RAISING MONEY - Let's list

UK IT companies looking to float and raise capital can choose from stock markets in London, Brussels and New York. But which one works best for your business?

For a UK IT company looking to float there are four choices: a fullstock markets in London, Brussels and New York. But which one works best for your business? listing on the London Stock Exchange (LSE); the Alternative Investment Market (AIM), the junior London market set up to help smaller, growing companies raise capital; Easdaq, the pan-European stock market, just a few years old; and Nasdaq, the highly acclaimed US market known for its hi-tech and high growth stocks. Companies listed on the Nasdaq include software giant Microsoft and chipmaker Intel.

The US has the largest pool of investment capital in the world, estimated at $14 trillion. More than $50 billion was raised in initial public offerings (IPOs) on Nasdaq in 1998 and last month it had a total of about 5,000 companies and a market capitalisation of $3 trillion. A significant attraction is that ratings are generally higher in the US, giving listed companies a higher market capitalisation.

But as pointed out by Guy Feld, head of research at brokers Teather & Greenwood, Nasdaq can be an expensive market to join. 'You have quarterly reporting which is time-consuming and costly,' he says. The market is tightly regulated, helping to maintain the quality of firms listed, but again increases the associated costs.

ARM, known as the 'chipless chip company', and which designs microprocessors and licenses the technology to global electronics companies such as Sony and IBM, obtained a dual listing on the LSE and Nasdaq in April 1998.

ARM was set up by Robin Saxby, its chief executive, in 1990 and recorded turnover of £42.3 million last year. Approximately half its business is generated in the US, with another 30 per cent in Asia Pacific and the rest coming from Europe.

Saxby explained his reasons for choosing Nasdaq in an interview for the US exchange. Noting that although ARM is a UK company, he said 90 per cent of its recent business came from outside the UK: 'Nasdaq has a good reputation as a global hi-tech benchmark. For international credibility, marketing and for staff, it's a good move. The flotation was strategic - it's easier to recruit and keep talent if you've something tangible like stock options to offer.'

Angela Au, financial controller at ARM, believes the decision to go for a dual listing has worked well. 'A lot of people say if you want credibility in the hi-tech sector, then Nasdaq is the market to go on,' she says.

'Robin Saxby wanted us to be a global firm so it made sense to be on Nasdaq and the LSE. We are still a UK company and we wanted a presence in our home market. People said, "If you are going for a UK listing, you might as well go for the LSE ".'

Au believes the LSE and Nasdaq, complement each other and that dual listing allows ARM access to a wider investment base than it would otherwise have.

But a listing on two markets has inevitably made the process more complex than joining a single market would have been, and there are ongoing implications.

'The regulatory frameworks in the US and the UK are different,' says Au. 'You have to learn what to do so you don't fall foul of the rules.

It's hard work. You have to think what you do in London and for Nasdaq. But it is more interesting.'

Because of quarterly reporting, at the end of each quarter the ARM team makes conference calls across the US. 'We also try to do a couple of roadshows a year, after the half-year and full-year results,' says Au. 'Sometimes, if I go to ARM in the US to do some work internally, I take time to go and see investors.'

UK firms attracted by the style and regulation of Nasdaq might consider Easdaq, which now has 44 companies listed on it, and a market capitalisation of about euro21 billion. 'Easdaq has a Nasdaq-style rule book in place so the rigour and controls are there,' says Feld.

About euro2.2 billion has been raised on the market and the index has risen by 37 per cent this year. 'We are happy with Easdaq's performance,' says Andrew Beeson, chief executive of Beeson Gregory and a board member of Easdaq.

Pan-European and hi-tech firms are very suitable for Easdaq. 'Some European companies may be a bit small for Nasdaq and get lost there, so they come to Easdaq,' says Beeson. 'Easdaq is also drawing Nasdaq firms that want to have a better profile in Europe.'

The Cambridge software company Autonomy, which is heading for turnover of about $20 million this year, was set up in June 1996 and floated on Easdaq in July 1998, raising $35 million.

'We considered three markets: Easdaq, the LSE and Nasdaq,' says Dominic Johnson, director of marketing at Autonomy. 'It was a fairly close call.

Nasdaq was rejected on the basis that we are a European company. We felt our presence was greater in Europe so an initial listing would be better in Europe than in the US.'

The management then had to choose between the LSE and Easdaq and decided in the end that London was less appropriate for younger companies. 'We saw that Easdaq was set up on the model of Nasdaq so it was conceivable that an initial listing here could be followed later by one in the US,' he says. So Easdaq it was.

Johnson believes the decision was the right one: 'Easdaq has met our expectations. We've no problem with liquidity - we've been one of the most traded stocks.'

