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Quoted Business - A Briefing For Quoted Companies
Last Updated: 26 October 2007

In this issue of Quoted Business we look at the internationalisation of Aim, and how cross-border mergers and acquisitions are flourishing alongside it.

Article by John Cowie

John Cowie on Aim’s coming of age on the global stage.

Despite the best efforts of those across the pond to besmirch its reputation (see Quoted Business, June 2007), Aim has become something of an international star. Ironically, outside Europe, the US is home to the largest number of non-UK Aim companies with 75 as at September 2007. China follows closely behind with 54, though we sense that new admissions from the Far East will slow in coming months. Henry Tan of Nexia TS Public Accounting Corporation, our Nexia International firm based in Singapore, comments on this later in this issue.

Looking solely at the locations of Aim companies’ registered offices, one might think that there were 283 non-UK companies listed on Aim. But data from the London Stock Exchange shows that, in fact, well over 400 companies (from a total of 1,689) hail from overseas. This includes those whose primary place of operations is overseas, not merely their registered offices. That’s 25% of all Aim companies.

The rate at which Aim has attracted these businesses has accelerated rapidly. In the nine years to the end of 2004, a mere 154 overseas companies came to Aim. In the two and a half years since, more than 250 have listed. Aim really has come of age.

Overseas: Greater Risk?

Overseas companies have been largely responsible for pushing up the average value of companies on Aim. The main reason cited for this phenomenon is that investors in London, rightly or wrongly, perceive there to be a greater risk associated with a company whose operations are principally outside the UK. In order to mitigate the ‘overseas’ risk, they seek larger, more established businesses in which to invest.

A secondary factor is likely to be the cost of bringing a company to Aim. There are two elements to these costs: the (broadly) fixed-cost element comprising fees for the nominated adviser (Nomad), broker, reporting accountant, lawyer, PR firm, registrar and printer; and the variable element – the commission charged on funds raised. Fixed costs tend to be somewhat higher for overseas companies, with economies of scale playing a part in determining whether these costs remain acceptable in relation to the size of the company. The effect of an increase in fixed costs is to drive up the average size of companies paying them.

Reasons for the fixed-cost element being higher for overseas companies are many but, typically, a non-UK company will have to appoint lawyers to advise the company in both London and the non- UK jurisdiction, as well as lawyers to advise the Nomad and broker. It may also have to seek accounting advice and input both at home and in London, where the reporting accountant is likely to be based, and there may be foreign exchange issues to be dealt with. Furthermore, the fees charged by a Nomad may well exceed those charged for a similarly sized UK business to reflect logistical complexities – time zone differences, language – as well as a perception of higher risk and, potentially, more far-reaching due diligence requirements.

Split Opinions

So is this globalisation a good thing? Well, it depends on who you ask. There are those who believe that Aim served the SME better when it attracted smaller businesses. It has become undeniably harder for those with a shorter track record or a less proven product to find money on Aim. But Aim itself is a bigger, more successful market than ever before. Liquidity, measured by dealing volumes, is at an all-time high (Figure 3). Predictably, given Aim’s higher risk profile, the Aim All-Share Index has suffered more than the FTSE as a result of recent market jitters. It may well be that the gradual increase in average company size will lead to Aim becoming a more stable environment in which to invest. This, in turn, may allow the ‘next tier’ Plus Markets to carve for itself the niche which Aim used to occupy. Watch this space.

Where Are Aim Companies Coming From?

The growing internationalisation of Aim is amply demonstrated by Smith & Williamson’s increasing involvement in overseas Aim admissions, both as Nomad and reporting accountant. In the past year, we have acted as Nomad to eight non-UK companies on their admission to Aim – and the range of companies is illuminating.

