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Fast movers want to go to America

Neil Baker finds that the City is ill serving technology firms
Dr Tim Cooke was popping the champagne corks when his company, Intelligent Environments, floated on London's one-year-old Alternative Investment Market last week. But, like many high technology bosses, he would rather be celebrating a debut on the 25-year veteran for promoting fast-growing companies: New York's Nasdaq exchange.

"We talked to a lot of brokers in the US but they said that we are still too small for Nasdaq," says Cooke. "But it is still an option for the future."

The fact is that most technology companies still see Nasdaq as their natural home. Why don't they feel at home in London? Easy. Higher valuations in New York, better expertise among brokers and greater liquidity than on this side of the Atlantic.

"When an entrepreneur takes his company public, he wants to feel that people understand it," says analyst Keith Woolcock ofbroker Merrill Lynch. "It's hard to get that comprehension without some degree of specialisation and we haven't got it in the London market. It's a tragedy that we haven't got a Nasdaq-type structure - some place you can go where there are other technology companies. It's a lost investment opportunity.

"We need to raise our understanding so that valuations are more realistic - whether that means valuing stocks upwards or downwards. We need to increase our expertise in analysing technology. In America you have far more specialisation: people spend their whole lives looking at disk drive manufacturers. Because we don't have that wealth of companies, people have had to generalise."

Nasdaq was founded in 1971 and lists more than 5,000 firms, valued at $1.2 trillion at the end of 1995. UK firms quoted there include the highly successful Madge Networks, based in a Buckinghamshire farmhouse and run by Robert Madge, one of the UK's richest men with a fortune of some pounds 400m.

Scottish faulty chip repairer Memory Corporation, which was once AIM's biggest firm, illustrates the perils for hi-tech firms in the fledgling market. Its shares have slumped from a sky-high US-style rating this year after a string of product delays, though it insists it has a viable product. Brokers blame the company's disappointing performance to date for the collapse but admit lack of understanding is a major factor following the initial hype in the market. Its private Newcastle-based rival is now looking at Nasdaq as its first port of call.

Patrick Spencer, head of international sales at the new London office of California brokers Hambrecht & Quist, says there is still a steep learning curve. "A lot of UK and European investors have ignored technology companies," he says. "There hasn't hitherto been the interest, the money or the education to invest, but that will change."

Spencer believes this change will come when the new European rival to Nasdaq, imaginatively called Easdaq, opens later this year. The European Association of Securities Dealers Automated Quotation system is designed to cater primarily for European high-growth companies. As the brainchild of the European venture capital industry, it is aimed at companies with large profit potential.

Hambrecht & Quist, along with other US brokers, has revamped European operations ahead of the Easdaq launch because it anticipates a lot of interest from US investors. But it remains to be seen whether companies which have already left Europe can be enticed back.

"The biggest computer networking market in the world is the US and more importantly the technology stocks are predominantly on Nasdaq ... so that is the place for us to be," says Madge Networks' Michael Beadsmoore.

Madge floated on Nasdaq in 1993 because it had difficulty finding funding in the UK. The company now employs 2,100 worldwide and had sales of $427m last year. "It was easier to raise the money and get interest in the US," says Beadsmoore. "It was the natural thing to do."

One of the biggest problems is the way companies on the London Stock Exchange are classified, saysWoolcock. "Is it really sensible to have companies like Azlan and Ideal Hardware, distributors of hi-tech products, compared to motor distributors like Cowie?

"American fund managers find it curious to see software companies in the same sub-sector as BET, Rentokil, Sketchley, Chubb Security and ADT. The politest thing you can say about it is that it is slightly eccentric."

According to Ben Tompkins, a principal with information technology merger specialists Broadview Associates, the AIM market has been partly successful so far for hi-tech firms because at least it has given them a way to raise money. But what it has not given is liquidity.

"European technology companies looking for investment still get sold, rather than float," he explains. According to research from Broadview, a fifth of those buyers come from the US.

Tompkins cites Leeds-based software house BACG. It had a turnover of pounds 24m last year, is expecting pounds 36m this year and includes Somerfield, Gateway and K-Mart as clients. It wanted to raise pounds 10m to expand and turned to a US investor, EM Warburg Pincus. It came up with $35m - the largest single investment in an IT company in Europe, according to Broadview. The company's advisers say it is too early to float now, but when it's ready it will be going to Nasdaq.

But at the end of the day, despite the drawbacks, Cooke of Intelligent Environments is still happy to be on AIM. "I think it is a matter of how you tell the story," he says. "For some investors it goes over their heads but we have had a good reception."