Underpricing In IPOs –
Aiming on AIM & Alternext
R.W. Timmer Student number: 1230476
rolf.timmer@bdo.nl
BDO Corporate Finance mentor: Drs. M.S. Spetter University of Groningen
Faculty of Organization & Management 1stsupervisor: Drs. D.P. Tavenier
2ndsupervisor: Dr. H.J. von Eije
Preface
This thesis is the final step for the Master of Science (Doctorandus) degree in Organization and Management (Bedrijfskunde) of the University of Groningen. It focuses on underpricing in initial public offerings on the Alternative Investment Market and the Alternext.
As my interest in corporate finance grew during my study, I began orientating for a future employer and a company to write my thesis. Because I felt attracted to working an entrepreneurial environment, BDO Corporate Finance was one of the companies that had my special interest. Luckily I was able to do an internship, which not only gave me the opportunity to write my thesis in a motivating area, but also gave me the possibility to get an idea of the daily corporate finance business. This resulted in finishing my thesis but also in signing a contract per February 2007 as a M&A consultant.
The subject for this thesis evolved during the first weeks of my internship from a broad scope to the focus on underpricing on the Alternative Investment Market (AIM) and the Alternext. For his help in this process and his feedback during the writing of this thesis, I would specially like to thank my 1st supervisor Drs. Daan Tavenier. Because I could meet
with him at his employer in Kampen, which by coincidence is the city where my parents live, I could combine input for my thesis with good old hotchpotch and meat-balls. This made my visits to him all the more pleasant.
Furthermore I would like to thank my 2nd university supervisor Dr. Henk von Eije for his
know-how in the field of IPOs, my mentor at BDO Corporate Finance Drs. Mark Spetter and all my fellow (junior) colleagues where I could always post a question.
Of course I would like to thank my parents and my brother, who motivated me during the whole period of working on this thesis. Because my brother finished his thesis at the University of Maastricht in August 2006 he could give me useful comments. Also, I would like to thank my brother’s girlfriend for checking my English grammar and writing.
I hope anyone who reads this thesis will like the additional insights that will be provided on the AIM and Alternext.
Management summary
The aim of this research was to determine if there was any over- or underpricing in the initial public offerings of companies on the Alternative Investment Market in London and the Alternext in Paris and Brussels in the period of 01-01-2005 till 16-08-2006. In order to maximize the added value of advice given to clients of BDO Corporate Finance when struggling with the IPO decision. 507 Companies for the AIM were analyzed, for the Alternext 47 companies were analyzed.
This research has exposed the following:
There is underpricing on the first trading day of companies going public on the AIM
and the Alternext. The amount of underpricing is respectively 10,28% and 10,12%.
This study showed that companies in some industry sectors have high underpricing.
Underpricing on the AIM tends to be high in the cyclical consumer sector as well as the energy sector and the technology sector. On the Alternext the non-cyclical consumer sector has high underpricing.
This research has also found that there is a significant correlation on the AIM
between being a high technology company and the amount of underpricing and between the reputation of the investment bank underwriting the IPO and the underpricing. High technology companies have slightly higher underpricing. High reputation investment banks cause lower underpricing.
Furthermore, on the Alternext there is a strong positive correlation between the
trading volume of the first trading day and underpricing.
For the Alternext, a regression model between the quality of the accountant, the
trading volume of the first trading day and the industry sector can be made as an alternative for using the mean as the amount of underpricing.
No significant other factors influencing the amount of underpricing were found.
When reflecting the outcomes on the global survey of Loughran et. al. (1994), which states that in all the 25 countries that were incorporated in their survey, companies going public are underpriced in the short-term (on average 17%), one can say this research supports their outcomes. However, the calculated underpricing for the AIM and Alternext is lower than the average of their studies.
Several other factors that may influence the amount of underpricing of an IPO have been analyzed. However this research has not found any other significant predictors for the amount of underpricing. Further research on this topic is recommended.
Table of Contents
Preface... 2
Management summary ... 3
Table of Content ... 4
List of Figures and Tables ... 6
Chapter 1: Research Outline... 8
1.1. Introduction ...8
1.2. Research context...9
1.3.1. Research objective... 10
1.3.2. Main research question... 10
1.3.3. Subquestions... 10 1.3.4. Limiting conditions ... 11 1.4. Conceptual model...11 1.5. Type of research ...13 1.6. Research methods...13 1.7. Structure...13
Chapter 2: Alternative Investment Market (AIM) and Alternext... 14
2.1. AIM ...14
2.1.1. AIM listing requirements... 15
2.1.2. Trading system on AIM ... 15
2.2. Alternext ...18
2.2.1. Alternext listing requirements... 19
2.2.2. Trading system on Alternext ... 19
2.3. Criticism on AIM and Alternext ...20
Chapter 3: Initial Public Offerings ... 22
3.1. Advantages of IPOs...23
3.2. Disadvantages of IPOs ...23
3.3. The process and execution of an IPO...24
3.4. Steps toward listing on AIM from a foreign perspective ...28
3.5. Steps toward listing on Alternext ...29
Chapter 4: Underpricing in IPOs ... 30
4.2. International insights on IPOs ...33
Chapter 5: Presentation of the IPO data ... 36
5.1. The process of building the dataset ...36
5.2. Unused data –first selection...37
5.3. Unused data –second selection ...37
5.4. IPO underpricing on the AIM...38
5.5. IPO underpricing on the Alternext...38
5.6. IPO underpricing per industry sector...38
5.6.1 Average underpricing per industry sector on AIM... 39
5.6.2. Average underpricing per industry sector on Alternext... 39
Chapter 6: Analysis of the data... 41
6.1. Predictors –data to be used...41
6.2. Methodology ...43
6.3. Regression analysis for AIM ...43
6.4. Regression analysis for Alternext ...44
6.5. Regression conclusions...46 6.6. Correlations on AIM...46 6.7. Correlations on Alternext...47 6.8. Correlation conclusions...48
Chapter 7: Conclusions ... 50
7.1. Introduction ...50 7.2. Results ...507.3. Added value, shortcomings and further research ...52
7.4. Recommendations for BDO Corporate Finance ...52
Bibliography... 53
Appendix 1: Choosing a listing location –IPO considerations ... 56
Appendix 2: Time line of admission on AIM & Alternext... 57
Appendix 3: USA: Nr. of IPOs, Initial Returns, Gross Proceeds, Amount
of Money Left on the Table & Long-run Performance ... 58
Appendix 4: Average initial return worldwide ... 59
Appendix 5: Unused data Alternext 2005-2006 ... 60
Appendix 6: Unused data AIM 2005-2006 ... 61
Appendix 7: Underpricing data collecting AIM ... 63
Appendix 8: Underpricing data collecting Alternext ... 64
Appendix 9: Descriptives AIM ... 65
Appendix 10: Descriptives Alternext ... 66
Appendix 11: Additional Regressions AIM... 67
List of Figures and Tables
Figures
Chapter 1
1.1. The service flow of BDO Corporate Finance 1.2. The path to the research objective
Chapter 2
2.1. London Stock Exchange trading services summary 2.2. SETSmm
2.3. SEAQ
2.4. SEATS Plus trading day 2.5. Organization of a trading day
Chapter 3
3.1. Typical sources of new venture financing 3.2. Cost of raising equity capital
Chapter 4
4.1. Explanations for underpricing in IPOs 4.2. Average initial return IPO
Chapter 5
5.1. Building the dataset
Tables
Chapter 3
3.1. Types of offerings used in IPOs in selected markets
Chapter 5
5.1. Underpricing for the AIM 5.2. Underpricing for the Alternext
5.3. Underpricing industry sectors on AIM 5.4. Observations for industry sectors on AIM 5.5. Underpricing industry sectors on Alternext 5.6. Observations for industry sectors on Alternext
Chapter 6
6.1. Search process potential predictors of underpricing 6.2. ANOVA AIM
6.3. Model Summary AIM 6.4. Coefficients AIM 6.5. ANOVA Alternext 6.6. Model Summary Alternext 6.7. Coefficients Altelnext 6.8. Pearson correlations AIM 6.9. Spearman’s rho AIM
6.10. Pearson correlations Alternext 6.11. Spearman’s rho Alternext
Chapter 7
Chapter 1: Research Outline
1.1.