Recently, we took Vycon, a flywheel energy storage system manufacturer headquartered in California, to Aim (profiled in Quoted Business, June 2007). Green Dragon Gas, a coal-bed methane business, was Aim’s largest-ever Chinese float in 2006. Speymill Deutsche Immobilien and Speymill Macau Property are property funds set up to invest in Germany and Macau, which we took to Aim, while the name Japan Residential Investment Company speaks for itself. Clean Energy Brazil is an investment fund putting money into renewable energy projects, PME African Infrastructure invests in projects in sub-Saharan Africa, and New Europe Property Investments intends to put money, initially, into Romanian commercial and residential property assets. In recent months, we have also acted as reporting accountant to AOI Medical (see back page) and Applied Intellectual Capital, both US-based.

Article by Azhic Basirov

Azhic Basirov looks at Aim’s performance in light of recent market upheaval.

Recent turmoil in financial markets around the world has led to increasing uncertainty. There have been a series of headline-grabbing events. In particular, emerging problems in the US sub-prime mortgage market, the collapse of sizeable hedge funds and difficulty in raising debt by private equity consortia, have caused widespread volatility in credit and stock markets.

What’s most worrying is that the extent of losses linked to the sub-prime mortgage market is not completely known. It may be that supposedly very safe, highly rated, complex debt products are backed further down the leverage line by subprime mortgage debt. It is this degree of uncertainty, as opposed to risk, that has got the market worried.

More recently, the problems in the banking sector have reinforced fears that a quickfire sale of assets could perpetuate the vicious cycle of collateral losses.

A Balanced Outlook

Of course, nobody can tell the future and it is not known whether recent events foreshadow a more disruptive movement in financial markets or represent a gradual easing of pressure that will allow credit spreads to return to more realistic levels. Despite the worrying signs, there does not appear to be a fundamental challenge to the macroeconomic outlook or corporate earnings expectations. Corporate debt in aggregate has been falling, balance sheets are becoming healthier, and, although the cost of raising debt is increasing, it remains relatively affordable. Indeed, activity in the key world economies has remained buoyant, riding on the back of record world economic growth.

The Impact On Aim

Against this background of uncertainty, the number of admissions to Aim fell to 174 for the year to the end of July, compared with 269 for the comparable period in 2006. At the same time, the capital raised by Aim-listed companies has increased by 24.5% to £11.7bn for the same period, reflecting the fact that while investors have become more selective, larger sums have been raised in secondary issues.

The Aim Index outperformed the FTSE for the year to August (Figure 1). However, the turbulent weeks during August saw a more dramatic decrease in the Aim Index compared to the FTSE. As is often the case in times of uncertainty and market volatility, investors have moved towards safe, non-speculative investments.

The Future

The outlook for Aim remains favourable as world economies continue to grow. As an established premier market for growth companies, Aim continues to attract those seeking to raise growth capital both domestically and, increasingly, internationally. As well as establishing itself as an ideal exchange for the junior oil and gas companies, Aim has attracted a variety of property and other funds in the past 18 months or so. Approximately 48% of funds raised on Aim in 2006 were used for these types of vehicles.

While Aim will continue to provide growth capital for deserving propositions, it cannot be entirely sheltered from the flux of equity markets and investor attitudes to smaller companies in times of turmoil or downturn in stock markets. The coming months will be instructive for gauging the direction of the markets in general – and Aim in particular.

Article by Henry Tan

Henry Tan charts the success of Aim in attracting Chinese companies.

The rapid expansion of China’s economy, privatisation of state-owned enterprises, deregulation of previously restricted industries and increased M&A activity have led to a significant increase in the number of Chinese companies listing overseas. Aim, in particular, has become very popular in China. In 2004, four Chinese companies applied for an Aim listing. This increased to a total of 12 in 2005 and 31 in 2006. Up to September 2007, 61 Chinese companies had listed on Aim. They come from a range of sectors including agriculture, technology and energy.

The Aim Attraction

Most larger Chinese companies choose to list in China or Hong Kong. If they have international ambitions then Hong Kong might still be an option, but many choose to list in the US. In the case of smaller, high-tech companies however, Aim has been proving increasingly popular in China since 2005.

