London's AIM - U.S. Company Performance - Share Price and Liquidity - H1 2009

Highlights

• U.S. domiciled companies* listed on the London Stock Exchange's AIM achieve a weighted return of 11%
• Foreign domiciled U.S. operating companies** listed on London's AIM achieve a weighted return of 36%
• FTSE AIM All-Share Index rises 34%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies listed on London's AIM

While there were 41 U.S. domiciled companies listed on London's AIM and 35 foreign domiciled U.S. operating companies listed on London's AIM as of the beginning of 2009, only 36 of the former and 34 of the latter traded on the London Stock Exchange's AIM for the entire six months.  Six U.S. companies listed on London's AIM left London's AIM during the first half of 2009; three delisted, citing a lack of liquidity on London's AIM and a low profile on the market, and three delisted due to business failure.  These companies listed on the London Stock Exchange's AIM are not included in the chart and analysis below because their aggregate market capitalization on London's AIM as of the beginning of 2009 was only 1% of the U.S. companies’ market capitalization, therefore, their effect on the share price return analysis is immaterial.

 

The weighted returns in the table below were calculated using the average market capitalizations on London's AIM of the companies listed on the London Stock Exchange's AIM during the six months, similar to how an index fund would calculate returns.

Index	Unweighted	Weighted
U.S. Domiciled Companies	93%	11%
Foreign Domiciled Companies	29%	36%
FTSE AIM All-Share Index	N/A	34%

*    U.S. operating companies listed on London's AIM directly through a U.S. entity.

**  U.S. operating companies listed on London's AIM through a U.K. or tax haven entity with central operations and/or decision making in the U.S.

The 93% unweighted return for the U.S. domiciled companies listed on London's AIM is heavily skewed by one company which returned a staggering 3,114% where, if excluded, it would drop to 7%.

In some respects, weighted results are a self-fulfilling prophesy in that companies listed on the London Stock Exchange's AIM with increasing share prices, and therefore increasing market capitalizations listed on London's AIM, become more heavily weighted relative to those with decreasing share prices / market capitalizations.  In addition, a company listed on the London Stock Exchange's AIM that is performing well has a better chance of completing a secondary offering on London's AIM and for its share price on London's AIM to hold up relative to the dilutive effects, further increasing its market capitalization on London's AIM and relative weighting.  This was even more true during the first half of 2009 compared to 2008 because of the challenging capital raising environment on London's AIM.  When these factors are controlled for by weighting the companies’ returns on the London Stock Exchange's AIM by their market capitalizations on London's AIM as of the beginning of 2009, the 36 U.S. domiciled companies listed on London's AIM lost 13% and the 34 foreign domiciled U.S. operating companies listed on London's AIM gained 18%.

In terms of average monthly liquidity on the London Stock Exchange's AIM , the foreign domiciled U.S. operating companies listed on London's AIM outperformed the U.S. domiciled companies listed on London's AIM and, in fact, London's AIM as a whole.  In more normal times, all of the weighted results exceed all of the unweighted results, reflecting the positive relationship between a company’s liquidity on London's AIM and its market capitalization on London's AIM .  The unweighted results represent the level of monthly liquidity on the London Stock Exchange's AIM that the average company can expect to achieve.  The reversal of this relationship for the U.S domiciled companies listed on London's AIM indicates that relative trading volumes on London's AIM were greatest for the companies listed on London's AIM with the smallest market capitalizations listed on the London Stock Exchange's AIM.  This could represent London AIM investors coming into companies listed on London's AIM that they felt were undervalued but is more likely reflective of London AIM investors exiting small companies listed on London's AIM where they are no longer comfortable with the risk/reward relationship.  This view is supported by the share price underperformance of the U.S. domiciled companies listed on London's AIM relative to the foreign domiciled U.S. operating companies listed on the London Stock Exchange's AIM and London's AIM as a whole.  The expectation is that these companies listed on London's AIM are the most likely delisting candidates during the second half of 2009.

Average Monthly Liquidity on London's AIM	Foreign Domiciled U.S. Operating Companies Listed on London's AIM	U.S. Domiciled Companies Listed on London AIM	Entire London's AIM
Weighted	5.61%	0.98%	5.45%
Unweighted	5.12%	2.65%	4.01%

 

The key takeaway from the chart above is that there is a liquidity advantage for U.S. companies that list on the London Stock Exchange's AIM via a U.K. holding company.  The four main reasons being:

1. Once the Reg. S period expires, the London AIM IPO shares can trade directly within CREST
2. Pre-IPO shares not subject to Reg. S can immediately trade directly within CREST
3. Articles of incorporation fully conform to U.K. law providing comfort to U.K. investors
4. London AIM institutional investors only allocate a portion of their investments to non-U.K. companies

Nevertheless, irrespective of where a company is domiciled, liquidity on the London Stock Exchange's AIM can be improved.  The reasons for a lack of liquidity on London's AIM are often company specific and not obvious.  As a consequence, thoughtful and thorough investigation is needed in order to formulate actionable solutions.  Several strategic decisions can be taken during the planning of the London Stock Exchange AIM IPO to minimize the risk of lack of liquidity on London's AIM becoming a problem in the first instance; including, selection of the most appropriate Nominated Adviser (Nomad), Nominated Broker(s), financial PR/IR firm and Independent Equity Research firm.