Introduction
Due to the overwhelming success of the Alternative Investment Market (AIM) in London and the founding of the Alternext in Amsterdam, Brussels and Paris, which are stock exchanges for small and midsize companies, many small and midsized companies are recently reconsidering being listed on a stock exchange. Loek Hermans, chairman of MKB Nederland (the Dutch employers’organization for small and midsized companies) said the following in an interview for the Euronext (30-05-2006)1: “The new Alternext market will enhance the position of small and medium-sized companies. Fast growing entrepreneurs will be able to raise funds more quickly and easily through Alternext, and transfers to third parties will also be easier. MKB Nederland therefore expects that there will be a high demand for listings from the business community”.The
financial times wrote the following about the AIM: “The LSE's Alternative Investment Market is
an obvious haven for fast-growing small companies to raise funds”(30-03-2006).
Indeed, there is much interest from the business community. According to Reuters2 for
instance: “…about 10 companies are to be listed on Amsterdam's Alternext in 2007”.
Most companies that go public do so via an Initial Public Offering (IPO) of shares to investors. However the path to listing on a stock exchange can be a bumpy one. The most IPOs are quite successful in raising capital. An example is the IPO of the Industrial & Commercial Bank of China that raised about €15 billion dollar in its overwritten IPO. But IPOs are usually underpriced and thus have indirect costs connected to the IPO. The Financial Times quoted that in America in a survey of 803 IPOs: “…an eye-watering $ 62 billion
was left on the table in 1999 and 2000 combined, according to Jay Ritter of the University of Florida”.
However, IPOs sometimes are disappointing in the way that they do not collect the amount of money that was intended. Examples are the IPO of Wavin the Dutch supplier of pipe system solutions and The Member Company (TMC) that was underwritten on its recent IPO on the Alternext Amsterdam.
In general one can say that when companies go public, the shares they sell tend to be underpriced, in that the share price jumps substantially on the first trading day3
. This underpricing in IPOs is a worldwide phenomenon and subject of a lot of research.
This paper is a contribution to the IPO-underpricing research specifically for IPOs for European small and mid caps, because it examines the underprice phenomenon for the AIM and Alternext. It tries to contribute to the question why companies should choose between the AIM or Alternext. It furthermore tries to highlight underpricing of the companies in the
1www.euronext.com 2
www.reuters.com
3Ljungqvist, A., Handbooks in Finance: Empirical Corporate Finance - Chapter III.4: IPO Underpricing, p. 1, 2004
different industry sectors on these stock exchanges and aims at finding some factors that explain this underpricing.
1.2.
Research context
This research is an assignment of the University of Groningen and BDO CampsObers Corporate Finance B.V. (hereinafter: “BDO Corporate Finance”or “BDO CF”). BDO CampsObers is a member company of BDO International and is a national professional services company providing financial advisory and consulting services to a wide range of companies. As part of BDO CampsObers, BDO Corporate Finance helps maximizing the value of companies by advising on mergers, acquisitions, disposals, fund raisings, and flotations. Because BDO Corporate Finance focuses on clients in small and midsized companies and the AIM and Alternext both are stock exchanges specifically for small and medium-sized companies, this research could be a valuable addition to the know-how of BDO Corporate Finance.
As an advisor for companies going public, BDO Corporate Finance needs up-to-date knowledge about IPOs in order to advice its clients about listing on a stock exchange. Because little is known about underpricing on the AIM and Alternext, this will be the focus of this research. By means of this research BDO Corporate Finance wants to optimize the knowledge of (underpricing on) IPOs on the AIM and Alternext. This is an important part of the advice because it represents a significant part of the total cost of being listed and thus could be an argument in advising a client to choose for one of these stock exchanges. This research thus aims at contributing to the knowledge that BDO Corporate Finance already has, so that BDO Corporate Finance can maximize the quality of its advice for companies that want to be listed on the AIM or Alternext. Figure 1.1 illustrates the relationship for IPO advice between BDO Corporate Finance and its clients:
Figure 1.1: The service flow of BDO Corporate Finance
1.3.
Problem definition
Scientific research starts with defining the problem. De Leeuw (2003) is used to specify the objective for BDO Corporate Finance. According to De Leeuw the main question should give an answer to: “What do we want to know for whom and why?”.In order to determine this, the following steps should be made:
Determine the research objective(s)
Determine the main question(s) and subquestions Determine the limiting conditions
In need of risk bearing capital Advising on IPO
Client
BDO CF
In need of risk bearing capital Advising on IPO
This parts will be discussed below.
1.3.1. Research objective
1.3.2. Main research question
1.3.3. Subquestions
The following sub questions have been formulated to further structure the research:
Background and theoretical framework:
What are the AIM and Alternext? What is an IPO?
What is underpricing in IPOs? What influences underpricing?
Data Research:
How does the market behave on the first trading day of IPOs on AIM and
Alternext?
Is there a relationship between companies in specific industry sectors on the AIM
and Alternext and the degree of over/underpricing?
What are other potential factors that influence the level of over/underpricing?
Interpretation of research outcomes::
What are the consequences of the data outcomes for the total cost of IPOs on AIM
and Alternext?
Do the research outcomes support or contradict the worldwide research of
Loughran et. al. (1994)?4
4Loughran, Ritter and Rydqvist, Pacific-Basin Finance Journal, vol. 2, p. 165-199, 1994, updated May 25, 2006
What recommendations should BDO Corporate Finance give its clients in going public on AIM or Alternext, when looking at under/overpricing on both stock exchanges?
Determine the amount of under/overpricing in IPOs on the AIM and Alternext from
01-01-2005 till 16-08-2006, in order to optimize the know-how of BDO Corporate Finance so that it can maximize its added value of advice for clients in favouring going public on AIM or Alternext.
