Whatever the hype that accompanies new flotations, it’s worth considering that for every IPO success story there is a corresponding failure.
VEM’s Perry says that typically more than half of small company initial public offerings “bomb” in the first year after listing. This means that their share price falls, often quite dramatically, against a background where new investors were expecting a decent gain.
Like Myer, BrisConnections was viewed as a promising IPO, but the scepticism which greeted both infrastructure and property assets last year rebounded on investors, many of whom were highly geared and sustained huge losses.
The last financial year was particularly difficult for the meagre number of newly listed entities, with the share prices of more than half taking a battering in the downturn. The average loss was 29 per cent.
Going public tends to be the only avenue for early-stage biotech and high-tech companies, as well as small resources-based exploration companies. There simply isn’t capital available from any other source – it’s either go public or starve. “These companies float, knowing it’s not the ideal option but the only option,” says PwC’s Greg Keys.
There are other forms of listing – backdoor listing into an existing shell company or into an operating company. If it’s an operating, listed company, there could be synergies of a greater scale as well as cost savings. The shell company might have some defunct operations but to all intents and purposes be effectively empty and available for use.
Keys says one of the problems of merging or entering “via the backdoor” is that you might lose control by backing into another vehicle. “You’re also going to have to deal with existing difficult shareholders, but there is the advantage of instant scale and quick access to the market,” says Keys.
Private equity is another route to procure capital, but often the new parties may want an exit within two to five years from the point of investment. Of course, he says, there is also the merger route or a straight trade sale.
“There are ways to both sell out and sell down to a trade player,” Keys says.
