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The Actuary The magazine of the Institute & Faculty of Actuaries
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To float or not to float?

Over the years I have been involved with a
number of flotations in a number of dif-
ferent capacities. Things have changed dramatically since my early days as an actuarial student at NPI, where I was lucky enough to spend my first sixth months in the investment department. One of the perks of the job then (1965) was to supplement my princely salary of £725 per annum with stagging profits. One would fill in ten or more application forms, each for the minimum holding, pin a cheque on each one (when one’s account could only cover say two), and take the forms round to the issuing house just before lists closed at 10am. There one would mill around with others dropping forms on different heaps to mix them up under the eyes of the staff of the bank. Every now and then a tall heap would be handed in over the counter, and a new one begun.

The usual approach
In dealing with the allocation of such an oversubscribed issue, the usual approach was to allocate minimum applications in full, but ballot for say one in ten to come up for a ‘certain’ profit. But even in those days things were beginning to be tightened up I remember being caught out when one company decided to clear all my cheques, and I had to scrabble round hurriedly to cover them (my bank manager kindly did not bounce them). Others were not so lucky, and many applications were thrown out as a result, leaving me getting a much higher allocation, and one of my biggest ever profits (I seem to remember over £100).
In the mid 1980s I was finance director of Abbey Life, then wholly owned by ITT, who decided to float off 48%. In this case the question raised in the title of this article was outside our control. ITT was a conglomerate holding company, and difficulties with some other parts (such as forestry) meant raising money from a highly successful subsidiary, namely us in Abbey Life. With hindsight, their timing was excellent £35m turned into over £500m in a dozen years.

Important decisions
Clearly, the most important decisions for the board, once the float decision is made in principle, concern appointing advisers. In those days the key choices were the merchant bank as sponsor, and the brokers. In addition, one must choose a reporting accountant and, in the case of a life company, a reporting actuary. The company will also need specialist legal advice, which may well require the appointment of a firm other than the company’s normal legal adviser.
The central document of the float is of course the prospectus itself. The directors are collectively responsible for ensuring that all the particulars contained in that massive document are correct in every detail. To give the sponsors and the board extra comfort the reporting accountants will produce a ‘long form report’ and a ‘working capital report’ (the latter particularly relevant in the context of dot.com mania!).
In the Abbey Life case, as finance director I had key responsibility, with the legal director/company secretary, for production of the prospectus and a soul-destroying job it can be. Clearly one wishes to sell the virtues of the company to maximum effect and in those days control of one’s own distribution through a direct salesforce had tremendous sex appeal. So when you had written the first draft, the lawyers would take you through it a word at a time, demanding substantiation of every point. In the end they put all this work together into a set of verification notes that are adopted by a full (and formal) board meeting just before the issue day.
Talking of the board in all five issues in which I have been involved, it has been necessary to bring in new non-executive directors, and how to choose them might merit an article in itself.

So it begins
Once the pathfinder prospectus has been settled, the roadshow begins. Your advisers bankers and stockbrokers, these days generally from the same house will have helped you structure the presentation, and will have made all the bookings of rooms, etc. Typically the company team will include some combination of the chairman, CEO, and GD, plus other executive directors as circumstances require. It is a gruelling two- or three-week period often, in this global age, requiring visits to Europe and America. Happily, I can say, as a non-executive these days, that we are spared that part of the action!
Once the initial marketing has been done, the board can meet again with the advisers to make the crucial decision. At what share price are we gong to launch? While the issue must get off to a good start (trade at a premium), the selling shareholders will not want the price to be too low. In the event, Abbey Life was some 20 times oversubscribed (with the board meeting again to decide on allocation policy) and we were left with some feeling of having sold too cheap. Very recently, in the terrible conditions on the actual day, we had to strike a price for Marlborough Stirling lower than the bottom end of the indicative price range, and a month later the shares were trading at the top end. In circumstances like these, it does help of course when the shareholders are offering only part of their holding, in what has now become known as an IPO initial public offering.

Basic principles
Different again have been prospectuses for floating a new investment trust. Here all the shares are new, and the price is fixed in advance at a round figure of, say, £1. The slack may then be taken up by issuing less or more shares, or scaling down applications. But the basic principles of a verified prospectus and roadshow, in this case by the investment managers, still apply. The practice of underwriting issues whereby big investors undertake to take up the issue if something awful happens to the market after the price is fixed seems to be a thing of the past. Instead there is a process of bookbuilding, and the price is fixed more or less on the day.
All in all, whether as a member of the executive team or more recently as a non-executive, I have found involvement in a flotation to be an exciting and challenging experience, and even modestly profitable. You should note that I have not subjected these personal ramblings to strict legal verification! My intention rather is to convey the flavour, not the detail, which can be found in a rule book of nearly 300 pages issued by the UK Listing Authority.

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