KPMG recently organised aconference on Tapping The Local Capital Market with the aim of explaining the benefits of taking a company to a stock exchange listing, the process involved and the regulatory obligations that a public listing entails.
One of the topics discussed at length was the aspect of succession planning, mainly with reference to a number of family-owned companies in Malta.
The changeover from a typical family-owned to a publicly-traded company involves the introduction of a number of corporate govern-ance structures such as the appointment of non-executive directors to the board and the establishment of internal committees to evaluate performance, remuneration etc. These structures are extremely beneficial in managing ownership issues and succession plans for a company.
In fact, it is common practice that such corporate governance structures are put in place irrespective of whether the company will take the public route or continue as a privately-held company. Besides the effectiveness of such initiatives, the additional obligations of a public company normally increase the success of a structured succession plan, and this is the main area that needs to be communicated to many companies which sometimes fail to recognise the long-term benefits of a listing.
During the discussion it clearly emerged that more needs to be done by the authorities concerned and the various industry stakeholders to promote this aspect to many companies in Malta. This will ensure that such family-owned or private companies understand the various benefits as well as obligations involved in a public listing. Bringing additional companies to a stock exchange listing will also provide added investment opportunities to the growing number of retail investors willing to diversify their investment portfolios.
Unfortunately, the Malta Stock Exchange has not managed to attract the desired number of equity listings, and a concerted effort must be made to achieve this. The present government’s plans to forge ahead with the pension reform further elevates the importance of a more developed exchange offering a wider range of opportunities.
Apart from the company restructuring and introduction of new procedures before a public listing, private companies ought to consider the other benefits that emerge from a stock exchange listing.
Since public companies are required to disclose financial information twice yearly through an announcement via the Malta Stock Exchange, and to regularly explain their future strategy as well as any major acquisitions or disposals, public companies are perceived to be more transparent than private companies.
This could be an important element to take into consideration for those minority shareholders in private companies who may not have representation on the board of directors and may therefore feel that they are not obtaining regular information on the performance of the company. This regular disclosure of information is also important for a company’s bankers and suppliers, and can lead to improved credit terms for the company in question.
The increased publicity that such disclosure provides should also be taken into consideration. Although some private companies may regard the scrutiny from the media and financial analysts (even through this column) as a negative when considering a public listing, on the other hand it may attract the attention of potential partners, candidates seeking employment in more recognised companies as well as other companies that may consider a merger. The scrutiny from the public may also encourage top management to consider new business development opportunities to ensure that strategic milestones are met. This may also lead to more generous pay packages for senior management.
The recent acquisition of a minority stake by Barclays Bank plc into RS2 Software was ... a clear example of a listing increasing the possibilities for companies in attracting investors of an international calibre
Although many investors still regard the Malta Stock Exchange as being rather illiquid due to the infrequent trades that take place in the smaller companies, undoubtedly a listing is a significant improvement in terms of liquidity when compared to a private company.
A public listing will create a market for a company’s shares, providing shareholders with a more feasible and effective exit strategy compared to a private company. Shareholders can also expect to request a higher market value for a stake in a public company as opposed to a shareholding in a private company. While valuations of public as well as private companies are all very subjective and dependent on a number of assumptions, the value indicated by a market listing provides a good basis for shareholders to consider opportunities for mergers and acquisitions which could potentially lead to an investment by a strategic partner or an institutional investor.
The advantage of the M&A aspect was discussed at length by the members on the panel during the conference, who were two senior members of the KPMG advisory team with considerable experience in helping companies to obtain a listing, and two stockbrokers who throughout the years also assisted most companies to achieve an equity or bond listing. During the discussion, it was inevitable that the recent acquisition of a minority stake by Barclays Bank in RS2 Software was mentioned. This was a clear example of a listing increasing the possibilities for companies in attracting investors of an inter-national calibre such as Barclays.
Public companies also have an easier task when needing to obtain funding for a cash acquisition either through a rights issue or the introduction of a new strategic or institutional shareholder, or by offering the shareholders of a target company new shares in the public company rather than cash. The latter was used on various occasions by a number of local companies such as Island Hotels Group Holdings, Crimsonwing and 6pm Holdings. It is debatable whether such acquis-itions would have gone through had the shareholders of the target company been offered a minority stake in a private company instead.
The taxation aspect should also be among the features to be taken into consideration when a private company is considering the public route. Gains arising on the transfer of shares in a company listed on the MSE are currently not subject to tax. Although there were some recent amendments in this respect for large shareholders disposing of shares through an initial public offering, a listing on the Malta Stock Exchange provides a tax-efficient route for shareholders.
One of the factors invariably arising in discussion with a prospective candidate for a public listing is the issue of control. Few would want to relinquish control in a family-owned company, not only for sentimental reasons but also to maintain a strong influence on the future direction of the company. A public listing very rarely leads to loss of control. In fact, the regulations stipulate that only a minimum of 25 per cent of a company must be in the hands of the general public upon listing. The 25 per cent ‘free float’ effectively means that only a minority stake needs to be offered, leaving majority control in the hands of the incumbent shareholders.
The adequate size of the free float was discussed at length in recent years, as this was regarded at times as being too high a hurdle for companies of a certain size to qualify in terms of current shareholding structures. One must also take the size of the local market into consideration, and whether there are sufficient investors willing to absorb the potential amount of shares on offer when considering a 25 per cent offering of a large company.
Ideally, this minimum free-float requirement is adjustable depending on the market capitalisation of the candidate company and whether it is aiming for a listing on the main market or the second-tier market. Many observers argue that a smaller stake of a large company can be more beneficial to the market in terms of liquidity than a 25 per cent holding of a small company which would not attract a sufficient number of public shareholders.
During the concluding discussion at the conference, most of the panel members argued that a ‘discussion group’ or ‘think-tank’ should be set up among industry stakeholders to consider a number of initiatives that would promote the listing aspect to local companies. This lobby group could also look at other initiatives that can be raised with the Ministry of Finance and the regulatory authorities to support this drive and instigate more companies to take the public route.
One such initiative is possibly the re-launch of the junior market (the Alternative Companies List) by making it more attractive to the younger entities and enticing them to take their first step to official listing. A growing number of publicly-traded companies on the MSE is vital for the continued development of the local financial market and for the wider economy in general.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC, on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising from the use of all or any part thereof, and no representation or warranty is provided in respect of the reliability of the information contained in this report.
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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.