growth,? Wirszycz says. Resellers, he feels, are in a particularly difficult position as much of their business depends on the development cycles and the performance of the manufacturers and software developers whose kit they sell.
A number of organisations specialise in offering advice to companies that are looking to go public or to raise capital by other means. Investment bank Broadview Associates specialises in the technology industry, particularly mergers and acquisitions. It acted for IBM in the takeover of Data Sciences.
Mergers and acquisitions are alternative ways of raising finance for expansion and are sometimes preferable to flotation, according to Broadview principal Ben Tomkins. In the case of the IBM/Data Sciences merger, the deal suited both parties. IBM was looking for skills in certain vertical market areas which it could not supply itself. Data Sciences was looking to raise further capital. Merging the two companies provided a natural synergy of products, skills and personnel.
Typically, a company will float 25 per cent of its equity, thus ensuring that it raises the necessary capital while retaining control of its own destiny, says Tomkins. ?Floating is a good way of raising money and is cheaper than going to the bank or a venture capitalist. But you are in the public spotlight. Companies need to ask themselves the question: is money enough to grow my business??
A public company comes under much greater scrutiny than a private one and some control over the way in which it operates is inevitably diluted. There are a number of key messages that need to be borne in mind when a company goes public, says Tomkins. ?Any broker will want to see a well thought out cash flow forecast and the company will not have the tax planning flexibility that it had as a private company.?
There are two key factors that investors will be looking for: turnover and profitability. ?What the market values is revenue and turnover,? Tomkins says. Of these, revenue is most important. If a company can show a steady growth in revenue year on year then the market will look more kindly on it. ?The market will forgive you for not being highly profitable, at least in the short term, providing you can demonstrate growth at revenue level.
Tomkins points to a number of multimedia companies that have floated on the basis that their revenue would be high but which failed to meet their targets and disappointed investors.
One of the problems with being a reseller planning to float is that the channel is dependent on its suppliers. If Intel announces it will bring out a new chip in six months? time, then sales of existing kit may dry up. Similarly, a major component failure or a machine that has to be withdrawn can leave the reseller stranded with systems that he is unable to sell. Tomkins? advice is to spread the portfolio of products as widely as possible. ?You cannot afford to become dependent upon a single supplier ? even one as large as Intel,? he says.
Distributor Ideal Hardware first floated as a plc on the London Stock Exchange in 1994. According to Ideal managing director James Wickes, the main advantage of floating on the Stock Exchange is that it raises the credibility of the company in the eyes of the industry and customers.
?The first port of call is to the company accountant. He will be able to tell very quickly if you have all your ducks in a row,? Wickes says.
One of the things that the accountant will be looking at is whether any of the directors has been previously made bankrupt or presided over a company that has been liquidated. Offshore holdings in countries such as Luxemburg or Panama will also be frowned on by the accountants, according to Wickes.
An increasing number of channel companies are attracting the interests of the investors, Wickes says. ?Much depends on how the stock is being held. One of the reasons that investors will invest in a reseller is that they do not wish to be tied to a manufacturer.?
Any company contemplating flotation also has to be committed to long-term growth, says Wickes, and he warns that floating on the Stock Exchange is just the start.
?Going public is a new beginning, it is not the end of the road,? he says. Ideal Hardware?s investors are largely financial institutions, but Wickes claims increasing numbers of smaller investors are willing to take a share in the company.
Although the institutional shareholders are largely governed by figures, they are by no means unaware of the trends in technology. ?It used to be the case that the shareholders did not understand the technology but that is no longer true ? they are now very well clued up,? Wickes says.
This view is shared by Broadview Associates, which believes that the markets today are very sophisticated. Tomkins believes that the market is not interested in investing in pure box-shifters and advises resellers that they should seek to add more value to the products in terms of consultancy, systems and network integrations integration and training.
?The resellers need to push up more value-added services. Just shifting boxes is not enough,? he says.
One of the reasons why a merger or acquisition is often more attractive than floating on the Stock Exchange is that it increases the critical mass of a company. Four Vars or dealers in different parts of the country, all specialising in a specific area, may find it more appropriate to merge into a single entity rather than to seek to float separately in order to raise capital. Not only would such a move give all the companies involved a higher profile, it would also give them greater purchasing power and a better chance to take advantage of volume discounts.
According to Peter Rowell, managing director of consultancy Regent Associates, there has been a slow-down in the number of IT companies going public this year. ?One of the difficulties is finding good quality companies, and the brokers have become a lot more discerning. I think most of them are looking for the larger organisations with a turnover of #50 million and there are not that many of those around,? Rowell says.
The first thing a company needs to do is to examine seriously its reasons for wanting to go public. ?They really need to take a step back and think about the reasons for floating. Is it to raise money for expansion, is it to allow some shareholders to get out, or is it to raise the status of the company?? he says.
In many ways he sees mergers and acquisitions as being a better route to expansion than flotation. The number of mergers and acquisitions are up on last year and prices have been steady and even rising, Rowell says. By contrast the share prices in IT companies have remained largely flat.
One of the reasons that brokers and investors are more chary of backing IT companies is that they have had their fingers burned in the past. Some companies which have floated have done so after only one extremely successful year and the promise of future rising turnover and profits have not materialised, making the market more cautious.
More than most industries, the IT business is highly volatile and susceptible to change. In the early 1980s, dozens of companies were peddling PC-based database packages. For several years these companies prospered, but in the end there was only one clear winner: US company Ashton-Tate with its dBase package. During those early years many of Ashton-Tate?s rivals could well have been candidates for flotation, but today very few of them still exist.
Those stockbrokers with an understanding of the IT industry ? and there are an increasing number of them ? will be aware of this volatility and advise investors accordingly. To be sure they will be keeping a close watch on trends in the industry such as the debate over the future of the PC versus the network computer. Whatever the outcome of this debate it is likely to engender a more cautious approach to the industry among analysts and brokers.
The decision to float on the Stock Exchange is not one that should be taken lightly, particularly in an industry as fast moving as IT. While it may be superficially attractive as a way of financing expansion, it also carries great dangers. The alternative route of merging or acquiring a company with a similar portfolio of products and skills is often seen as preferable to flotation. For the resellers, many of which are small firms with a turnover of about #10 million, a well thought out merger or acquisition may be a better way of financing growth.
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