You have a great little company that needs a cash injection to realise its potential. Listing on the sharemarket could be the answer.
KEY POINTS:
Had you ever heard of 42 Below before the company listed on the NZSX in 2003?
Probably not, unless you are a vodka connoisseur. Many people seem to assume a company has to be a certain size before it can be listed on the stock exchange. One of the main reasons companies go for a listing is that they have a great idea, but need more cash to fulfil their potential. They may still be quite small.
Drink' company, 42 Below had never made a profit but it was still embraced by stockmarket investors and raised $15.5 million in Initial Public Offer (IPO) funds. Its plan: to explore more international
markets.
"In most cases, the companies want to expand and need capital," says Damas Potoi, NZX's market products manager.
Banks may not want to lend those companies any more money because they
don't have the required assets. Geoff Ross , 42 Below boss, preferred to take the public listing route rather than bringing in a big angel investor.
"Listing was the most effective option because it solved our need to raise capital but without the intrusion of private investors wanting a big stake in 42 Below's product culture and business," he says.
Another reason to go for an IPO is to realise the value of the company.
"The vendors are realising the value for their hard work," says Potoi.
"A stockmarket listing can also be an opportunity for people who like and know your company to feel closer to you. The Pumpkin Patch listing introduced a lot of new investors to the stock market, working mothers for instance.
More companies are being tempted to go public so they can provide employee share incentive schemes. BT Investment Management which listed in Australia last December said in its prospectus:
"The primary purpose of the Offer is to seek to enhance investment performance and growth in the business by reducingemployee turnover and aligning the interests of shareholders, clients, investment managers and other employees. This will be achieved by offering employees direct equity participation in BTIM to attract and retain high calibre professionals."
It's all in the brand
A public listing can help a company's profile and brand leverage. This can be a key driver for successful companies who don't feel their product has the public awareness that it should.
"If you've got an appetite for fame, or your company could benefit from brand awareness and publicity, then you should consider becoming NZX Listed," says the NZX.
Potoi says the day of public listing is a huge PR opportunity and 42 Below certainly found this to be the case.
"It probably would not have been picked up by Bacardi if it hadn't been listed. It gave the company legitimacy overseas."
The cost of listing
It is not cheap to raise equity through a stockmarket listing but it can be worth the investment. In 2004 the Initial Public Offering costs as a percentage of funds
raised ranged between 2.7 per cent and 8.8 per cent with an average of 5.5 per cent. This compares with the median cost in Australia of 7.8 per cent. The costs are spread among various advisers - accountants, marketing and PR, management consulting, NZX fees and exchange registry fees.
The IPO will not be a company's only opportunity to bring in some money. They can raise cash through future secondary capital raising options. This can be done in various ways: including new issues of shares to existing shareholders, placements or subsequent public offerings. This will raise additional capital and expand the shareholder base.
No pain no gain
For those considering listing there is hard work in the lead up to the IPO. Public companies have to abide by stringent rules of corporate governance and need to provide regular financial information to shareholders. They have to have a board of directors and accounts have to be published every six months. There is an upside to this - it means customers, suppliers and potential employees all feel more comfortable about your company.
The backdoor listing
This is the takeover of a non-listed company by a listed entity with no
operating assets and is undoubtedly a cheaper way of listing. You don't have to publishing a costly prospectus. Also, you have access to the shell company's shareholders. The doomed real estate company, The Joneses, was attempting to reverse into the NZX-listed RLV No 3.
But Brian Gaynor, NZ Herald columnist and executive director of Milford Asset Management says many backdoor listings have a dreadful record of survival.
Many of the more "infamous" companies in New Zealand took this route and have not survived. There are currently 23 backdoor listed companies on the NZX.
Successful examples have been Hellaby Holdings and CDL Investments.
The private equity alternative
The NZX has had some hot competition for listing fast growing companies and this is from wealthy private equity parties, many of whom are coming from Australia.
"Increasingly we are seeing private equity sell to private equity," says Potoi. In the past, private equity's exit strategy was a listing, but if it's a good company with strong growth prospects, the private equity investors are lining up.
This happened with successful New Zealand multichannel catalogue business, EziBuy. When Direct Capital wanted to sell its minority stake in the company early 2007, EziBuy selected from a string of contenders, and decided on experienced retail players Catalyst Investment.
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Family success story
Rakon, a world leader in the development of high performance frequency control technology based on quartz crystals, which lie at the heart of all electronic products, was an example of a family company wanting to realise some of its value.
It raised $65 million at the listing - $55 million of that went to the vendor, the Robinson family and the rest went to the company to fund growth.
Despite employing 500 people and supplying many of the world's top Fortune 500 companies, very little was known about Rakon by the average Kiwi pre-listing.
Before choosing the NZX market, Rakon's lead manager UBS investigated private equity and listings on overseas bourses such as the London Alternative Investment Market (AIM) and the Nasdaq in the US, but Rakon liked the size of the NZX market and it also meant the company was kept in New Zealand and Rakon employees could easily become shareholders.
Despite some recent correction to the company's stock due to lowered forecasts, Rakon has been a slightly volatile success story, at one point, its market valuation was four times the size it first listed in 2006.
