Shares on the Frankfurt stock exchange
European exchanges are opening back up for riskier ventures, and experts expect the trend to continue. But trade-sales should still dominate, says Mary Lisbeth D'Amico.
CMR Fuel Cells chose late December to take the plunge. The spin-out of UK technology consultancy Generics Group, which makes fuel cells for use in battery chargers, auxiliary power units, laptops and portable military applications, launched an IPO on AIM, raising £10.3 million (€14.9 million). Priced at 176 pence (€1.1) a share, the deal valued the company at about £35.7 million (€51.9) - more than £2 million (€2.9 million) than expected due to investor interest, according to Generics, and the shares were up roughly 9% at the start of the year.
Older and wiser on AIM
Lombard Medical Technologies, which launched an IPO in December raising £26.2 million, is actually on its second run of the AIM markets. But it returns to the market somewhat better equipped to face investor demands, and is thus perhaps a good representative of a new, more mature breed of "high-risk" company that investors can appreciate.
The Didcot, UK company, which makes devices to address cardiovascular ailments, first launched on AIM in October 2000, only to delist in 2003. "The company listed too early and didn’t have sufficient funds to carry it through", notes Lombard CFO Tim Hall, who recently joined the company. When the dot-com bubble burst, the company’s shares plummeted. In June 2003 it was taken private by financial investors.
In 2005, Lombard began marketing its first product, Aorfix, a stent graft to repair abdominal aortic aneurysms, a condition the company says is the 13th leading cause of death in the US. Aorfix is expected to bring the company revenues in the millions of pounds in 2006, Hall says.
In addition, Lombard also recently struck a deal with Boston Scientific which gives the company an option to distribute Lombard’s products. "This was a strong selling point for the IPO, because it validates our product in the eyes of investors," says Hall.
Boston Scientific also put $3 million into the company as part of the recent IPO. On that basis, other investors received Lombard's new offering favourably. Hall says the company was presented to about 45 institutional investors, of which about half subscribed to the IPO. Launched at a price of 159 pence per share, the company's shares currently hover at around 161 pence per share.
The funds will be put towards financing the cost of US trials of Aorfix, and should bring it through to profitability, according to Hall. Lombard also briefly considered NASDAQ, but decided the cost of compliance was too high. "There's enough money to be found in Europe," says Hall.
One drawback, however, is the lack of trading liquidity in the company's shares, which Hall says could make the company consider a full listing on the London Stock Exchange some time in the future, although for now there are no concrete plans. According to AIM market data, share trading on individual days for Lombard has ranged from a high of 159,000 shares down to only several thousand shares, or even zero on some days.
Other recent deals have included cardiovascular device maker Lombard Medical Technologies, which raised £26.3 million (€38.2 million) on AIM at year’s end to finance US trials of its Aorfix product and Exonhit Therapeutics in November, which raised €6.5 million on the small and mid-cap market Alternext in Paris.
Next to go on AIM: Amteus, a Leeds, UK maker of secure collaboration software plans to launch early this year, as does NovaBiotics, an Aberdeen, Scotland-based firm developing two anti-infection drugs.
"We're going to see quite a bit of biotech in 2006," predicts Patrick Robb at Investec, a corporate broker that has helped bring 10 companies public on Aim over the past 18 months.
Although the volumes are not great, investors in Europe are indeed showing a returned appetite for smaller, riskier ventures, allowing selected biotech, alternative energy, and even the occasional high-tech company to venture into the markets - in some countries such as Germany, for the first time in several years. Experts expect that to continue in 2006, barring any unforeseen events.
"The appetite towards year-end was good, as we saw a series of issues that were priced at reasonable levels," says Chris Redhead, biotech analyst with Code Securities in London, which underwrote two biotech deals on AIM in the last quarter of the year. "As long as there is no major glitch in the market, I think we’ll see continue to see good acceptance of high-quality issues."
Less regulated markets thrive
Working in favour of more such deals is growing investor interest in European exchanges, in particular non EU regulated markets such as AIM and Euronext and even the tiny Luxembourg stock market, according to Tom Troubridge, head of the capital markets group at PricewaterhouseCoopers in London.
"Investors are less worried about investing in more lightly regulated markets than they were a few years ago and are willing to take the risk," believes Troubridge.
AIM and other European stock markets are also benefiting from the fact that small and mid-cap companies worldwide currently seem to prefer European stock markets over NASDAQ. "What's happened in the last 18 months is that companies worldwide are either looking to London or to a domestic exchange, rather than the NASDAQ," Troubridge adds.
