Member Article

The Facebook Factor

A variation of the BBC Quiz show, “Who Dares Wins” was played at the recent New Street Square social. Participants were asked to call-out the number of reasons why a company would undertake an IPO. When the number was thought high the last person was asked to name those reasons.

How did Facebook come to the assistance of the winner? By creating a new reason for a company to go public, namely to raise funds to pay the tax charge incurred by employees on their option shares. Such charge arises solely and as a direct consequence of going public.

Facebook proposes raising $5billion – more than the market cap of several FTSE 100 Companies to pay the tax charge on profits earned by some 3,000 Facebook employees as a consequence of Facebook becoming a public company. Together the combined holdings of those employees have a value of approximately £25 billion.

The important fact to note - Facebook has 3,000 employees who suffer this tax charge. Bearing in mind that Facebook only began trading some eight or nine years ago, this is a phenomenal rate of job creation. It confirms what we long suspected, namely that high growth companies can create jobs at a phenomenal rate.

Developing this theme, mobile payment company, Monitise last week announced plans to list on NASDAQ and appointed Goldman Sachs to assist.

In June 2007 Monitise was a division of Morse plc. It separated and raised £20million and at the same time its shares were admitted to AIM. From this early and small start Monitise has grown rapidly. In the interim results for the six months ended 31 December 2011 half year revenues were £16million and the forecast revenue for the full year was £34million. With an order book of £83million, the future for Monitise and its 400 employees looks good.

Yes, that’s right, 400 jobs created since 2007. Monitise is a classic example of where, albeit in 2007, equity markets worked efficiently to create value, jobs and growth. But that was then and now with the equity markets at best ajar, what are the fundraising alternatives?

The CBI has published its views on the way forward for financing small and growing businesses. The paper opens with the comment, “the private sector growth agenda requires a focus on both working capital and investment capital”. The report continues, “fixed income corporate bonds can be made more accessible by encouraging both retail investors and businesses to make greater use of bond markets”.

So the emphasis moves towards replacing access to bank credit with subscriptions for loan notes or bonds by individuals, corporates and institutions.

Is the vision of bank funding being replaced by an active new issuance bond market available to companies large and small a reality?

Some research reveals that actually a new issuance private debt market is forming. In 2011 there were at least four private bond issues by SMEs. For instance, Wind Prospect raised £10million at interest rates varying between 7.5-8%, Caxton raised £4million at an interest rate of 7.25%, Ecotricity raised £10million at interest rates varying between 6-6.5% and finally, Thin Cats raised £2millon at interest rates varying between 9-12%.

The number and range of such bond issues enables market pricing to be developed, an important element of any new market. The next steps involve establishing a market in the trading of such debt. Perhaps this can be achieved on a regional basis with local brokers with knowledge of local businesses assisting buyers and sellers with price formation, settlement and research.

So, it seems that the door is opening on the world of SME bond issuance.

This was posted in Bdaily's Members' News section by Tim Stocks .