Cash in the Balance

This year has seen a flood of companies looking to raise capital through a public flotation. To date, 49 companies have listed on the Alternative Investment Market (AIM), raising £551m, compared with only nine in the same period last year, raising only £7.8m. A number of brokers and insurers have been part of this trend. The Broker Network and Pavilion Insurance Network floated on AIM, raising over £3.5m, and Catlin Group has listed on the London Stock Exchange (LSE) in a float worth nearly £200m. Euclidian is set to follow suit with a mid-July float worth £125m on either AIM or the LSE main market. While floating is a way to create capital, it is not a straightforward task. "Selling your house is a breeze compared to floating your company. Floating is definitely not for the faint hearted," says Grant Ellis, chief executive of The Broker Network.On average, a flotation can take seven months, but companies start preparing for their listing at least two to three years in advance. Those who have gone through the process advise that a list of pros and cons should be made and then presented to the board. If the board has any doubts then it should not go ahead. Ellis says: "While you are preparing to list you should ask yourself if you are willing to gamble millions and dedicate at least six months of your time to the project while knowing there is always a chance that you may not achieve your listing. "Some things will be under your control and others won't." The main reason for a public listing is to raise more capital. And, once listed, a company can go through a similar process at a later stage if there is need for more capital. For example, a company may want to raise capital to pay back a capital provider, expand the business or make acquisitions. Admiral, for instance, is planning to float this year to recoup the money invested by its capital provider, Barclays Private Equity.

Higher profileA listing can also provide a market for the company's shares. It could, for example, help to broaden the shareholder base and allow investors to exit, either on flotation or at a later date. Share schemes also mean that employees can benefit by investing in their company and so boost morale and increase loyalty to the company. A flotation will raise the company's profile higher than ever before. It will attract press attention and be scrutinised by analysts. This has positive and negative sides, so companies should list only if they can handle the spotlight. Ellis says: "One of the reasons we listed was because we knew we would have some good years ahead in terms of consolidations. We felt that good news is better received in public than in private."But there are drawbacks - the most obvious being cost and time. The costs involved in a flotation and then maintaining a listing can be overwhelming and even underestimated. Ellis says: "The minimum cost to list is about £500,000, so it is not a step to take lightly. The main advisers that you need, such as accountants and lawyers, all charge at least £150,000 each for their services."The LSE says that costs will account for at least 10% of the money raised.Flotation also requires a lot of time and hard work. "The IPO took up an enormous amount of my time and the time of a key group of Catlin employees for over six months," says Catlin Group founder Stephen Catlin. "I had to take a few days off and we spent many weekends working in the office."The wrong market conditions could also be an obstacle and may even force the float to be delayed or terminated. Last year, for example, HLF, the holding company for Heath Lambert, pulled out of a flotation it had spent £5.5m on. At the time, the group blamed the extreme volatility of the stock market as one of the reasons.It is essential that listing takes place at the right time for the company. When HLF attempted to float, industry sources said that HLF pulled out because of problems with Heath Lambert's pension liabilities and with lawsuits pending over film finance products. "You should make sure that any skeletons are aired at the outset and not later," advises Ellis.

Lose controlListing will mean that the company directors will lose a certain amount of control over the business. Shareholders will have the power to veto many corporate actions, such as significant acquisitions. They will also be able to decide the fate of the board, the executives and their remuneration.Listing requires a substantial amount of paperwork. A prospectus will need to be compiled, describing the business and disclosing material contracts, directors earnings, incentive plans and major shareholders. Putting together a prospectus is no easy task either. "It was the most time consuming and frustrating part of the listing process. It's about 60 to 70 pages long and every word in it has to be verified with evidence," explains Ellis.It is essential that the prospectus is accurate as any anomalies could impact on the success of the float.

Flotation for beginnersOnce a company has decided to float, it will have to decide which market to float on and the method. Most companies tend to float on the main market, which is the principal market for listed companies from the UK and overseas. This market tends to suit the larger companies and currently comprises about 1,800 UK companies and 430 overseas companies. For small or growing business AIM is more suitable.Once the board has reached an agreement on which market to float, the next step is to decide how to go about it. There are three different ways to float: initial public offer (IPO), a placing or an introduction. If a company is big enough and can handle the expense it can list by way of an IPO. In an IPO, sponsors will try to sell the company's shares to institutional or private investors. The sponsor should also arrange for the offer to be 'underwritten' in the event that not all of the shares are bought. A placing means that the shares are offered to a selection of institutional investors. The advantage here is that the costs are lower and the company has greater discretion over who invests in it. However, a narrower shareholder base will mean that there could be less liquidity in the shares.An introduction is where a company lists without needing to raise any capital. This is the cheapest method of entering the market. Usually, this means that the company already has 25% of its shares in the public domain or that it has a decent spread of shareholders.A sponsor will also need to be appointed. The sponsor's primary function is to help coordinate the company's entry to the market. Investment banks, stockbrokers or corporate finance houses can act as sponsors, provided they have United Kingdom Listing Authority (UKLA) approval. Hugh Elwiss, director of Hawkpoint Partners, a corporate financial advisory firm, says: "Sponsors used to be banks or brokers. Now law firms and independent advisers can act as sponsors too." For a list of approved sponsors go to UKLA's website at www.fsa.gov.uk/ukla .