By Brian Gorman
Stock market turmoil is forcing an increasing number of small British companies to abandon their public quotations, with many deciding the cost of staying listed outweighs any potential benefit. Analysts say up to a third of companies listed on Britain's Alternative Investment Market (AIM) could delist this year, accelerating a trend begun in 2008, and in sharp contrast to the boom years of 2003-2007, when the number of companies on the market more than doubled.
The top reasons to list are the ability it gives to raise capital and the chance to use listed shares as currency in any acquisitions — but such goals are much less achievable when stock prices are tumbling.
Take the case of recruitment group SteppingStone, which listed on AIM in January 2008 and even changed its name to 1700, partly because the listing took the number of companies on AIM to 1700.
By December it had delisted, which Chief Executive Steve Hyde told Reuters was "a good indicator of the rapidity with which the markets fell away".
"Our strategy was to buy and build. Initially everything went tickety-boo. Then after a few months we started to struggle,"he said.
The company suffered as major clients cut recruitment budgets, and market capitalisation halved in eight months.
"If it doesn't give you the currency to make acquisitions- you have to question the value of being listed," said Hyde.
Analysts said the case was typical.
"For a lot of the companies sitting there with a value of five million pounds, you've got to ask what the point is," said an analyst with a British bank.
"Investors are not interested in companies like that. So it's a pretty natural move to delist."
In 2008, 88 companies took a decision to delist from UK stock markets, with the vast majority coming from AIM, according to a report from the London Business School and Royal Bank of Scotland.
The figure, which excludes companies ejected for reasons such as bankruptcy, is more than double the 2007 total of 40.
Football club Sheffield United delisted in January, saying that there was little point in staying on the exchange.
"Sheffield United, like most other listed football clubs, is unable to raise capital from investors on the stock exchange," it said.
IPO funds raised on AIM plunged to 920 million pounds in 2008, from 6.26 billion in 2007, according to AIM Advisers, Inc., which advises 76 U.S.-based companies listed on AIM.
The number of secondary offerings is also declining, falling to 578 in 2008, from 949 in 2007. And average funds raised per offering fell to 5.41 million pounds, from 10.23 million pounds.
The trend of delisting could continue, said Mark McGowan, managing director, AIM Advisers, Inc.
"The outlook for 2009 is for secondary offering activity during H1 to be very slow with a modest recovery during H2."
He added: "My view is that far too many companies listed on AIM during 2004-2007 and many of them should not have been public companies. What we are now seeing is largely a cleansing of the market of these companies."
"I suspect another 300-500 will delist from AIM this year which would decrease the number of AIM-listed companies from the current 1,500 to the 1,000-1,200 range," he said.
Typical fees for an Initial Public Offering might be around 600,000 pounds. This may appear to be an argument for retaining a listing, having made the initial investment, in case markets get better.
However, 1700's Hyde felt it would have been "at least a couple of years" before the market returned to a level which would have justified staying put. The ongoing costs of an AIM listing are usually in the low hundreds of thousands per year, notably to pay the Nominated Adviser (NOMAD) — typically a stockbroking or accountancy firm — which each company must retain to keep its listing.
DELISTING POSES PROBLEMS, AS WELL
Delisting often leaves small investors stuck with shares that are more difficult to sell.
"The key issue is how you deal with current institutional investors," said Robert Moir, partner at London law firm Pinsent Masons LLP. "Most will have to sell if they can't hold unlisted paper."
Typically, a small company, where the majority is still owned by the management, sometimes a family, may look to buy out the minority.
"But often they don't have the money. And if the company is about to delist, that would deter other potential buyers," said Moir.
He added that as a result of not having the means to buy out the minority, some companies remain listed.
Many companies delisting arrange for a broker to offer a "matched bargain" facility, where buyers and sellers can be matched up.
Brokers say this arrangement is not satisfactory, however, as the shares are less liquid.
The minority may seek to block a delisting, but could be powerless if the directors and management own more than 75 percent of the shares.
This scenario is less likely on the main market, where companies usually have to have 25 percent of their shares in free float. There is no such requirement on AIM.
