Someone asked me last week to explain the pros and cons of being a company on the Stock Exchange.
He runs a small business that started from scratch and wonders about the cost benefit analysis that should be undertaken by anyone considering a life in the public equity markets. Here’s a thumbnail sketch.
The stockmarket is a junction box that connects companies who want to use equity (shares) for funding with investors looking for credible corporates in which to invest.
Those of us who live within the stockmarket have a nasty habit of shrouding the business in high brow terminology that puts off a lot of business people.
An initial public offering is the transaction that places a company on the stock market for the first time. Rights issues are a way to sell shares to investors in exchange for cash.
PER is the share price of a company divided by the after tax profit per share. These terms are part of a tool box we use to join issuers (companies) with investors (pension funds, insurers, private investors).
Let’s assume you and I own a company making garden gnomes. Sales are €20m and after tax profits are €1m. The business is thriving and we want to spend €5m building a new factory, buying a distributor in the UK and putting a few bob in to marketing.
We can borrow from the bank, but being conservative types we decide instead to raise private equity capital. Issuing shares means we dilute our ownership of the business but we get finance which, unlike a loan, is not repayable.
Now we approach the stockmarket and find a broker who does some ground work. That includes a research report that examines the global gnome market and its growth potential. Then, we are introduced to the stockbroking sales desk who get to learn about us and our business.
They contact a range of potential investors and bring us out to meet them. This is known as a ‘roadshow’. After that some investors will say “no thanks, gnomes are not for us”. Otherswill inevitably be interested as all investors are constantly looking for business opportunities.
Next step is to price any share offer. Lets assume the global gnome sector trades on an average PER of 10x so that values our company at €10m.
We now raise fresh equity finance of €5m and those investors end up with 33% of our business.
You and I now have our chests puffed up as our company joins the stockmarket. The Financial Times wants to interview you about conquering the global gnome market. I’m speaking at conferences about our plans for gnomes with moving parts.
Forthwith, we have to abide by a set of rules that ensure we provide transparent information to the stockmarket and our investors. Interim and annual results must be posted, any acquisitions we complete have to be announced and detailed, and we have to commit to meeting investors at least every six months.
Some of these may want to buy more shares, others may want to sell, and entirely new shareholders are likely if our business plan unfolds as promised.
An orderly market develops in the shares of our business.
Not enough energy is being expended in explaining how the stockmarket, instead of being a virtual casino preoccupied with short-term greed, is in fact a live source of risk capital for companies that want to grow.
Even gnome producers can apply.
* Joe Gill is director of Corporate Broking with Goodbody Stockbrokers
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