Floating a company on the stock market involves selling a percentage of your company in the form of shares to stock market investors. These could be institutional investors or private investors/ individuals.
In the UK, there is a choice of stock markets, each with their own characteristics and design to meet the needs of different types of companies. At the larger end is The London Stock Exchange’s Main Market which is generally populated by larger companies. The Main Market is also home to the top 100 largest companies known as the FTSE 100.
The UK is regarded globally as operating well regulated and transparent stock markets, which cater for the needs of not only UK companies, but also those based overseas. London is home to all the major stock markets in the UK, and remains one of the largest and most vibrant financial centres in the world. London is also home to some of the deepest pools of investment capital in the world, making it a natural destination for the Directors and owners of companies who are considering floating.
Choosing whether to float a company is one of the most important business decisions that the Directors and owners of a company will make, and whilst there are significant benefits in floating a company there are also some drawbacks.
Your company and your shareholders will have unique aspirations, and long term objectives, which mean that the decision to float on the stock market must be based entirely on what is right for your particular circumstances and those of your shareholders.
In order to weigh up the benefits and drawbacks of stock market flotation for a company it is essential to undertake a feasibility exercise first, before making any decisions. A flotation feasibility study may be undertaken by your company, if you have the financial and stock market expertise in house. Alternatively, Holland Bendelow can undertake a study on your behalf.
The Harvard Business School undertook a ten year study into the factors that affected the success of newly floated companies. Over 2500 senior executives were researched and asked to rate the success of their company’s flotation. The results were compared with objective performance reviews for a three year period following the initial flotation.
The key finding of this comprehensive research was that floating a company successfully required a carefully planned pre–float preparation stage, and that this may be crucial to the success of a stock market listing. Perhaps unsurprisingly, the most successful companies reviewed in the study were those that prepared well in advance of the flotation.
Importantly, the research also showed that a number of non-financial factors had a bearing on the success of floating a company. Many of the companies that had been most successful once floated had taken time to strengthen their senior management teams prior to the flotation, and had a record of retention of key staff, often through share-based incentive schemes.
Existing shares in the company are admitted to trading on a stock market such as AIM, but no new shares are issued to stock market investors in the company. This method of floating a company is often suitable if the company has no short-term need to raise funds or extend the company’s existing share ownership more widely. Floating a company via an introduction is likely to be the most cost-effective method for a company to float on a stock market.
The company will issue new shares to a small group of stock market investors; usually these will be institutional investors. This will be undertaken by a Broker prior to the company being admitted to trading on a particular stock market. Floating a company by way of a stock market placing will enable the company to have greater discretion over the number and the nature of who the company’s new shareholders are. A placing also provides a company with the opportunity to raise capital through the flotation at relatively low cost. Floating a company via a placing is likely to be less time consuming and less onerous than undertaking an IPO (Initial Public Offering).
An IPO describes a flotation in which shares in the company will be offered to the public, thereby attracting a wide range of shareholders. Because of regulatory requirements, IPOs tend to be the most expensive method of floating a company and therefore this method of flotation is more common for larger companies raising significant amounts of investment capital and seeking a broader shareholder base.
For some privately owned companies, using a cash shell can provide a less risky route to joining the public markets than the more conventional listing and fundraising. Companies are often attracted to floating via a reverse transaction into a cash shell as there is a transparent amount of cash on the balance sheet of the shell company ready to invest in the right company.
The process of floating a company provides companies with the opportunity to attract external investors from across a spectrum of the investment community. The size of a company, and which stock market the company is floated on, will largely dictate the most appropriate balance of a company’s shareholder base. Often company brokers will look to bring in a mixture of institutional shareholders, retail shareholders (individuals) and, in some cases, venture capital trusts (if the company meets certain criteria).
Stock market investors are looking for a balance of risk and reward for any sum they choose to invest. It’s helpful for a company to have a simple yet strong story about their business, its products and services on which investors may base their investment decision.
During the process of floating a company it will be the directors of the company and its advisors that will decide what proportion of the company’s shares to sell. This may be influenced by the size of the fundraising required and the valuation of the business. Other factors too may influence this decision, such as whether to pay off existing shareholders, including venture capitalists, or bank debt.