Chinese companies look to list on Aim for much the same reasons as any other company. They seek to achieve liquidity in a good investment environment and to achieve a high return. They might also list to gain publicity for their company. Aim offers smaller, growing Chinese companies all the benefits of being traded on a world-class public market within a regulatory environment that is designed to meet their needs.

A key facet of Aim’s attraction in China lies in its regulatory set up. There are no minimum criteria in relation to company size, or the number of shares held by the public and no need for a trading history. The initial public offering (IPO) process itself is essentially self-regulated through the Nomad.

Chinese companies are also attracted to Aim because they are able to take fundraising decisions or engage in corporate activity without recourse to shareholders.

The IPO process on Aim is considerably quicker than on local markets. Chinese companies have been able to complete IPOs on Aim within 12 to 16 weeks, as opposed to 12 to 24 months in Hong Kong and 8 to 12 months in Singapore. This also means it should cost significantly less.

Possible Slowdown?

Despite the benefits, the steady flow of Chinese companies looking to tap London’s Aim investors seems to be slowing. One possible cause of this slowdown is Singapore’s plans for a new stock market for smaller businesses.

The proposed Singapore junior market will be operated by the same body as the main market, with reduced listing requirements to allow more freedom for corporate activity. In other words, it may be just like Aim, only far closer to China.

Despite the fact that Chinese companies have done well on Aim, and the actual listing experience has been broadly positive, there are drawbacks. The long distances and conflicting time zone and language differences between China and the western-based investment and advisory community cannot be completely disregarded. It takes an experienced and flexible advisory team to list a Chinese company successfully. The possible introduction of a new market player in Singapore will provide much greater competition for Aim. We await the impact of this on the current east-to-west flow with great interest.

Interview: Richard Webster-Smith, Aim

US companies are joining Aim in ever greater numbers – and provoking some heated debate. Quoted Business talks to Aim’s Richard Webster-Smith about the US influx.

Aim is growing rapidly. How many US companies are now involved?

There are currently 76 US companies from a huge range of sectors – everything from finance and insurance to media and automobile parts. But the most popular areas are renewable energy, software and biotechnology, which tend to be better understood by investors in London. These are also more globalised industries so, for many of the companies concerned, there’s a desire to be listed alongside their global peers.

As far as geographical spread goes, they come from across the US, although most are centred around America’s main venture capital hubs such as the West Coast, Massachusetts and Chicago. This is often because Aim is a logical next step from venture capital funding.

Is it true that overseas companies listing on Aim tend to be larger than UK companies?

Yes, they do tend to be. I think there are two main reasons for this. The costs involved in listing overseas can be higher. For example, there are additional travel, advisory and staff costs that might be incurred. And secondly, institutional investors tend to lean towards slightly larger companies when investing overseas.

Why are many choosing to set up a UK holding company rather than listing their US company shares?

This is mainly due to restrictions imposed by the US SEC’s Regulation S, which limits the number of shareholders US companies are allowed to have if they take a primary listing on an overseas exchange. To overcome this, many are choosing to set up a holding company in places like the UK, the Channel Islands or the Cayman Islands. This route could also bring some tax benefits for the company in question. So far, around 40% of US companies quoted on Aim have followed this structure.

Who is investing in US companies on Aim?

At the moment, Aim is largely institutional investor-based, with around half of shares held by large institutional managers, mainly in the UK. But this is changing – we’re increasingly seeing Aim’s investor base internationalise and more participation from professional investors from the US.

Why are US company executives considering Aim? Have these reasons changed in recent months?

Aim is now the pre-eminent growth market in the world. It offers a good combination of an appropriate regulatory model designed for the needs of growing companies and, at the same time, good protection to investors. It also provides high levels of analyst coverage and a deep pool of institutional investment capital.

Equally important, it is potentially a lower-cost route to public equity markets compared with other US exchanges. This cost element means that for companies in the US, achieving entry into Nasdaq is now pretty much out of reach for those with a market cap of under $400-500m. They are looking for other options, either other financing options in the US or a listing overseas. If they choose the latter, Aim is the logical choice – it’s well ahead of other international growth markets.

