View from City Road: Danger signals in prospectus

It was perhaps inevitable that the flood of new issues earlier this year would end in a number of high-profile disasters. The surprise is that McDonnell Information Systems should be among them.

McDonnell was one of the biggest flotations of the year, backed by a glittering array of top City names. Baring Brothers was its sponsor and Ian Hay- Davison its chairman. One fund manager who bought stock at the issue price of 260p (closing price last night, 112p) confesses that he did so only on the basis of the top-notch list of names attached to the prospectus.

More fool him. In retrospect it is easy to see the signals. MDIS suffered declining profits and sales in each of the three years prior to its flotation. Though management gave a plausible enough explanation, its insistence in the prospectus that the company was 'well placed to grow strongly' somehow lacked conviction. The statement that 'prospects in those markets which have been influenced by recession or uncertainty will in due course improve and give rise to future opportunities for increased sales', is about as woolly as they come.

If that were not bad enough, the 17 senior staff who invested in the company at the time of its buyout from McDonnell Douglas also cashed in half their shares. Their pounds 1m investment in the buyout, completed in March 1993, was worth pounds 21m at the time the company floated last March.

As the sixth recent flotation and second this week to send its share price plummeting with a profits warning, MDIS has fouled the water for new issues about as badly as is possible. As one disgruntled investor said yesterday, it defies belief that managements of companies floated so recently could have had no inkling of the problems they now face. If they did not, then you have to wonder about the quality of these people in the first place. Either way investors appear to have been fleeced. There is, presumably, no question of deceit - heaven forbid - but fund managers will none the less be taking a magnifying glass to the MDIS prospectus to find grounds for action.

6

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