It is no secret that the restrictions of Sarbanes-Oxley Act passed in 2002 in the US are discouraging a number of companies from tapping the NASDAQ. (See Science Business, 8 December, Is AIM a viable alternative?) Preliminary PwC data indicate that overall, more money was raised in Europe last year via IPOs than in the US. In Europe some €49 billion euros were raised, compared with only 20 billion raised at the end of the third quarter in the US. (Fourth quarter figures are to be launched next week.) "The US won’t catch up to that," says Troubridge.
The increased international interest is in particular feeding the growth of AIM.
AIM had a banner year in 2005, admitting 500 new companies, 112 of which were non-UK issuers. They raised more than £5.2 billion, compared with £2.3 billion in 2004, an increase of around 45 per cent.
In particular, AIM has benefited from tax benefits that the UK government offers investors in venture capital trusts, and the return to the market of large institutional investors. "There is a large volume of money looking for a home," says Patrick Robb at Investec.
But other exchanges also grew. Euronext saw the number of IPOs on exchanges in Paris, Brussels, Amsterdam and Lisbon increase last year to 78 issues from 52 the previous year, raising a total of €17.23 billion, up from €9.4 billion in 2004 - although much of the volume came from large privatisations, so it cannot be directly compared with AIM. Its Alternext market for small and mid-caps, launched last year, is too new to fairly compare it to AIM.
New sources of funding
Clearly, high-growth companies are finding a new source of funding in such markets, where there is a far lower barrier to entry than on regulated exchanges.
"Before we had to rely on VC financing for the C-round, and those rounds were made on less attractive terms. AIM has provided us with a different method for financing new technology ventures," says Martin Frost, managing director of Cambridge-based Generics Group Ltd.
Based on the good performance of AIM companies, he says, "institutions are now prepared to take bigger risks than previously in return for a bigger return." Frost expects more of its companies to tap AIM this year, such as Sphere Medical, a joint venture between Generics Group and Siemens that makes chip-based microsensors for use in intensive care medicine.
Smaller companies are also attracted to going public because they can currently get a better deal. "Companies are finding that exchange investors are valuing them more highly than venture capital firms would," notes Philippe Herbert, managing partner with Banexi Ventures, an early-stage VC, in Paris.
Whether IPOs should be occurring as a kind of third round is debatable. "You have to ask yourself, what [public] investors know that we don't," quips Christian Claussen, with TVM in Munich. He notes that many such deals are very thinly traded, which makes them little more than a private placement. But as one VC put it: "These deals make everybody happy: VCs don't have to take a risk, and the company has a success story."
Even the most optimistic players, however, concede that the market will need self-discipline to keep from spoiling investors mood with a high-profile disaster. "AIM is essentially unregulated. If we have something happen akin to the REFCO disaster (the commodities trading firm that recently imploded) that could have repercussions for the market," says Frost.
Good deals getting done
For now, however, investors appear to be separating the wheat from the chaff, with some deals not making it out of the gate. Last year for example, biotech companies Renovo Ltd and EpiTan Ltd had to cancel their plans to issue on AIM owing to lack of investor interest.
Luckier companies will continue to take advantage of the window,such as Lombard with its year-end deal (see box) and the upcoming Amteus deal.
In Germany, investors are still more cautious, although a trickle of IPOs have begun to emerge after a long drought. On the biotech front, Biofrontera, a company that focuses on dermatology products, said it would launch on the Frankfurt Stock Exchange in the first quarter. Other recent IPOs in Germany have included Interhyp, a financial services company, and solar energy company ErSol.
Trade sales still rule
But although chances may be improving for mature biotech companies, Christian Claussen, general partner with TVM’s IT group in Munich, doesn’t believe that IPOs are going to be a big option for German ICT companies in 2006.
"German investors are now prepared to invest in solid companies with a clear story. But I think complex technology-based companies are currently better sold to strategic investors," he notes, pointing to the sale last year of TVM portfolio company Neolinea for $100 million to Cadence of the US. "This filled a gap that they were looking for," he notes.
Nor does Claussen believe that foreign markets such as AIM will be attractive exits for his portfolio companies, due to the low average market capitalisation of the deals and their lack of liquidity. "For us, an IPO only becomes interesting for companies with a market capitalisation of €100 million," he notes.
Indeed, VCs still expect trade sales to dominate their exit activity in 2006. A recent report by Israeli investment bank Leap Capital showed, for example, that although up to five Israeli technology companies were launched on AIM last year, the main method of sale was still acquisition by strategic partners such as Cisco, eBay, HP and Juniper. Israeli Technology companies raised $12.1 billion last year through M&A activity, according to Leap.
A return of investor enthusiasm for public markets is a good thing for small technology companies, but more as a sentiment indicator, as most activity will still come from mergers and acquisitions.
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