In the next figure the path to the research objective will be shown:
Figure 1.2: The path to the research objective
1.3.4. Limiting conditions
De Leeuw (2003) describes two kinds of limiting conditions for doing research; limiting conditions regarding research content and regarding research process.
In this research there are limiting conditions. First, the end result has to comply with the general rules and prescriptions for scientific research and thesis’as set by the University of Groningen. Secondly, only 2005 and 2006 IPO data of the AIM and Alternext-Paris/Brussels is used (01-01-2005 till 16-08-2006). Because the Alternext was launched in may 2005 and its name recognition therefore is considerably lower then the AIM there have been substantially less IPOs on the Alternext than on the AIM. This somewhat limits the research.
Furthermore the following definition of an IPO is used; an IPO is a securities offering, in which an enterprise sells its stock publicly for the first time without having a prior price history5. Consequently, no secondary offerings (an offering of existing shares6) are included.
The only limiting condition about the process is that the research within BDO Corporate Finance has to be finished within six months.
1.4.
Conceptual model
A model is a certain view on reality. The term ‘conceptual’refers to the fact that some concepts and methods are used to model this view on reality7. The conceptual model, which
can be found on the next page, will provide a good image of the view or perspective a (potential) client has when deciding about going public and therefore can also be seen as the information process that BDO Corporate Finance uses when advising its clients in going public. It furthermore highlights the part of an IPO process that is analyzed in this research. This study begins at the point that the client is seriously interested in an IPO, so any decisions prior to the IPO process, such as the decision to chose between several types of
5Louko, P. , Initial Public Offerings and online IPO auctions, Thesis Swedish School of Economics and Business Administration, p. 1, 2006
6Geddes, R. , IPOs and Equity Offerings, p. 6-8, 2003
7Leeuw, A.C.J. de, Bedrijfskundig Management, Van Gorcum, p. 93, 2000
BDO CF wants more knowledge about IPO underpricing on AIM and Alternext Map all (dis)advantages of listing a company
Map all facts that influence the amount of underpricing Complete a thesis that contains all collected information
BDO CF has more knowledge about underpricing on IPOs which it can use in advising clients Collect and analyse data on underpricing on the AIM and Alternext BDO CF wants more
knowledge about IPO underpricing on AIM and Alternext Map all (dis)advantages of listing a company
Map all facts that influence the amount of underpricing Complete a thesis that contains all collected information
BDO CF has more knowledge about underpricing on IPOs which it can use in advising clients Collect and analyse data on underpricing on the AIM and Alternext
risk-bearing debt are not addressed. The theoretical framework for underpricing is given in Chapter 4.
Figure 1.3: Conceptual model - Aspects influencing the decision of going public on AIM & Alternext
The model has been build up in the following way; before going public all advantages and disadvantages of the decision to go public should be carefully weighted by a company. This is largely a cost-revenue matter as can be seen in a comprehensive overview in chapter three. When we look at the advantages of an IPO, three categories are defined; earnings of an IPO, the
liquidity of stocks and the credibility/name recognition. When we look at the disadvantages of an IPO
the following categories are defined; (listing) requirements, cost of being listed, costs of an IPO. These six categories can be split up in different subcategories. This research focuses on two of these subcategories, namely over- and underpricing on the first day of a listing. Because of this focus the main reasons for over- and underpricing are separately discussed and presented in chapter four.
Decision to go public Overpricing
Cheap capital
Number of shares traded
Frequency of shares traded
Employees
Suppliers
Customers
Management lock-in periods
Track record company
Minimum subscription
Providing annual/quarterly reports
Shareholder meetings/communication
Underwriting fee
Filing & registration fee
Cost of accountants
Cost of lawyers
Underpricing
Earnings of an IPO
Liquidity of stocks
Credibility/ name recognition
(Listing) requirements
Cost of being listed
Cost of an IPO Advantages of an IPO Disadvantages of an IPO Decision to go public Overpricing Cheap capital
Number of shares traded
Frequency of shares traded
Employees
Suppliers
Customers
Management lock-in periods
Track record company
Minimum subscription
Providing annual/quarterly reports
Shareholder meetings/communication
Underwriting fee
Filing & registration fee
Cost of accountants
Cost of lawyers
Underpricing
Earnings of an IPO
Liquidity of stocks
Credibility/ name recognition
(Listing) requirements
Cost of being listed
Cost of an IPO
Advantages of an IPO
Disadvantages of an IPO
= means an influence = means sub relation = focus of research = means an influence = means a sub relation = focus of research = means an influence = means sub relation = focus of research = means an influence = means a sub relation = focus of research
1.5.
Type of research
De Leeuw (2003) makes a difference between pure scientific and applied field research. Applied field research focuses on application, policy, action, decision-making and design. Scientific business research focuses on fundamental creation of theory. This research does not create new theory. It will use the insights that are commonly known throughout scientific literature about IPOs and apply these on a specific dataset so that it will give BDO Corporate Finance more know-how on underpricing on AIM and Alternext. In this way, the research tries to maximize the added value of advice on BDO Corporate Finance’s clients. Therefore it can be seen as an applied field research.
1.6.
Research methods
In this research the following method is being used:
Desk research; The researcher makes use of data that is already known and which is both
quantitatively and qualitatively analyzed. For instance statistics are being used to give more meaning on collected data and books and scientific articles are used to give a more qualitative meaning (Baarda & De Goede, 1998). In the points listed below a closer description of the methods is being given:
Books and scientific articles; These are used to get a clear view on academic literature about underpricing in IPOs.
Data; Bloomberg is used to collect the dataset for the IPOs on AIM and Alternext, furthermore the websites of the AIM and Alternext are used to verify data and Amadeus 250,000 is used for some additional data on the selected companies.
Workshops; In two workshops given by the University of Groningen, this thesis will be discussed with other students. Although workshops are not regarded as a scientific method for data collection, there might however arise some fruitful insight from these group discussions.
1.7.
Structure
In the following chapter of this paper the stock exchanges AIM and Alternext are introduced. This will be done in order to give a clear image of both stock exchanges and its advantages and disadvantages. In chapter three theory about IPOs and aspects concerning IPOs will be discussed, furthermore the process of an IPO on AIM and Alternext are being outlined. The fourth chapter will be used to discuss theory about the phenomenon of underpricing and to discuss the worldwide research for underpricing in IPOs in order to give a sound insight in levels of underpricing in IPOs on stock exchanges worldwide. Finally the data research and analysis will be presented in chapters five and six. Conclusions will be drawn in chapter seven.
Chapter 2: Alternative Investment Market (AIM) and Alternext
The AIM and the Alternext are stock exchanges for small- and midsize companies. The listing rules of these junior stock exchanges are less stringent then the main markets (e.g. FTSE/Euronext). These exchanges have been established specifically to provide a source of equity capital for junior growth companies and to serve as a an alternative to venture capital. Lately, institutional interest in small cap (i.e. capitalization) stocks has declined, mainly because of the difficulty in getting a stake that is significant in terms of the overall portfolio, the lack of liquidity in the aftermarket (the period after the IPO) and the effort to monitor relatively under-researched companies8. Both AIM and Alternext were partly founded in
reaction to this trend. In the preceding paragraphs both markets will be introduced. Furthermore a short overview of several IPO considerations on both markets is given in Appendix 1.
