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| London calling |
May 9, 2006 |
By Mark Evans
In the late 1990s, high-tech companies flocked to NASDAQ as they scrambled to capitalize on dot-com fever.
Today, a new wave of fast-growing companies is looking to raise capital, but rather than list on U.S. or Canadian exchanges they are going to Europe, where the London Stock Exchange’s (LSE) Alternative Investment Market (AIM) is quickly becoming the new NASDAQ.
AIM’s popularity is difficult to ignore. Last year, the number of listings jumped 60 per cent, or 519 companies (including 335 initial public offerings), to 2,200. Meanwhile, the value of IPOs more than doubled to £5.63 billion from £2.37 billion in 2004, while the number of international IPOs climbed to 76 from 40.
Among the Canadian high-tech companies to raise money on AIM last year were March Networks, Azure Dynamics and Visual Defence. As well, Waterloo, Ont.-based Sandvine completed a $40 million IPO on AIM, rather than list on the Toronto Venture Exchange or NASDAQ.
Deep pockets
So why the rush to AIM?
A major reason is a healthy appetite for high-tech growth stories from large European institutional investors, who were not burned as badly as their North American counterparts when the dot-com bubble burst in 2001.
Neil Johnson, managing director and European head of corporate finance with Canaccord Adams, said there is significant institutional money focused on small-cap companies, and many large funds that specialize in niches such as computer networking.
“It’s the depth of the capital pool that allows them to specialize, and there are a lot of world-class fund-management firms seeking growth,” he said. “The small-cap money that is run out of London is significant, and they don’t care where it’s domiciled, they care where it’s listed.”
For high-tech start-ups with ambitious plans, this enthusiasm makes AIM an increasingly attractive selection, especially as they discover their IPO prospects are dim on U.S. and Canadian stock exchanges, while venture capital remains expensive.
“Opportunities follow capital, capital follows opportunities,” said J. Bradley Hall, chief executive officer with Amazing Technologies, which plans to do a US$30 million IPO on AIM later this year. “The conclusion is that AIM is the new NASDAQ, and that is where smart, aggressive companies are going to live.”
Amazing Technologies is typical of a lot of companies looking for growth capital. The Newport Beach, Calif.-based company has an ambitious and aggressive growth-through-acquisition strategy that involves the purchase of software companies and the creation of a global reseller network tied to J.D. Edwards’ ERP software.
As an over-the-counter publicly traded company in the U.S., Amazing wanted to move up to a major exchange and had targeted AMEX, said the Canadian-born Hall. But it proved to be an off-putting challenge, he said, because the securities environment in the U.S. has become antagonistic and expensive amid the emergence of the Sarbanes-Oxley Act.
“The regulatory environment in the U.S. and the current tightening of the screw makes it too expensive for any company with a market capitalization under US$500 million,” he said. “If you’re in a hostile environment where you have to spend a disproportionate amount of time and resources jumping through hoops for the SEC and complying with expenses associated with Sarbanes-Oxley, it just doesn’t make sense.”
Hungry for tech
Hall said AIM started to look even more appealing following discussions with investment bankers and institutional investors in London who were looking for new technology plays.
“Most of the London institutions have a little bit of Google-mania,” he said. “Tech is back and it’s on an upswing. There is a renewed appetite for fast-growing tech-based opportunities. For us, it is the perfect tipping point where software and technology are back in favour.”
Another edge AIM is hoping to capitalize on is its light regulatory environment. AIM-listed companies, for example, only have to report financial results once every six months, rather than doing it quarterly. There are no management discussion and analysis documents to produce, and no CEO/CFO certification.
Ian McLaren, chief executive of Ubiquity Software, a Terry Matthews-backed company that went public on AIM last year, said the exchange is more amenable because the listing and corporate governance requirements are not as severe. “It is a user-friendly market and it doesn’t put a big, onerous overhead and burden on the company to report and run governance,” he said.
March Networks, another Matthews-backed company, raised $68.8 million on a dual listing on AIM and the TSX last year.
Anil Dilawri, director of investor and public relations with March, said AIM’s listing requirements were definitely a key consideration. “It’s not that the company is not interested in being Sarbanes-compliant, because we’re in the midst of doing so,” he said. “It was a time-to-market thing. We could wait and be Sarbanes-compliant and go public in the U.S., or do it now in London and Canada.”
AIM initiatives
Not content to sit on its laurels, AIM is pushing forward this year in North America with a marketing campaign to maintain its momentum. Graham Dallas, senior manager, international business development with AIM, said the exchange is reaching out to corporate finance firms, lawyers, brokers, and the media to deliver its message. As well, AIM is putting on seminars across Canada.
“AIM is simply part of the spectrum of solutions for a growing company — be it private money, VC money or public money through an IPO,” he said. “No one has a perfect solution that fits every company or every circumstance but for a company that needs equity capital to fund rapid growth, AIM is very efficient for IPOs and subsequent secondary issues.
A survey done recently by LSE with the 80 international companies that completed an IPO last year concluded access to capital was the biggest reason 77 per cent of respondents were attracted to the exchange and AIM. The survey also found 27 per cent cited the LSE’s liquid international trading market as the most important factor, followed by the U.K.’s regulations standards (25 per cent), analyst coverage (25 per cent) and emerging market institutional investors (23 per cent).
AIM was launched in 1995 as a junior exchange to capture smaller companies that may have not been able to list on the London Stock Exchange. At the same time, similar exchanges were started in Germany and France.
Dallas said AIM has thrived while rivals have disappeared due to two key factors. First, London is a multi-disciplinary, international financial centre with everything from shipping and lending to insurance and commodities trading. Second, AIM took a diversified approach to public listings, so when the dot-com bubble burst in 2001, it still had a solid foundation of financial services, natural resources and transportation companies to maintain trading and the flow of IPOs and secondary offerings.
AIM’s success is not encouraging news for the Toronto Venture Exchange (TVE), which is trying to carve a niche as the place for growth-oriented companies. In a recent speech, TVE president Linda Hohol said AIM’s Achilles heel is its reliance on its 85 nominated advisors (NOMADS) to police the companies they bring to the exchange — as opposed to having a strong central regulatory body that ensures a market is fair and open.
This structure, she said, does not work because “instead of setting standards that encourage companies to get better as they grow, AIM holds the NOMADS responsible for a company’s transgressions.” As a result, she contends NOMADS are conflicted because they have a financial stake in a client’s success while, at the same time, a responsibility to do the job of a regulator.
Nevertheless, Amazing Technologies’ Hall said the Toronto Venture Exchange is not a consideration, mostly due to liquidity.
“The big dollars to be invested seem to be in London,” he said. “You gravitate to where the money is, and that is where the deals get done. There is an aggressiveness to get deals done.”
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