Listing on a stock exchange is not just the reserve of large corporations. While heavyweights like Naspers and British American Tobacco account for the lion’s share of market capitalisations on the Johannesburg Stock Exchange, the listed space is also occupied by a diverse range of companies of different sizes and sectors.
According to Melanie De Nysschen, Principal at Bravura, an independent investment banking firm specialising in corporate finance and structured solutions, listing on a stock exchange can stimulate the growth strategies of medium-sized companies. A listing provides an addition or potential alternative to relying on bank funding and could potentially release the company from onerous loan repayment commitments.
The enhancement of liquidity of the firm’s shares can open up a number of opportunities, for example, by using shares in place of cash as consideration for the acquisition of a potential target company. While this can also occur in the unlisted environment, a listed stock potentially bears more credibility, specifically where an investor’s mandate might prohibit unlisted investments. The Bidvest/Bidcorp and EOH groups are examples of businesses who utilised their listed shares in achieving exponential growth, through aggressive acquisition strategies. This is also the promise that the new Long4Life (the new Brian Joffe initiative) holds.
Melanie is part of the Corporate Finance team at Bravura and as a JSE Approved Executive, she has a primary focus on Capital Markets, Corporate Broking and JSE Sponsor Services. Bravura has advised on a wide range of JSE listings and international stock exchange listings. Melanie states: “In our experience, companies often seek to list on the stock exchange to raise capital for expansion into national or even international markets, or investing in new business ventures. Listing may enable an accessible route to pools of local, global and institutional investor capital available. “
Listing can also create a measurable and transparent valuation of the company, thereby enhancing credibility. Should a merger with another entity be considered, the listed price of the company could form the basis of a valuation. But companies must be cognisant of all the other factors that come with a public listing.
In many instances the listed share price is actually not reflective of the company’s true valuation, especially if there is low trading in the shares. A listed share price, for various reasons, may also disregard a sum of the parts valuation, reflecting a so-called “holding company discount”, one such example being JSE listed Naspers.
Preparing for an IPO (Initial Public Offering) requires total commitment on the part of the founder and management team and a clear awareness of how this will affect the entity to be listed. For the company’s owners, there will be a significant loss of autonomy in running the business. A board of directors must be appointed, comprising executive, non-executive and independent directors who will act as guardians and protectors of public shareholders’ interests. Stakeholders will now include other institutional investors and regulators that were probably not part of the business prior to listing.
Material business decisions must consider the interest of public shareholders, and will require shareholder approval. All business dealings between the listed company and related parties, including other companies controlled by the directors or material shareholders (and the associates of such persons), would similarly require shareholder approval and, in certain instances, the preparation of independent professional expert’s opinions reflecting on fairness. Shareholders of the company would also need to be mindful of the accumulation of shares in the firm, as there may be take-over implications.
Once listed, there is ongoing monetary, resource and time expenditure related to ensuring compliance with the various stock market regulations, especially in relation to accounting and disclosure requirements. This implies more management time, and the appointment of additional resources and advisers. Failure to adhere to reporting requirements can result in suspension and sanctioning by the stock exchange.
The Johannesburg Stock Exchange recently announced the requirement for mandatory compliance with the King IV corporate governance requirements by its listed companies. The King Code includes, amongst others, a requirement for integrated reporting in accordance with the International Framework released by the International Integrated Reporting Council in 2013. Given the requirement for all South African stock exchanges to annually report on their initiatives and plans to implement the recommendations of the King Code, is it likely that other stock exchanges will impose similar obligations on its listed companies.
Perhaps one of the key issues that firms must consider when listing, is the need to balance the increased pressure for short-term performance with long-term goals. Many shareholders are short-term and dividend focused. This makes it crucial that the firm’s strategy on these issues has been clearly verbalised at the time of listing, to ensure a supportive shareholder register and the avoidance of “forced” decision-making on the part of the board that may be driven by aggressive shareholder demands.
Particularly in the South African environment, external factors can have a profound impact on investor sentiment relating to a particular industry sector or listed entity as most recently illustrated on the release of the new Mining Charter. Investors generally are highly reactive to negative market conditions, and this can result in share price movement as a result of those market conditions rather than specific conditions relating to the firm. It is therefore clear that the decision to list, is not for the faint-hearted.