Finally, I believe success breeds success. As companies in the US see their peers doing well, they decide to hop on board. And this growing confidence means that lawyers and investors in the US are becoming more comfortable with the whole concept of Aim, and more happy to recommend it.

Does the London Stock Exchange make trips to the US or rely on intermediaries to spread the word?

The Exchange has been very proactive over the past three years or so in the US. We work mainly in partnership with the advisory community, running seminars with law firms and UK-based Nomads. Last year alone, we participated in 64 seminars in cities across the US.

Over time, our pitch has certainly changed. In many ways the profile of Aim was raised in the US when Nasdaq launched its hostile takeover bid, and these days we don’t have to explain what Aim is – people are much more interested in the details. In addition, our focus is now on broadening interest among the institutional investor community.

What reasons do US company executives give for dismissing Aim?

For a US company to choose to float on Aim, in many ways it requires an intellectual leap of faith on their part. The US is home to one of the world’s largest and most liquid capital markets and, up until now, it has entirely satisfied the financing needs of US companies. Companies may think they can get a lower market valuation, and some even believe it will be an admission of failure if they go outside the US. These reasons can be hard to fathom.

That said, we agree that Aim isn’t right for everyone. If you’re purely a domestic US company with no international aspirations, then Aim is probably not suitable. In fact, we would say that for the large majority of US companies, it isn’t suitable. However, for a very substantial minority of fast-growing, internationally focused, smaller companies, it’s a great option.

Is Sarbanes-Oxley still driving business away from US markets?

It’s clearly having an impact, but it’s not the only factor. Perhaps more important is the relatively low level of analyst coverage, poor liquidity and high costs that smaller US companies face on domestic exchanges. Also, the strength of the small cap advisory community in the UK is certainly a draw. Arguably the relative depth of such advisers in the US is not as great since the bubble burst.

What other options are available to US companies for raising funds?

There are three viable alternatives. First, many venture capital (VC) firms are extending their investment horizons and keeping companies under their wings for longer, so more VC funding is a possibility. They could attempt a reverse merger into a company that’s already listed, but this can be complex. Or they could look to angel investors or traditional bank funding.

Have the comments from Roel Campos and John Thain harmed Aim’s reputation?

We strongly refute some of the ill-informed comments about Aim that have emerged from the US recently. These comments probably reflect confusion about what a principles-based regulatory regime looks like, and a lack of knowledge about Aim itself. They seem to believe that Aim is some kind of regulation-free zone when, in fact, nothing could be further from the truth. Whether they have been misinformed or are being plain mischievous, we don’t expect it to challenge our role or impact on our success.

Despite these comments, we’re continuing to see many of our rivals trying to emulate Aim. A plethora of smaller growth markets have been springing up around the world trying to recreate our Nomad structure. They say imitation is the highest form of flattery!

What does the future hold for Aim and the US market?

We’re hoping for continued strong growth. Part of this will involve strengthening ties between the investor and advisory community. At the same time, we’re looking to make sure that US companies that have already listed on Aim make the most of the opportunities and liquidity available, and come back to the market for further funding. Whatever happens, we certainly won’t be standing still.

Article by Stuart Macy and Brad Adams

Stuart Marcy and Brad Adams of M&A International Inc. reflect on a remarkable year for international M&A activity.

Despite concerns over some macroeconomic indicators, strategic acquirers, fuelled by strong corporate profits and aggressive private equity buyers, continue to propel the M&A market. With deal volume of more than $2.7trn to date, 2007 is on pace to be the most active M&A year in history. Although some commentators are beginning to predict a cooling-off period, we believe there is still plenty of impetus behind the wave of consolidation.

Based on our experience within M&A International Inc. (MAI), the global alliance of mid-market corporate finance advisers, the M&A mid-market is clearly thriving and becoming more internationally focused. We are seeing buyers and sellers considering both domestic and cross-border opportunities as a matter of course. In particular, we expect to see further consolidation in the technology sector, which has become a truly international market.

