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Derek Pain: Survivor of the dot.com boom has put up a remarkable fight

No Pain, No Gain

Scotty, an audio and video communication and surveillance group, has been a bitter disappointment to shareholders. Its latest capital restructuring is unlikely to offer them any comfort.

Yet around the turn of the century it enjoyed a glamour rating. As Motion Media it was a leading performer in the dot.com madness that propelled the stock market to its highest-ever level. Unlike many it survived the boom and bust, but its shares are now a bedraggled shadow of their former selves.

Resource shares have for years enjoyed the dubious distinction of exhibiting an exceptionally high degree of volatility. But in the dot.com explosion the hi-tech sector produced an eruption of five-minute wonders, probably exceeding any past upheaval on the resources front.

Scotty, it could be argued, has done well to avoid the disasters that overwhelmed many of its peers. Nonetheless, the high cost of its survival has devastated shareholder value.

I first encountered the group in 1996. It held a reception at a Fleet Street pub to mark its share flotation. The main product was video telephones. The idea of viewing the person at the other end of the line as you talked with them was deemed revolutionary. A huge avalanche of orders was anticipated. It never arrived.

But Scotty's video technology has much to commend it. Video conference calls are increasingly popular and seem to have helped to keep the wheels of commerce turning while the Icelandic ash crisis kept airports closed.

Although the company has produced profits and announced a string of contract wins in recent years, its shares have wilted.

The latest capital reorganisation, announced last week, is by no means the first. The shares were floated at 67.5p. They did not take off immediately but at the height of the dot.com boom hit 290p. Shareholders who sold in the good times made a mint; those who displayed patience have, unlike the examples I discussed last week, caught a cold.

The first rejig saw the "heavyweight" shares split. Less than two years ago came another restructuring; this time it was a consolidation as 50 shares were packaged into one, with a 50p nominal value.

Last week's proposed change will reduce the 50p shares to 5p. After the announcement, the shares, which had bumped along in the low 20s and topped 150p just five years ago, slumped to 11p.

The group's yearly report illustrates why the stock market has lost faith. It would appear that Scotty, not for the first time, is planning to raise cash. In the past it has pulled in money by issuing shares, but it has yet to indulge in a rights issue. A 50p par value, with the share price in the doldrums, blocks any more cash-raising activity as shares cannot be issued at a discount to their nominal value.

The chairman, Lord Trafgarne, is at pains to point out that the number of shares each shareholder owns will be unchanged. Their rights and entitlements will be unaffected.

My guess is that Scotty will attempt a rights issue if shareholders approve the reorganisation. But it must be hoping its shares settle down at somewhere near the current price. As I write they are 15.5p, allowing it to offer rights shares (or, perhaps, indulge in a placing) at around 10p.

There is much to be said for Scotty's products. In this age of international tension there is obviously a demand for its sophisticated range of equipment. But government debt problems have reduced the flow of orders. Delays in signing contracts are putting "demands on our cash resources", admits Lord Trafgarne.

The group is a classic example of a small company offering equipment which costs an arm and a leg to develop. It needs a steady stream of orders. There is no doubt that it is in the forefront of the development of civilian and military communication and surveillance equipment. But such products require deep pockets. And its rivals, often major companies, can devote more plentiful resources.

Too often, the group has flattered only to deceive. It has, however, put up a remarkable fight and there must be a good chance that when economic conditions improve its day will come. In the meantime shareholders could face a long wait.