He feels Autonomy has perhaps received more attention by listing on Easdaq than it would have done had it gone to the US. 'Nasdaq has hundreds of companies all viciously competing for eyeballs,' Johnson says, pointing out that in Europe there are fewer IT stocks but plenty of investor interest.

'For us it's been very successful. Easdaq is holding us up as one of the shining lights of the exchange.' The regulatory aspects are 'extremely tedious', Johnson admits. 'But Autonomy was set up with an eye to the public markets, so it was always aware of the financial controls that had to be in place. The regulation is slow but Easdaq isn't unduly bureaucratic.'

As for the quarterly reporting, he says jokingly: 'It means going grey every three months,' adding on a more serious note: 'You see a lot of your auditors.'

Autonomy chose to have its shares quoted in dollars. Easdaq allows companies a choice of currency, a degree of flexibility appreciated by Johnson.

On flotation, Autonomy had a share price of $3.70 and by the end of June this year was quoted at about $6.65.

'It's been fairly healthy,' says Johnson of the rise in share price.

He also believes that the market isn't too volatile: 'It's mainly an institutional exchange which helps ensure a stable market.'

The majority of Autonomy's shareholders are based in the UK and there are also investors from Sweden, Germany, Belgium and Italy. 'But Easdaq offers us US exposure as well,' says Johnson. 'People see Easdaq as the European sister of Nasdaq.' Some US investors believe European stocks are undervalued and are eager to buy into the market, via Easdaq.

If Nasdaq and Easdaq have their appeal, they aren't suitable for all.

Some company strategies may involve flotation at an early stage, earlier than would allow them to join some markets.

'Where companies are early stage startups, they should go to AIM initially,' says Chris Searle, corporate finance partner at Pannell Kerr Forster.

'If the companies are a bit older and more established, they could look at Nasdaq or Easdaq which have minimum size requirements.'

The market base of the firm can also affect its decision. 'If you are mostly a local player, for example if you are the biggest PC reseller in the UK, there is no point going to another market abroad,' says Ken Olissa, managing director of Interregnum Venture Marketing, a specialist IT venture marketing firm. 'You go to a market to raise capital and you do that when people know about you and understand you. If you are a UK business, a German analyst won't be interested, and zero coverage equals zero liquidity. So the first rule of flotation is that the market has to be one that's relevant to you.'

Of course, the relevant market may not be the one with the best market values. 'Nasdaq is the market that has the best values so everyone's ambition is to get there at some point,' says Olissa. 'So one option is to go onto AIM, raise capital, grow and then set up US operations. Then you could get a Nasdaq listing. That's a clever strategy.'

AIM could also be used as a stepping stone to the LSE. But Searle advises companies to consider this step carefully. 'They could end up as small fish in a very large pond suffering from lack of liquidity and investor interest,' he says. Feld agrees. 'You have to remember that just because you have a full listing it doesn't mean that your shares will be more liquid or that investors will follow them more closely,' he says.

AIM, which passed its fourth birthday in June, has its fair share of sceptics who suggest the market is running out of steam.

At the end of May, there were 315 companies trading on AIM with a total market capitalisation of £5.5 billion. A year ago there were 306 firms with a value of about £6.8 billion. Critics point out that the rate of companies joining the market has slowed this year, and fewer firms seem to be making the move from AIM to the LSE.

However, such statistics don't necessarily indicate a failure of AIM, but reflect a lack of institutional interest in backing small companies.

'There is a general malaise affecting small cap companies and AIM is dominated by those,' says Olissa.

Pannell Kerr Forster's second annual AIM Survey, published last month, found that the market has actually been doing much better than it is given credit for. The survey of AIM companies found a high level of customer satisfaction with the market - 78 per cent of respondents felt AIM had met or exceeded their expectations both in terms of the initial flotation and subsequent performance.

Survey respondents believed the respectability and profile of AIM had improved in the past twelve months, although there was some concern about investor appetite for the market and liquidity. AIM was still seen as a good stepping stone to the main market.

Internet Technology Group (ITG), which has forecast turnover for 1999 of £21 million, joined AIM in 1996 to raise finance. The company recently said it is looking to move up to the main London market towards the end of the year. ITG has a market capitalisation of about £95 million and is regularly in the top 10 for share turnover.

'We're getting to be one of the largest companies on AIM,' says Richard Brocksom, finance director at ITG. 'AIM has served its purpose and it is time to move onto the LSE. We've always been aware that timing was important and that we needed a market capitalisation of about £100 million to move up.'

That minimum market cap is important to catch the eye of brokers and analysts, most of whom don't have the time and resources to pay heed to smaller companies.

'AIM has had its moments,' says Brocksom. 'It's served its purpose - we have done some acquisitions.' But there has been disappointment too.