2.1.
AIM
The Alternative Investment Market (or AIM), was founded in 1995 by the London Stock Exchange and is a leading market for smaller, growing companies from all over the world. Since the launch over 2,500 companies have chosen to join AIM, thereby creating a unique community of innovative and entrepreneurial companies. AIM now has a total of more than 1,300 quoted companies, including over 200 non-UK, and a total market value of over £ 45 billion. AIM’s success is built on a simplified regulatory environment which has been specifically designed for the needs of smaller companies (that want to avoid IFRS). In 2005 the AIM accounted for 52% of the European IPOs in that year9.
On AIM you will find a wide range of companies from young, venture capital-backed businesses to more established businesses looking to expand. There are a number of reasons for listing AIM10
:
Raising capital to fund future organic growth;
Raising capital for a buy-and-build acquisitions strategy;
Function as a stepping stone to a ‘full listing’on the London Stock Exchange.
There are some important advantages of a listing on AIM:
Accessibility; Unlike most other markets, AIM does not stipulate minimum criteria in
relation to: company size, track-record, or a set number of shares to be in public hands. Instead, all prospective companies will need a nominated adviser (Nomad) who will ensure that they are suitable for AIM and ready to be admitted to a public market.
8
Geddes, R. , IPOs and Equity Offerings, p. 46-48, 2003 9IPO Watch Europe 2005, PriceWaterhouseCoopers 10AIM webbrochure, www.londonstockexchange.com
A simple admission process; The Nomad will coordinate the admission process and carry
out the extensive due diligence to ensure the company is suitable for AIM. Furthermore AIM has a simplified fast-track admission process for international companies that already meet the criteria of, for instance, Deutsche Börse, Euronext, NASDAQ or the NYSE. This is called the AIM Designated Markets Route.
Appropriate regulation for smaller companies; All AIM companies are required to disclose
details of their financial performance through scheduled interim and full year results announcements. In addition, the company will be required to make disclosures on an ongoing basis about other developments that might have an impact on the future performance of the company and/or its share price. However, in most cases, AIM companies are not required to produce further documentation when effecting acquisitions and disposals thus enabling the company to expand or change direction quickly and cost-effectively.
Tax breaks for investors in AIM companies; There are a range of tax breaks available for
investors in AIM companies. The same that are also available for investments in other non-listed risk bearing investments in the UK.
2.1.1. AIM listing requirements
One can find all the AIM listing rules in the PDF-document11: “AIM rules for companies”,
however some of the more general requirements for listing on the AIM are:
Being a reasonable-sized business and initial funding requirement of at least $10
million for an overseas business
A good track record or clear, exceptional business opportunity if the company has
no track record
A growth story that stands up to the dynamics of the industry sector A compelling reason to float and a good reason for floating on the AIM Appropriate management, systems and controls
High-quality asset backing Management lock-in periods
2.1.2. Trading system on AIM
In figure 2.1 one can find all the different UK trading services of the LSE. AIM uses three of these different platforms according to the liquidity of the security concerned, the SETS Market Maker, SEAQ and the SEATS Plus. In this paragraph some additional information will be provided, all figures are derived from the “Guide to Trading Services”of the London Stock Exchange12.
11“AIM rules for companies”, PDF-document on www.londonstockexchange.com 12“Guide to Trading Services”, Word-document on www.londonstockexchange.com
Figure 2.1: London Stock Exchange trading services summary
SETS Market maker (SETSmm)
The 100 most liquid AIM securities trade on SETSmm, the Stock Exchange Electronic Trading Service. The price formation of SETSmm centers around a central order book, with registered market makers entering committed principal orders to provide two-way prices during the mandatory trading period. The key features of SETSmm are:
Exclusive use of committed principal (CP) orders to enter two-way prices by
registered market makers, to maintain a minimum level of liquidity
Order book based dealing obligations for market makers, including mandatory
provision of CP orders and a maximum bid / offer spread regime
Figure 2.2: SETSmm 08:00* 07:50 PMMP 07:00 OPEN Market open
* Auction match starts subject to 60 second random ends and exte nsions
•Member Firm can enter trade reports from 07:15 • Order entry and deletion LO, IB, MO and CP only
SETSmm
Continuous trading 16:20 16:30 17:15 MP10/MP25 CCAL OBC 16:35*Closing prices disseminated
17:00 Closing auction CAUC Order management period STMM, SSMM SSMU, AMSM •Order entry and deletion
(LO, MO, IB, CP, AA, AB)
•Order entry and deletion LO, IB, MO and CP only • Order deletion only CLOS MTP1/2 MTP5/6 •No trade reports can be submitted • No order entry or deletion allowed Opening auction Order book close Close 08:00* 07:50 PMMP 07:00 OPEN Market open
* Auction match starts subject to 60 second random ends and exte nsions
•Member Firm can enter trade reports from 07:15 • Order entry and deletion LO, IB, MO and CP only
SETSmm
Continuous trading 16:20 16:30 17:15 MP10/MP25 CCAL OBC 16:35*Closing prices disseminated
17:00 Closing auction CAUC Order management period STMM, SSMM SSMU, AMSM •Order entry and deletion
(LO, MO, IB, CP, AA, AB)
•Order entry and deletion LO, IB, MO and CP only • Order deletion only CLOS MTP1/2 MTP5/6 •No trade reports can be submitted • No order entry or deletion allowed 08:00* 07:50 PMMP 07:00 OPEN Market open
* Auction match starts subject to 60 second random ends and exte nsions
•Member Firm can enter trade reports from 07:15 • Order entry and deletion LO, IB, MO and CP only
SETSmm
Continuous trading 16:20 16:30 17:15 MP10/MP25 CCAL OBC 16:35*Closing prices disseminated
17:00 Closing auction CAUC Order management period STMM, SSMM SSMU, AMSM •Order entry and deletion
(LO, MO, IB, CP, AA, AB)
•Order entry and deletion LO, IB, MO and CP only • Order deletion only CLOS MTP1/2 MTP5/6 •No trade reports can be submitted • No order entry or deletion allowed 08:00* 07:50 PMMP 07:00 OPEN Market open
* Auction match starts subject to 60 second random ends and exte nsions
•Member Firm can enter trade reports from 07:15 • Order entry and deletion LO, IB, MO and CP only
SETSmm
Continuous trading 16:20 16:30 17:15 MP10/MP25 CCAL OBC 16:35*Closing prices disseminated
17:00 Closing auction CAUC Order management period STMM, SSMM SSMU, AMSM •Order entry and deletion
(LO, MO, IB, CP, AA, AB)
