London's AIM - U.S. Company Performance - Share Price and Liquidity - H1 2011

The 50 U.S. companies listed on the London Stock Exchange's AIM continue to outperform the FTSE AIM All-Share Index and a few U.S. companies listed on London's AIM recently took the next step in their evolution by accessing the U.S. public markets via NASDAQ.  This post provides additional insights.

Highlights

• U.S. domiciled companies* listed on the London Stock Exchange's AIM register a weighted loss of 1%
• Foreign domiciled U.S. operating companies** listed on London's AIM achieve a weighted return of 11%
• FTSE AIM All-Share Index contracts by 8%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies listed on London's AIM

While there were 23 U.S. domiciled companies listed on London Stock Exchange's AIM and 33 foreign domiciled U.S. operating companies listed on London's AIM as of the beginning of 2011, only 21 of the former and 29 of the latter traded on London's AIM for the entire first six months of 2011.  Of the six U.S. companies that left the London Stock Exchange's AIM during the first half of 2011, one was acquired by another U.S. London AIM-listed company for six times its, arguably depressed, market cap, one completed its London AIM IPO in 2003 and a NASDAQ IPO in 2007 and had now fully integrated itself into the U.S. public markets, one completed its London AIM IPO in 2006 and a NASDAQ IPO during H1 2011 and chose to delist from London's AIM, one acquired a 70% stake in a NASDAQ listed company a couple years ago, recently acquired the vast majority of the balance and took over the targets NASDAQ listing and delisted from the London Stock Exchange's AIM and two failed with one going private and the other restructuring itself into a non-U.S. focused investment company.

The six U.S. companies that left London's AIM are not included in the chart and analysis below because most happened to delist in January 2011 or their market caps on London's AIM were relatively small, therefore, the effect on the share price return analysis would be immaterial.  The bifurcation of the share price returns that was noted in 2010 has continued during the first half of 2011 with 22 of the 50 U.S. companies listed on the London Stock Exchange's AIM losing 26% - 75% of their value and four posting triple digit returns.

 

*   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 efficient jurisdiction with central operations and/or decision making in the U.S.

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

Index	Unweighted	Weighted
U.S. Domiciled Companies	(6%)	(1%)
Foreign Domiciled Companies	(3%)	11%
FTSE AIM All-Share Index	N/A	(8%)

The weighted return contributions for the U.S. domiciled companies listed on the London Stock Exchange's AIM were tightly packed at +/-3% with two exceptions; one company contributed an 8% weighted loss (absolute loss of 55%) and the other company contributed a 16% weighted gain (absolute gain of 123%).  The latter company filed a registration statement with the SEC in July 2011 for a proposed U.S. IPO and intends to remain listed on London's AIM after the completion of its U.S. IPO.  The weighted return contributions for the foreign domiciled U.S. operating companies listed on London's AIM were also tightly packed at +/-5% with one exception.  This company contributed an 8% weighted gain (absolute gain of 19%), is the third largest company on the London Stock Exchange's AIM with a market cap equivalent to $2.2 billion and has been dual listed on NASDAQ since 2007 after raising $300 million on London's AIM in its 2005 IPO.

In some respects, weighted results are a self-fulfilling prophesy.  Companies with increasing share prices on the London Stock Exchange's AIM, and therefore increasing market capitalizations, become more heavily weighted relative to those with decreasing share prices/market capitalizations.  In addition, a company listed on London's AIM that is performing well has a better chance of completing a secondary offering on London's AIM and for its share price to hold up relative to the dilutive effects, further increasing its market capitalization on the London Stock Exchange's AIM and relative weighting.  When these factors are controlled for by weighting the companies’ returns by their market capitalizations as of the beginning of 2011, as expected, the 21 U.S. domiciled companies listed on London's AIM lost more at 9% and the 29 foreign domiciled U.S. operating companies listed on London's AIM gained less at 6%.

In terms of average monthly liquidity on the London Stock Exchange's AIM (see the table below), the foreign domiciled U.S. operating companies listed on London's AIM outperformed the U.S. domiciled companies listed on London's AIM on both measures and the London's AIM as a whole on one of two measures.  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 the London Stock Exchange's AIM and its market capitalization on London's AIM.  The unweighted results represent the level of monthly liquidity on London's AIM that the average company can expect to achieve.

The reversal of this relationship for both categories of U.S companies listed on London's AIM indicates that relative trading volumes were slightly larger for companies listed on London's AIM with smaller market capitalizations.  For the U.S. domiciled companies listed on the London Stock Exchange's AIM, this was likely the result of London AIM investors exiting small companies in which they were no longer comfortable with the risk/reward relationship, as evidenced by their share price underperformance relative to the foreign domiciled U.S. operating companies listed on London's AIM.  For the foreign domiciled U.S.  operating companies listed on the London Stock Exchange's AIM, the reversed relationship likely reflects a slight bias towards investment in smaller companies listed on London's AIM that are viewed as undervalued.

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	4.22%	1.19%	4.42%
Unweighted	6.66%	1.38%	3.24%

The chart below provides the monthly detail of the unweighted liquidity on London's AIM for each of the three categories in the table above.  It should be noted that an abnormal level of trading activity in one foreign domiciled U.S. operating company listed on London's AIM during May caused the average for that month to spike to 10.10%.  If this company is excluded, the average would have been broadly in line with the surrounding months at 4.35%.  The increased liquidity on the London Stock Exchange's AIM noted during the final four months of 2010 has only receded slightly during the first six months of 2011, therefore, existing liquidity levels on London's AIM may represent a ‘new normal’.

 

The key takeaway from the chart above is that there is a liquidity advantage for U.S. companies that list on London'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 London'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 AIM IPO to minimize the risk of lack of liquidity on the London Stock Exchange's AIM becoming a problem in the first instance; including, selection of the most appropriate AIM Nominated Adviser (Nomad), AIM Nominated Broker, financial PR/IR firm and Independent Equity Research firm.