Technology Bubbling

The technology sector has been hyperactive during 2007. M&A soared to new levels, totalling 1,424 transactions, with an aggregate deal value of $158.6bn for the first half of the year (Source: Capital IQ). We believe that more mature markets, increased cash flows and longer-term, reliable revenue streams are the key factors driving interest from financial acquirers, as well as traditional corporate acquirers.

In the second quarter alone, we tracked 322 technology-based M&A transactions, amassing $38.2bn in aggregate deal value (based on 133 reported deals). Sector activity in the second quarter mirrored the first quarter, but with a slight decrease in aggregate volume. Much of this decrease in volume can be attributed to a greater emphasis on integration following the acquisition spree of the past 18 to 24 months, while the increases in deal value can be attributed to the flurry of large private equity transactions.

Large global buyers remain active in searching for middle-market acquisitions that can add capability and/or help build an international presence. Many of our sellside assignments have generated multiple offers at very strong valuations – a sure sign that the M&A market remains healthy. However, according to our technology specialists in the US, while M&A activity in the technology middle market remains robust, there is a scarcity of high-quality targets in certain specialist market segments. These sectors have undergone significant consolidation in the past two years, leaving very few middle-market players available for acquisition.

Crossing Borders

M&A activity in the technology sector is increasingly international, with almost 50% of all transactions having a cross-border element. A large proportion of this activity is between the US and Europe. As the technology market continues to mature and consolidate, we believe that the growth in cross-border deals will continue, with buyers and sellers from around the world looking beyond their domestic markets. Within MAI we have a robust pipeline of cross-border opportunities that should close in the next six months.

It is clear to see why cross-border M&A has become more attractive with the harmonising effects of globalisation. IT capacity allows seamless communication between offices and there is a glut of financing options. Competitive local markets, especially in the US and UK, have forced private equity houses and trade buyers to capitalise on the wealth of family and privately owned mid-market businesses outside their domestic markets to generate interesting investment opportunities.

Private Equity’s Growing Appetite

The deep pockets of private equity buyers have consistently grabbed the headlines this year, with one multi-billion dollar acquisition after another. These private equity buyers are now major players in the technology space. We have seen tremendous interest from private equity buyers in many technology M&A opportunities, whereas previously they have rarely appeared on potential buyers’ lists. In the first half of 2007, MAI observed 29 private equity backed transactions in the technology sector, totalling $55.5bn. Private equity buyers have impacted the market significantly and made it increasingly challenging for strategic acquirers to compete for solid acquisition targets in certain sectors.


Although investors are flush with cash, industry pundits have been quietly comparing the massive amounts of cheap debt issued to fund these buy-outs with the sub-prime mortgage problems in the US economy. There is a fear that despite the ‘covenant lite’ terms of the loans issued by many lenders, a credit crunch could have a detrimental impact on many of these highly leveraged companies.

However, MAI remains extremely active and, given underlying market conditions, optimistic growth predictions for the technology sector and the fact that private equity buyers need to deploy capital, we do not believe private equity players will slow down their aggressive acquisition pace during the remainder of 2007.

M&A International Inc. is a global alliance of mid-market corporate finance advisers consisting of 42 M&A advisory firms operating in 38 countries. MAI completed 156 deals with a value of $6.4bn in the first half of 2007.

Article by Rajesh Sharma

Rajesh Sharma explores proposals for a more favourable tax regime for multinationals.

The Government recently published a consultation document on the treatment of foreign profits for multinationals. Its aim is to maintain the competitiveness of the UK by removing the burden of double taxation relief on overseas dividends. Put simply, the idea is to make the UK a more attractive location for multinationals by making dividends and capital gains (derived from trading companies) exempt from tax.

Several multinationals have recently talked about the possibility of moving their headquarters from the UK, citing tax as a factor. Further pressure has been created by recent European Court of Justice rulings that some UK tax legislation is contrary to the freedom of establishment enshrined in the Treaty of Rome.