•Order entry and deletion LO, IB, MO and CP only • Order deletion only CLOS MTP1/2 MTP5/6 08:00* 07:50 PMMP 07:00 OPEN Market open
* Auction match starts subject to 60 second random ends and exte nsions
•Member Firm can enter trade reports from 07:15 • Order entry and deletion LO, IB, MO and CP only
SETSmm
Continuous trading 16:20 16:30 17:15 MP10/MP25 CCAL OBC 16:35*Closing prices disseminated
17:00 Closing auction CAUC Order management period STMM, SSMM SSMU, AMSM •Order entry and deletion
(LO, MO, IB, CP, AA, AB)
•Order entry and deletion LO, IB, MO and CP only • Order deletion only CLOS 08:00* 07:50 PMMP 07:00 OPEN Market open
* Auction match starts subject to 60 second random ends and exte nsions
•Member Firm can enter trade reports from 07:15 • Order entry and deletion LO, IB, MO and CP only 08:00* 07:50 PMMP 07:00 OPEN Market open
* Auction match starts subject to 60 second random ends and exte nsions
•Member Firm can enter trade reports from 07:15 • Order entry and deletion LO, IB, MO and CP only
SETSmm
Continuous trading 16:20 16:30 17:15 MP10/MP25 CCAL OBC 16:35*Closing prices disseminated
17:00 Closing auction CAUC Order management period STMM, SSMM SSMU, AMSM •Order entry and deletion
(LO, MO, IB, CP, AA, AB)
•Order entry and deletion LO, IB, MO and CP only • Order deletion only CLOS MTP1/2 MTP5/6 •No trade reports can be submitted • No order entry or deletion allowed Opening auction Order book close Close SETS SETSmm SEAQ SEATS Plus Covered warrants Order book
Order book with Market Makers
Competing quotes
Quotes with Exposure Orders
Order book with Committed Principals
Most liquid securities incl. FTSE 100 Liquid FTSE 250
FTSE 250 securities not trading in SETS. ETF, some small cap & some leading
Irish securities
All other domestic securities (incl. AIM) with at least two market makers Domestic securities (incl. AIM) with less than two market makers
All covered warrants
L iq u id it y Trading Services
International Trading Structures Securities Traded
SETS SETSmm SEAQ SEATS Plus Covered warrants Order book
Order book with Market Makers
Competing quotes
Quotes with Exposure Orders
Order book with Committed Principals
Most liquid securities incl. FTSE 100 Liquid FTSE 250
FTSE 250 securities not trading in SETS. ETF, some small cap & some leading
Irish securities
All other domestic securities (incl. AIM) with at least two market makers Domestic securities (incl. AIM) with less than two market makers
All covered warrants
L iq u id it y L iq u id it y Trading Services
SEAQ
The Stock Exchange Automated Quotation (SEAQ) service is the official trading service for non-order book securities, which have at least two market makers trade on SEAQ. The key features are:
Continuous, buy and sell prices displayed by named, registered market makers
Registered market makers are obliged to deal at displayed prices not less than the normal
market size for the security when dealing with another market maker, and up to the quote size when executing a trade with a broker dealer acting in an agent capacity
It displays a number of market makers offering competing quotes Trade reporting and publication of all trades executed by member firms
The following figure illustrates the SEAQ trading day:
SEAQ
07:00 07:30 08:00 16:30 17:15
OPEN PMQP MQP EMQP CLOS
Market open
Pre-mandatory
quote period Mandatory quote period
End of mandatory quote period Close • No open market maker quotes • Member Firms can enter trade reports f rom 07:15 • Market maker quotes are indicativ e
• Market maker quotes are f irm • Market
maker quotes may be closed • Quote updates enabled
• All quotes that are still open will be automatically closed • No trade reports can be submitted
SEQ1; SEAQ; AIM; AIMI
Closing prices di sseminated
SEAQ
07:00 07:30 08:00 16:30 17:15
OPEN PMQP MQP EMQP CLOS
Market open
Pre-mandatory
quote period Mandatory quote period
End of mandatory quote period Close • No open market maker quotes • Member Firms can enter trade reports f rom 07:15 • Market maker quotes are indicativ e
• Market maker quotes are f irm • Market
maker quotes may be closed • Quote updates enabled
• All quotes that are still open will be automatically closed • No trade reports can be submitted
SEQ1; SEAQ; AIM; AIMI
Closing prices di sseminated
Figure 2.3: SEAQ
SEATS Plus
Finally any other securities with one or no market makers currently trade on SEATS Plus (Stock Exchange Alternative Trading System –SEATS), which is due to be replaced by a new platform from the middle of 2007. It is a hybrid trading service for less liquid domestic securities and smaller or growing companies.
This service offers enhanced execution capabilities of an order-driven service combined with guaranteed liquidity provided by a market maker (a maximum on 1 marker maker is allowed, otherwise the security is moved to SEAQ). Trades can be executed electronically or via the telephone with a registered market maker.
SEATS Plus
(Order-driven)SETN; SMKT; AIMN
07:00 07:30 08:00 16:30 17:15
OPEN OETY ODRH EODRH CLOS
M arket open
Order entry
allowed Order hitting allowed End of orderhitting Close
• Member Firm can enter trade reports f rom 07:15 • Only FE orders & quotes can be entered • No auto execution
• Order/quote entry and execution • Can be automatically executed or v ia telephone • Only period when hit order entry is allowed • HO orders can only execute against FE orders
• All quotes/ orders that are still open will be automatically closed • No trade reports can be submitted
SEATS Plus
(Order-driven & Quote-driven)SEAT; AIM1*; AIM2*
MQP
OPEN PMQP EMQP CLOS
• Only FE orders can be entered.
Closing prices di sseminated Close Market open Pre -mandatory quote
period Mandatory quote period
End of mandatory quote period
*Note: AIM1 and AIM2 segm ents follow SEAQ publication rules
SEATS Plus
(Order-driven)SETN; SMKT; AIMN
07:00 07:30 08:00 16:30 17:15
OPEN OETY ODRH EODRH CLOS
M arket open
Order entry
allowed Order hitting allowed End of orderhitting Close
• Member Firm can enter trade reports f rom 07:15 • Only FE orders & quotes can be entered • No auto execution
• Order/quote entry and execution • Can be automatically executed or v ia telephone • Only period when hit order entry is allowed • HO orders can only execute against FE orders
• All quotes/ orders that are still open will be automatically closed • No trade reports can be submitted
SEATS Plus
(Order-driven & Quote-driven)SEAT; AIM1*; AIM2*
MQP
OPEN PMQP EMQP CLOS
• Only FE orders can be entered.
Closing prices di sseminated Close Market open Pre -mandatory quote
period Mandatory quote period
End of mandatory quote period
*Note: AIM1 and AIM2 segm ents follow SEAQ publication rules
Figure 2.4: SEATS Plus trading day
2.2. Alternext
Alternext-Paris was launched by Euronext in May 2005 as a reaction to the overwhelming succes of the AIM. Alternext started in Paris but recently the first two companies have listed on Alternext-Brussels and while writing this paper the first Dutch IPOs are also on the agenda. On 7thJuly 2006 there were 49 companies listed on Paris, 2 on
Alternext-Brussels and still none on Alternext-Amsterdam.