'It hasn't been the easiest place to raise money,' he adds. 'I think that's also symptomatic of the sector we are in. In the US, there is so much money sloshing around for IT investment but it doesn't seem to have been replicated in the UK. Here, a lack of understanding of the internet hasn't helped.'

That said, Brocksom concedes that attitudes may have changed a bit. In 1996 most brokers were not interested in AIM at all, he recalls. 'Some institutions that would not look at AIM stocks in any way, now will.' Still he is concerned that AIM may eventually suffer the same fate as its predecessor, the USM, which 'went wrong eventually' due to inadequate regulation and quality control.

'It's easier to get onto AIM than the main market,' says Brocksom, suggesting that companies controlled or run any how could join. 'The market will be tarnished.'

Seeking a joint listing on Nasdaq may be a possibility for ITG at some point in the future. 'We have grown very quickly in two years, from 30 to 280 people,' says Brocksom. 'The problem with Nasdaq is that there are additional reporting requirements and regulatory burdens. But we would be stupid not to consider Nasdaq at some stage. There is a better understanding of our business there than in the UK.'

Floating is never an easy process and success often depends greatly on timing. The climate is particularly tough for smaller companies at the moment, so the decision to go public should be considered harder than ever. However, among smaller firms listing in London, IT stocks are probably better placed than most to attract interest.

Olissa believes IT stocks should do reasonably well partly because of the IT sector categories introduced by the LSE. 'Fund managers are now likely to be required to invest in every category,' he says. 'Until recently you could get away without investing in IT and that led to lower valuations. But now fund managers can't get around it. So these sectors should do well.'

Searle also sees opportunities for IT companies to draw institutional investors. 'In the City there are internet funds being set up, so if someone has a good story to tell they could consider floating on AIM,' he says.

'And all IT companies, as long as they have a good story to tell, would be able to float.' That 'good story' implies a product or service that is different or will provide cheaper processes.

Having a good story is the best way to attract investors, who look for a mix of good returns and safety in their shareholdings. Markets such as the LSE and Nasdaq have performed well in recent years. In the past four years the main FTSE 100 share index has doubled, rising 10 per cent in the past 12 months alone. Nasdaq's index rose 36 per cent in the year from April 1998 to April 1999. By contrast, AIM's index has fallen by about 2 per cent over four years, reflecting the lack of interest in smaller cap companies by institutional investors.

In terms of the risk attached to investing in different markets, AIM is less tightly regulated than either the LSE, Easdaq or Nasdaq. 'An unregulated market by definition has a greater degree of risk,' believes Olissa.

But safety doesn't just depend on the market. 'The issue is more to do with the company than the market,' says Feld. 'On average you would want to be in a larger fully-listed company than a small AIM company which has a greater liquidity risk.'

Terry Bond, a private investor and director of ProShare, the organisation promoting wider share ownership, says: 'A balanced portfolio has 25 per cent of its money in the FTSE 100, another 50 per cent in the rest of the main market and the remaining 25 per cent made available for "funny money" - to have a punt in some interesting stock. If an individual thinks there is potential in a company, then they should have a go, but not a big go because nine times out of 10, hot tips burn.'

Bond suggests private investors pick out 10 companies for investment and follow four golden rules: 'First, buy shares with a proven success record and growth potential,' he says. 'Secondly, remember that you are buying the companies, not the market. So you really should invest in your chosen shares regularly. Ignore how the market is moving. Some of the shares you will buy at the top and some at the bottom. It will even out in the end.'

Bond's third rule is to reinvest all dividends received, and finally, to diversify the portfolio if possible. 'Spread your risk,' he says.

'Some enterprise sectors go out of favour for whatever reason. The internet is the fashion stock of the moment - everyone is into it, but it will go out of fashion again.'

In this century, stock markets have done well for both companies and investors, as Bond illustrates. 'Since 1918, in any 10-year period, shares have gone up,' he says. 'At the end of the World War II, £100 in the bank would now be worth about £7,000 - or £350 taking into account inflation.

'If you had put £100 in the building society, it would have risen to £11,000 or £550 in real terms. If you had put it in the stock market, it would be worth £990,000 - or £45,000 in real terms, allowing for inflation.' In this case, the numbers say it all.

EASDAQ: KEY FIGURES

The Easdaq stock market operates across 14 European countries with one regulatory structure, one rule book and one seamless trading and settlement system.

 Number of companies currently trading                        44
 Current total market capitalisation                          $22.1bn
 Average market capitalisation per company at admission       $201m
 Current average market capitalisation per company            $502m
 Average money raised per company at admission                $55m
 Source: Easdaq (as of 18 June 1999)