Foreign Dividends

The new rules would apply to large and medium-sized businesses. Small businesses will be excluded and continue to be taxable on overseas dividends, although a simplified form of relief for overseas tax will still be available.

Under the proposals, provided foreign companies are within the new Controlled Company (CC) rules, dividends received by the UK company will be exempt from tax. To qualify, companies will need to have a minimum 10% holding in the overseas subsidiary.

To protect the tax base, anti-avoidance provisions would be introduced – so some dividends not paid out of the CC’s profits would continue to be taxable in the UK.

Portfolio Dividends

The proposals also seek to align the treatment of portfolio dividends with dividends of UK companies. The proposals are to:

  • provide credit for underlying tax (as well as withholding tax) for foreign dividends or
  • provide exemption for foreign dividends or
  • charge to tax both UK and foreign dividends without giving credit for underlying tax (but giving credit for withholding tax).

Reform Of Old CFC Rules

The new CC rules will be a move away from an ‘all or nothing’ approach to a more targeted income-based regime, which will be extended to UK subsidiaries. The rules will tax relevant companies on passive income. This could include interest, royalties, rent, dividends from non-qualifying companies and similar income. The new rules will also bring capital gains into the regime. The disposal of assets giving rise to passive income will be taxable.

"Its aim is to maintain the competitiveness of the UK by removing the burden of double taxation relief on overseas dividends"

The main exemptions for passive income are similar to the existing Controlled Foreign Company (CFC) rules. The following types of income will be excluded:

  • Income derived from genuine treasury activities.
  • Inter-group interest where the paying company paid the interest out of profits not within the CC rules and the recipient company was also capitalised adequately.
  • Certain dividends flowing within a controlled group so that the complex rules relating to intermediate holding companies will not be required.

Activities that do not satisfy the existing ‘exempt activities test’, such as income arising from dealing in goods for delivery to or from the UK, or to or from affiliates where the goods are not delivered to the CC’s territory of residence, will be regarded as passive income. Additionally, inter-group or UK-derived sales or service income from wholesale, distributive and financial services businesses will be included as passive income.

In order to avoid double taxation, relief would be given for any overseas tax suffered on the apportioned income. It is proposed that compensating adjustments (similar to the transfer pricing rules) will be used in relation to income apportioned to the UK parent from UK subsidiaries. This ‘compensating adjustments’ rule has been proposed to align the treatment of UK companies with others in the EU.

Interest Relief

The proposals state that rather than restrict interest expense where the foreign profits are not taxable, targeted anti-avoidance measures will apply. This is to limit abuse of the UK rules for interest relief so the amount of relief is limited to groups’ total consolidated external finance costs. This may have a far-reaching effect for multinational companies.

It is also proposed that the restrictions under the unallowable purpose rules under the loan relationships and derivative contracts should be amended. This is so that interest relief is restricted in situations where a loan relationship or derivative contract is part of a scheme or arrangement, with one of the main benefits being to secure a tax advantage.

Reaction To The Proposals

Many commentators have expressed their enthusiasm for the proposals as a way of making the UK more attractive as a European headquarters. In effect, the UK will:

  • not tax qualifying dividends
  • have a low rate of corporate tax
  • have no withholding tax on dividends
  • exempt gains on substantial shareholdings in trading companies.

However, the proposals do give some cause for concern:

  • The CC rules are likely to be wider in scope than the existing CFC rules. The CC rules would apply to capital gains, and some income would be categorised as passive rather than active.
  • The new rules will apply where the UK company holds a 10% interest in the controlled company. The current CFC rules apply only to holdings in excess of 25%.
  • The proposals to restrict interest relief by reference to the overall group borrowings could have a significant impact on companies and further clarification on the proposal is required.

A Promising Future

Clearly, there remain many questions to be addressed but, all in all, the proposals should be welcomed. They could help make the UK a more attractive place for holding companies. However, it may be too early to judge and we eagerly await the results of the consultation process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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