The creation of Alternext is a sign that Euronext is also committed to helping small and midsized companies gain access to the stock market. Alternext is a key component of Euronext’s program for small and mid cap stocks, which began with the formation of a single list, Eurolist by Euronext, the introduction of a new range of special indices, and the creation of small and mid cap experts.
Alternext is a market that provides an innovative, customized solution for small and midsized companies seeking to finance growth and gain access to the financial markets of the Euro zone. Advantages of Alternext are the following13:
Tailor-made for small and mid caps; Alternext’s listing requirements and operating
methods have been tailored to the needs and aspirations of small and midsized companies, regardless of the sector in which they operate.
Meeting investor transparency requirements; Alternext gives investors new investment
opportunities, but furthermore it provides them with assurances in terms of regulation and transparency to ensure their protection and security.
Liquidity-enhancing trading mechanisms; Alternext uses a market model designed specially
to meet the needs of small and mid caps and to enhance liquidity.
2.2.1. Alternext listing requirements
The admission to listing is contingent on shares being in public hands. This can be achieved in two ways14:
a public offer subscribed for at least €2.5 million, or;
a private placement of at least €5 million, made in the two preceding years, with a
number of persons deemed to be sufficiently large in the light of the following conditions;
Issuers originating from another market must prove that their securities have been placed in public hands through their home market. Failing this, they must follow the public offer procedure.
Special conditions for public offers; A public offer is carried out through a proper authorized
investment service provider.
Special conditions for private placements; At least five persons, not including the ones listed below,
must, directly prior to the listing, hold securities:
1. managers, members of governing bodies, corporate officers, the chief executive, and their families (spouses and minor children), as well as any company in which such persons hold twenty per cent or more of the voting rights, whether jointly or severally
2. persons holding shares for more than two years preceding the listing, and their families (spouses and minor children) as well as any company or entity managed by such persons or in which they hold twenty per cent or more of the voting rights, whether jointly or severally
3. companies in the issuer's corporate group
4. any person bound by a shareholders’agreement or other accord that materially limits the disposal of said securities
5. any person having received a share-based payment exceeding a value of €100,000 or representing more than three per cent of the securities admitted to listing, all at the time of listing
2.2.2. Trading system on Alternext
Alternext’s aim is also offering a market model that can be adapted to different liquidity profiles. The model combines market making with central order book trading, on a continuous basis for the most liquid shares (at least 2,500 trades annually) and through call
auction for other shares. Investors can choose how their orders are to be executed. Prices and spreads are displayed in order to ensure transparent trading.
Market making
Market makers choose the shares they wish to quote
Market makers are then required to display indicative bid/ask spreads for a minimum
quantity of those shares
The mandatory minimum presence: from 9:00 to the end of the call auction (15:30) or the continuous trading session (17:30). The optional presence: from 7:15 to 9:00 and from the end of the call auction (15:30) or the continuous session (17:30) until 19:00
Central orderbook trading
Continuous quotation and trading daily from 9:00 to 17:30, with a pre-opening phase
on the orderbook from 7:15 to 9:00
Daily call auction at 15:30. Orders accumulate in the orderbook between 7:15 and
15:30 but are not traded
This dual method (auction and continuous quotation) makes it possible to establish a
reference price every day, even for shares not quoted by a market maker
In the next figure one can see how the Alternext, guarantees liquidity by its trading system.
Figure 2.5: Organization of a trading day15
2.3. Criticism on AIM and Alternext
Peter Paul de Vries, director of the Dutch Investors’Association, said in reaction on the green light that Alternext Amsterdam was given: “Euronext’s plan to set up an Alternext market in Amsterdam as well as in Paris and Brussels could provide a boost for Amsterdam. However, in order to protect investors, Euronext Amsterdam needs to make sure it pays close attention to the quality of the 15 www.euronext.com
companies it lists, just as Euronext Paris does.”Although forcing an open door here, the quality
of companies is a significant point of attention.
In the past there have been several initiatives for easy accessible markets. Besides the AIM they all were rather disappointing. In the Netherlands for instance, the Nmax tried to copy the NASDAQ in its goal to function as a stock exchange for high-growth (technology) companies. Because of the relatively low listing requirements and the internet bubble, it also attracted companies who were not supposed to be on a stock exchange. During the collapse of the internet-bubble, companies like Ring Rosa and Newconomy eventually went bankrupt. Nowadays only four companies are listed on Nmax. Other stories about young growth companies are quite similar, for instance the Neuer Market (founded in 1997) announced in 2002 that is was shutting down. Furthermore Easdaq and NASDAQ-Europe are also examples of failures. Both initiatives have ceased to exist. So, with the exception of NASDAQ and AIM, markets for small growth companies have consistently failed following market downturn16.
If Euronext succeeds in obtaining the investors confidence for Alternext, the stock exchange can also become a success story like AIM. However, obtaining this confidence will not be an easy job. Alternext Paris (as well as AIM) is an unregulated stock exchange were the listing requirements are marginal; companies do only have to exist two years and can neglect a lot of IFRS accounting standards. As the main guarantee AIM and Alternext use listing sponsors, which are experienced legal entities that guide a company through the first years of being public. For the Alternext for instance these listing sponsors must demonstrate the following experience17:
at least two years’of general activity in advising companies on capital structure,
industrial strategy and related issues, and providing services related to mergers and acquisitions;
successful completion, in the previous two years, of transactions in the equity of
issuers that involved the drafting of information documents
However companies like Newconomy and World Online also had such listing sponsors and their story is commonly known.
16
Ritter, J.R. , Differences between European and American IPO Markets, European Financial Management, Vol. 9, No. 4, 2003, p. 421
Chapter 3: Initial Public Offerings
Initial Public Offering (IPO) is a securities offering, in which an enterprise sells its stock publicly for the first time without having a prior price history18. An IPO is a major event in a
company’s history and represents a significant change in its public profile and investor base. The management is now responsible to a new group of dispersed shareholders, unlike the situation of concentrated ownership of a private company19.
IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded20. The IPO
process can be a catalyst for developing the companies’strategy more fully. It can also be seen as the final step in the financial development of a company.
There is a mythology of a general process of the capital requirement of an organization that can be found in figure 3.1 which was derived from Geddes (2003)21. It stipulates that the
process of capital requirement of a company, usually follows a certain path. In the beginning a company is self-financed and/or financed by friends and family. At a certain level of development, bank credit will be used to finance operations. If a company is growing rapidly, venture capital or institutional investors may solve capital needs for organizations. The final step to attract capital is an IPO.
