Startup Toolbox

Jay Parkhill September 14th, 2007

I’m really glad I’m not a print publisher. The Silicon Alley Insider posted an article the other day showing the New York Times Company’s 50% stock-price drop over the past five years. I understand this is largely due to the ad revenue they have lost to Craigslist and others.

The thing is that the NYT is doing everything right, or just about. They’re trying hard to play by new media rules, but the economics just aren’t there for the business. The Times produces great podcasts, seemingly dozens of blogs and has a Twitter feed that is one of the best things on that platform- news comes straight to my desktop throughout the day and the posts frequently get me to click through to the articles. The tweet format seems tailor-made for headline link-baiting.

Compare this with the Wall Street Journal. The WSJ has 3-times-daily updates over AIM, but they completely botch things. First, the updates comes three times every day, but it’s almost always the same stories in each update. Can’t they find more articles to showcase? They have a Twitter feed as well, but haven’t updated in months (ironically, they stopped with a headline about Google’s DoubleClick acquisition).

Worse, though, is that the content is stuck behind the paywall. I have given up linking through at this point because I don’t have a WSJ online subscription. If all I can get by clicking through is a couple of introductory sentences then it isn’t worth it- I’ll use the AIM headlines to let me know to read the details elsewhere. This comparison graph of NYT and WSJ pageviews (courtesy of Fred Wilson) seems to show that I’m not the only one.

Getting back to the original point, the NYT seems to do a great job driving traffic to the site, but online ad revenue just doesn’t compare to the old-fashioned offline kind. What’s going to happen? Will media-companies-formerly-known-as-print-publishers have to shrink to be competitive in the online world? Is that a workable model for companies that depend on far-flung networks of reporters, editors and staff? Or will some new revenue stream emerge to save them? Like I said, I’m glad I’m not in the business and these are not my problems to solve.

• Markets , media
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Jay Parkhill January 5th, 2007

I recently found a couple of articles talking about the AIM and its place in the scheme of things for cash-hungry businesses. My earlier point about the AIM was that it is not a very good “out” for companies hoping to escape the US environment. Most companies merge eventually, and if a suitor is subject to Sarbanes-Oxley and the rest of the SEC’s requirements, the prospective selling company had better comply as well or risk a drop in its purchase valuation.

AIM as a Step on the Road to Liquidity
Cleantech Investing summarizes the benefits and pitfalls of the AIM pretty well. It is easier and cheaper to go public, but harder for big shareholders to get liquidity given the thin trading in most stocks on the market. The AIM therefore serves more as an alternative to mezzanine financing for certain kinds of companies- it is not a good source of liquidity and at present doesn’t appear to be a great place to remain long term.

This may all change over time, of course. The number of US-based companies on the AIM (36 by my count) is very small. Still, the data definitely supports my thinking that companies need to maintain a plan for Sarbanes compliance.

AIM as Market of Choice for Clean Energy Companies
The other interesting point Cleantech notes is that a survey lists the AIM as the go-to market of choice for clean energy companies, and predicts it will remain that way for the next three years. The survey summary is frustratingly short on detail as to why this should be so. It cites the “arduous US regulatory environment” as the principal driver behind the trend, but doesn’t explain why this makes the AIM more compelling for clean energy businesses than for those in any other sector.

The danger I see in this thinking is companies financing themselves into a corner by going public too quickly with too little planning for how to keep M&A valuations high in the long term.

• Cleantech , M&A , Markets , Sarbanes-Oxley , Securities
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Jay Parkhill January 1st, 2007

The AIM, formerly known as the Alternative Investment Market of the London Stock Exchange, has gotten attention recently in the US due to increasingly complex and burdensome reporting requirements for companies listed on US-based stock exchanges, most notably the Sarbanes-Oxley Act of 2002.  In particular, Sarbanes-Oxley’s Section 404 requires companies to certify that their internal controls and procedures are sufficient to provide complete and adequate disclosure of material issues to investors.

Sarbanes only applies (formally at least- more on that point below) to public companies listed on US exchanges, esp NASDAQ and the NYSE. A trend has thus arisen in the last couple of years where companies seeking to raise capital from public markets do so on exchanges outside the US. A few companies have listed on the Toronto Stock Exchange, but the exchange receiving the most attention is the London Stock Exchange’s AIM.

In some respects, this is a natural fit. The AIM was created in 1995 as a “lighter-touch” alternative to the main London Stock Exchange. Costs of an initial listing are much lower than the LSE, NASDAQ or NYSE and ongoing regulatory requirements are much less stringent as well.

There are currently about 1,600 companies listed on the AIM, of which 36 described themselves as US-based as of this writing. The regulatory requirements consist principally of the oversight of a “nomad“, a nominated advisor hired by the company both to vet the company’s filings and to advise the company on investor-relations issues. The Wall Street Journal (subscription required) has a good article on pros and cons of the nomad system. Since January 2005, the number of US companies listed on the AIM has tripled from 12 to 36, indicating a possible trend in the making (though the numbers do not exactly indicate a mass exodus from US exchanges).

However, companies hoping that the AIM will let them avoid the US regulatory framework are misguided (Sarbanes-Oxley imposes the most stringent set of requirements in the US currently, so this post focuses on compliance with it).  It is the rare company, public or private, that continues in business indefinitely without being acquired.  Any company that lists on the AIM thinking it will be able to forever avoid Sarbanes issues succeeds only in (a) limiting its pool of prospective acquirors to other business not subject to US securities laws, (b) reducing its sale price by the amount required to bring the company into compliance, or some combination of the two.
Thus, companies listing on the AIM still need to comply with Sarbanes-Oxley. AIM provides a way for companies to go public at significantly lower cost than in US markets, but as the title of this post suggests, the AIM is not a way out of Sarbanes-Oxley compliance.

However, this is not to say that AIM has no value.  There may well be companies capable of going public and supporting a reasonable valuation on a small-cap exchange, but for whom compliance with Sarbanes-Oxley and other US regulations would be excessively burdensome.  This seems like a pretty big gamble, but it is possible that such companies could go public on AIM, get enough cash to kick the business into high gear, then bring in US compliance at a later date.

Given that the AIM has underperformed major US indices recently (see chart), it seems as though the risk here is extremely high. As this chart shows, the S&P 500 during 2006 outperformed the AIM as a whole by close to 15% (note: I have not tried to separately measure performance of US-based AIM companies).
On balance, then, the AIM sounds like a great opportunity, but it entails significant tradeoffs as well.  Companies listing on AIM need to be aware that long-term planning will probably require them to deal with Sarbanes-Oxley and other US securities laws at some point, and choosing not to comply in the short term may foreclose- or alter the economics of- merger opportunities in the future.

• M&A , Markets , Sarbanes-Oxley , Securities , Startups
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