Finance: It's a private matter

The idea of becoming a plc no longer seems quite so attractive. And many publicly quoted companies are retreating into private hands.
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The Independent Culture
Time was when it seemed that just about every business was set on becoming a public company. After all, floating a business often makes its founder rich beyond most people's dreams. However, the notion does not seem to be as attractive as it once was. Research published last week shows an explosion in the number of publicly quoted companies that are retreating into private hands.

It is not the first time this sort of thing has happened. Back in 1989 there was a near-doubling in the number of public-to-private transactions in the UK. Accordingly, the more cynically minded might view this as the sort of free spending that is typical at the end of rising markets.

But those involved in funding the deals say this is different. Tom Lamb, managing director UK of Barclays Private Equity, which, with the accountants Deloitte & Touche, sponsored the study by the Centre of Management Buy- out Research at Nottingham University's business school, says there has been a much more dramatic increase in the number of deals - 29 last year, compared with just seven in 1997, while in 1989 there were 13, compared with seven the previous year.

Moreover, the value of the deals is lower. Many transactions in the late Eighties were completed after hostile bid battles involving outside managers. This time, only seven of the situations involved companies valued at more than pounds 100m.

It is this that leads Mr Lamb and Chris Ward, head of private equity at Deloitte's corporate finance business, to conclude that the level of activity is down to the particular plight of smaller quoted companies.

The division of the stock market into high-flying telecommunications and other hi-tech stocks, and the remainder of the market, is familiar to most observers. But there is another split - between larger public companies and the rest.

As a result, what are known as "small cap" companies are likely to be ignored by investors. Though they may be performing well in trading terms, this lack of interest in their stock tends to lead to underperformance in the share price, which in turn leads to a vicious circle, whereby the underperformance of the shares puts off would-be investors.

Nor does the issue have only a domestic dimension. Mr Lamb sees signs of institutional investors looking at stock markets on a pan-European basis and raising the level at which they begin to invest.

As a result, institutional investors are becoming less sceptical of management motives in such deals, and are welcoming buy-outs and similar transactions as a way of getting out of "illiquid", or little-traded, shareholdings at a premium.

At the same time, founders of businesses are becoming more sophisticated. Whereas previously they might have aimed at floating the company merely to see the letters "plc" after its name, now they are more likely to assess what it is they seek to gain. With other means of raising finance more available than before, going public without a plan can lead to managers of such businesses into a cul-de-sac, argues Mr Lamb.

But it is not all good news. The venture capitalists who back such deals will have to work harder if they are to achieve the "exits" by which they make their profits.

Since such indifference to smaller companies is likely to continue, they are unlikely to be able to produce quick returns to the stock market. Instead, Mr Ward expects there to be a trend towards selling such businesses to other companies, or acquisitions and restructurings aimed at making the entities larger before attempting a return to the market.