Figure 3.1: Typical sources of new venture financing
In this chapter all the different aspects of an IPO are described. The advantages and disadvantages of an IPO will be discussed and the process of going public will be described. Furthermore the difference price-setting mechanism will be discussed in light of the AIM
18Louko, P. , Initial Public Offerings and online IPO auctions, (http://www.pafis.shh.fi/graduates/patlou02.pdf), 2006 19
Draho, J. , The IPO Decision: Why and how companies go public, p. 1, 2004 20www.investopedia.com
21Geddes, R. , IPOs and Equity Offerings, p. 8, 2003 Self-financed
Friends and family
Bank line credit
Later stage venture capital Bank long-term debt
Public markets
and Alternext, because several survey’s have proven that choosing for one of these methods influences the amount of underpricing.
3.1.
Advantages of IPOs
Gaining access to a large pool of relatively cheap capital is the most frequently cited reason why firms go public. According to Grinblatt & Titman (2002) there are a number of advantages of an IPO22. These advantages including an additional advantage will be
summarized23
:
Better access to capital markets; Organizations may be able to obtain (more) capital at
more attractive terms from the public market, then getting a bank loan.
Shareholders gain liquidity; An IPO creates a permanent market for companies’shares
and as such, owners of all shares will always be able to dispose of their holdings at a firm price.
Original owners can diversify; An IPO gives the current shareholders the opportunity to
diversify their portfolio. This can be reached by selling company stock and buying other companies’stock.
Monitoring and information are provided by external capital markets; Every day investors buy
and sell shares, thereby rendering their judgments about the firm’s prospects. Although the market isn’t infallible, it can be a useful reality check.
Enhances the firm’s credibility with customers, employees and suppliers; Listing the
organizations’stock on a national exchange may bring name recognition and increase the credibility with its customers, employees and suppliers.
Window of opportunity for the organizations; IPOs are observed frequently in some years
(hot issue period) and not in other years (cold issue period). Several empirical studies have suggested that organizations are better off going public during a hot issue period, because of the high valuations in these periods and thus a relatively large amount of capital which can be obtained. A good example of a hot issue period is the internet bubble.
3.2. Disadvantages of IPOs
It would be a mistake to presume that public equity is always superior to alternative financing options. There are a lot of circumstances in which bank loans or private equity are preferable substitutes for the public market. Grinblatt & Titman (2002) describe the following disadvantages of going public:
Expensive; There are a lot of direct costs attached to an IPO, one has to hire an
investment banker, lawyers and accountants.
22
Grinblatt, M. & Titman, S. , Financial Markets & Corporate Strategy, p. 80, New York, 2001 23Rozendal, J.H., “Nederlandse Small Caps - Size does matter”,p. 5-6, Thesis University of Groningen, 2005
The largest expense however, is the underwriting fee, which is about 11 percent of the amount of money raised24. Furthermore there exists an additional yet equally
important indirect cost of going public, namely the cost of underpricing. The price at which an investment banker sells the issue is usually some 10 to 15 percent (Loughran et. al. (1994) say about 17 percent) lower than the price of a stock in the secondary market shortly thereafter. Regardless of the reason for the underpricing of new issues, firms should add up the typical 10 to 15 percent to their costs of going public. Therefore the total costs of going public can exceed 25 percent of the amount raised in the IPO. An overview of all costs is given in figure 3.2.
Costs of dealing with shareholders; Public companies are required to provide information
to shareholders by quarterly and annual reports. They must hold shareholder meetings and communicate with institutional shareholders and financial analysts.
Information revealed to competitors; All the information that is provided to the
shareholders will be available to competitors also, which may damage a companies’ competitive position.
Public pressure; A public company may be pressured to do things that it would not do
otherwise.
Figure 3.2: Cost of raising equity capital25
3.3. The process and execution of an IPO
Before describing the process of going public on the AIM and Alternext, the general path of an IPO will be described. The essence of an IPO is nothing more than a sale of shares by the issuing organization. This simple characterization however, belies the complexity of
24Grinblatt, M. & Titman, S. , Financial Markets & Corporate Strategy, pp. 80, New York, 2001 25www.oxera.com
Cost at IPO Stage
Cost of equity capital
Ongoing costs Direct costs
•Underwriting fees •Professional fees •Initialising fees •Other direct IPO fees Indirect costs •IPO underpricing
Direct costs •Regulation, corporate governance, professional fees •Annual listing fees
Indirect costs •Trading costs Cost at IPO Stage
Cost of equity capital
Ongoing costs Direct costs
•Underwriting fees •Professional fees •Initialising fees •Other direct IPO fees Indirect costs •IPO underpricing
Direct costs •Regulation, corporate governance, professional fees •Annual listing fees
Indirect costs •Trading costs
conducting an IPO26. Before even considering becoming publicly listed, a company should
be well prepared. This is for two principal reasons. First of all, being publicly listed and executing an IPO attracts a substantial degree of thorough examination. Secondly, the ongoing obligations of a publicly listed company are such that a company must have the infrastructure in place to deal with them27.
Risks
On the first point, to execute an IPO, i.e. to attract a range of new investors at a suitable valuation, the company needs to ensure that any risks to the business such as outstanding liabilities, unresolved disputes, contract renewals etc. are effectively minimized as the company will be obliged to disclose such risks to potential investors. Clarity on material issues and visibility on financial performance are attributes investors value highly. As a publicly listed company, or merely as an IPO candidate, all aspects of the company’s business are constantly being thoroughly examined and the company must be prepared to deal with this.
Infrastructure
Second, the company needs to guarantee that it has adequate legal and accounting infrastructure to ensure it can fulfil its continuing obligations as a publicly listed company. Examples of these obligations include: regular and prompt financial reporting, managing relations with investors, and required legal disclosures (e.g. dealings by directors). Efforts should be made to ensure such infrastructure is in place ahead of an IPO.
Assuming a company is well prepared, i.e. all the necessary advisors are at one’s disposal and all the required permissions have been granted, an IPO process can be completed from start to finish in as little as three months.
Investment bank
The execution of an IPO is a well established process. Ahead of an IPO, the company will be expected to appoint an investment bank to manage the IPO, guarantee the proceeds (perform underwriting) and ultimately sell the shares available in the IPO.
The registration statement
Once the firm chooses an underwriter, it begins assembling the data required for the registration statement. This includes the audited financial statements and a complete description of the firm’s business: products, prospects, and possible risks (e.g. reliance on major customers or contracts and dependence on key personnel). The underwriter is legally responsible for ensuring that the registration statement discloses all material information about the firm.
Marketing the Issue
The underwriter is also responsible for forming the underwriting syndicate, marketing the stock, and allocating shares among syndicate members. Marketing the stock usually involves “road shows”in which the management of the company and underwriter explain and try to
26
Draho, J. , The IPO Decision: Why and how companies go public, p. 5, 2004 27Lazard B.V. , Schiphol Group Privatisation Options,
sell the IPO to institutional investors. These presentations not only enable investors to get a feel for management, but also, and equally important, they enable the underwriter to form an estimate of the demand for an issue. Although “expressions of interest”from potential buyers are nonbinding, they influence the offer price, number of shares, and allocations to particular investors.
Pricing the Issue
Once the registration statement has been approved by the legal authority, the process of going public can move into its final stage of pricing the issue, determining the number of shares to be sold, and distributing the shares to investors.
