Owners don't float their companies when the market is looking cheap.
We all know how hard it is to make predictions, especially about the future. But we all try to predict the stock market to some degree, even if it's just "I expect it'll be quite a bit higher in 20 years".
There are always plenty of pundits out there telling us the market is heading up, or down. But by the nature of markets, investors are always split 50/50 -- any other balance, and prices would move to bring it back into equilibrium. But we know the madness of crowds can push a market way higher or way lower than any rational valuation would suggest.
Sell high, not low
There are some people who we hope might be able to bypass fashion and sentiment and come up with a better opinion of the current state of the market -- I'm talking about the owners of private businesses who are planning to float them on the market, selling a bunch of their shares.
Investors often see a flotation as a way to get in at the start of a new company, one that is hopefully going to be a runaway success. And it can be just that. But at the same time, the current private owners of a company will be wanting to get the most money they can for themselves, and not provide new investors with a bargain, and so they'll be more likely to float their companies when they think the market is high than low.
We saw that in the dot com bubble, when new companies were floating almost daily and making instant multi-millionaires of their owners (and paupers of a lot of new investors who failed to predict the subsequent crash and watched their shares turn out almost worthless). So one reasonable rule-of-thumb is never to invest in a flotation when the market is roaring and new issues are all the rage -- I did it once, and it wasn't pretty. (The corollary, of course, is to always buy at flotation when there aren't any, but that's less useful in practice).
Three pulled, three new ones
But what about right now? Well, there has been some interesting flotation news of late, and it has been mixed.
Last week, three planned flotations were pulled. The New Look fashion chain postponed its planned flotation for the second time in two years. Announcing its change of plan just 10 days after its intention to float, New Look cited "considerable volatility in the equity markets" -- in other words, the shares might not command a high enough price. The other two, hotel bookers Travelport and Merlin Entertainments, the owners of Madame Tussauds and the London Eye, pulled their flotations for similar reasons.
But on the plus side, the immodestly named fashion retailer SuperGroup announced this week that it intends to come to market with a £125m placing. The company is apparently one of the UK's fastest growing retailers, expanding overseas and via internet retailing, and will use the cash to provide working capital and to further that expansion. Though growing, the company is still quite small, with fewer than 100 outlets in the UK, so there is certainly potential, although it's one I'd give a miss as the fashion industry is a closed book to me.
Perhaps more intriguing is the planned flotation of Promethean World, a company that develops interactive learning technology. In my day, interactive learning technology consisted of a blackboard and a cane, but Promethean specialises in things like interactive display technology and learning software. The company sold £205m worth of this stuff last year, and it is surely a growing market.
Software for GPs
But the one that interests me the most, as I have some experience of the medical software business, is the smallest of the bunch, EMIS Group. EMIS, which plans to float on AIM, is "the UK's leading supplier of healthcare software and related services to GPs", and intends to sell a quarter of the company for around £50m. The company's software, which computerises GP patient data, is now in use by over 50% of GP practices, managing around 34 million records.
Procurement of non-essential medical systems did slow down quite dramatically in the credit crunch, with many orders placed on hold and planned new ones postponed, but EMIS seems to have ridden out any effect from that pretty well, earning £15.8m profit last year from sales of £58m. And with the need for proper management of patient databases, the demand for its products can surely only grow in the coming years. I'll be watching this one closely.
So, with this even-handed balance of new and postponed floats, where do I think the market is heading in the next year or so? I don't know really, but I expect it'll be quite a bit higher in 20 years.
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