Price-setting mechanism
As part of this process the bank makes the choice for a price-setting mechanism, Draho (2004) categorizes these mechanisms into three main groups28:
1. Auctions (or tender or “offre a prix minimum”); In auctions investors submit limit orders
and then the auctioneer sets the price as a function of aggregate demand. Auctions, or tender, are the least common form of price setting, although they continue to be used occasionally in some markets.
2. Fixed price offer; Singapore, France and UK are countries were the fixed price offer method is used, whereby investors submit at the fixed price, and (possibly random) rationing rules are used to allocate the shares.
3. Book-building; Bookbuilding involves the submitting of (legally) non-binding bids or indications of interest by a relatively exclusive group of institutional investors. The book manager, in consultation with the issuing company, uses this crude approximation of the market demand curve to establish the price at which the share offering is sold and exercises considerable discretion in the allocation of shares29.
In table 3.1, derived from Draho (2004), the different types of IPO structures are classified for several countries, to provide some insights in the methods used in IPO’s worldwide:
28
Draho, J. , The IPO Decision: Why and how companies go public, pp. 5, 2004
29Wilhelm, W.J. , Bookbuilding, Auctions, and the Future of the IPO Process, Journal of Applied Corporate Finance, pp. 2, vol. 17, no. 1, 2005
Table 3.1: Types of offerings used in IPOs in selected markets
There are advocates of each of these mechanisms. However book-building is gaining popularity. Despite its criticisms book-building methods are now being used in most large institutional equity offerings30. Degeorge (2004) claims in his article that the book-building
procedure for selling initial public offerings to investors has captured significant market share from auction alternatives in recent years, despite significantly lower costs in both direct fees and initial underpricing when using the auction mechanism31. According to Draho
(2004) book-building is indeed becoming the dominant mechanism worldwide. One can imagine that this increasing popularity for the book-building practices reflects an expectation among issuing firms that this underwriting strategy will generate greater proceeds than existing alternatives, like the auction and fixed-price methods. Simply put, book-building is more efficient than alternative methods because it makes better use of information about market demand conditions32. Ljungqvist, Jenkinson and Wilhelm (2003) also stipulate that
book-building is becoming the dominant mechanism worldwide and now accounts for 80 percent of all IPOs outside the US and Canada.
Meanwhile, others have demonstrated that there are drawbacks to the book-building mechanism. For example Derrien & Womack (2003), in their survey using 1992-1998 data, find that the auction mechanism is associated with less underpricing and lower variance of underpricing. Furthermore, because of the 1999-2000 IPO-bubble and some other scandals regarding share allocations, some questions have risen about the book-building approach to IPOs (Jenkinson, 2005). For instance, in the U.S. the NYSE and NASD have called for an exploration of alternative IPO techniques33.
30Lee, P. , Don’t Blame Us - It’s the Markets, Euromoney –London- , 1995
31Degeorge, F. , Quid Pro Quo in IPOs: Why Book-building is Dominating Auctions, CEPR Discussion Paper No. 4462, p. 2, 2004
32Benveniste, L.M. & Wilhelm, W.J. , Initial Public Offerings: Going by the book, Journal of Applied Corporate Finance, vol. 10, p. 98, 1997
33
For example, the NYSE/NASD IPO Advisory Committee recommended that regulators review existing rules and practices in order to promote the development of alternatives to the book-building process.
Country Offer type
Book-building Fixed Price offer (underwritten)
Fixed Price offer
(best efforts) Auction
Australia X X Canada X X France X X X X Germany X X Hong Kong X Italy X X Japan X (1) Singapore X UK X X X(2) USA X X X
(1) Not used since book-building was permitted since 1997 (2) Rarely used
3.4. Steps toward listing on AIM from a foreign perspective
In this paragraph the path of going public will be described. While listing on the Alternative Investment Market seems to be simpler and less expensive then listing on the common stock exchanges, the process still requires careful planning and execution. Foreign companies preparing to list on the AIM need to follow the following steps34(for an extensive overview
see: www.londonstockexchange.com/aim):
Appoint advisor; only designated Nomads can introduce companies to the AIM, so
prospective AIM companies need to find the right partner to assess their suitability for the exchange and oversee the admission process. Companies also must appoint a reporting accountant, broker and lawyer;
Determine deal structure; some foreign companies listing on the AIM establish a U.K.
parent company to facilitate the process. However, being U.K.-based is not required;
Prepare required documentation; listing on the AIM requires an admission document,
around 100 pages of densely packed prose setting out every past en present fact about the company. It details the company, its market, historic performance, strategy and funding requirements. Required documentation also includes professional advisor reports (including financial and legal reports), a working capital review, an agreement detailing the Nomad’s responsibility to the company and a placing agreement that supports the issue of shares. The listing process typically takes three to four months and costs up to about €750,000.
Before crossing the pond
The opportunity to gain access to U.K. capital markets, enjoy more-relaxed regulation and heighten the corporate profile may sound attractive to midsized companies, but it’s not all a bed of roses. Going public on the AIM is, after all, going public. And being a public company carries important responsibilities. While AIM regulations carry a comparatively lighter touch, the rules do bear some similarities to Sarbanes Oxley (SOX) such as the requirement for boards to have independent directors. Even though it is not mandatory, most AIM companies look to comply with the requirement of the Combined Code on Corporate Governance35. It is likely that a foreign-based company will be required to appoint
at least one U.K.-based, non-executive director.
Furthermore, experts advise that foreign companies going public on the AIM should spend time in the United Kingdom, an action that carries some expense. First, directors should travel to meet potential advisors and sell the prospects of their companies to brokers and potential investors. Then, to help boost share price after going public, directors should make regular trips to the United Kingdom to meet with their Nomads and other advisors while touting their companies’potential value to current and potential investors.
For some midsized companies, the AIM may be a stepping stone to the main London Stock Exchange, the NASDAQ or other markets for larger companies. Some companies have multiple listings on the AIM and other markets. But for others, especially those with
34www.londonstockexchange.com/aim
relatively small capital needs, the AIM may provide all the profile and capital they need for the foreseeable future.
3.5. Steps toward listing on Alternext
For listing on the Alternext-Amsterdam, Brussels or Paris (the path is identical), the following steps have to be taken in order to go public:
Appoint a listing sponsor; the listing sponsor plays two main roles as the company’s
long-term partner:
helps and advises the applicant to prepare for an Alternext listing including preparing the prospectus or information memorandum;
supports and guides the issuer throughout its life as a listed company, reminding it of disclosure requirements (initially for at least a 2 year period). The listing sponsor makes a contractual commitment to Euronext to ensure that listed companies meet their disclosure requirements.
Submit the last two years financial statements; IFRS is not mandatory, but recognized
accounting standards do offer investor comfort and confidence;
Prepare required documentation; for the Alternext a prospectus is required.
In Appendix 2 you will find the process of an IPO on AIM and Alternext, in order to give a clear image of the steps taken in time.
