The egos of founding shareholders grow with the profits of their private company. This results in the very significant decision to list the company on the stock exchange at some stage – typically as part of a mid-life crisis.
This listing process “enhances brand”, gives “a higher profile”, provides a “better rating” with the banks. The key thing for the founding shareholders is that they don’t have to give away control. They raise money from retail shareholders who participate to make a “quick buck”, irrespective of the IPO price. The expectation of a “quick buck” breeds the expectation of a “quick buck” and so stagging inevitably occurs to the ultimate detriment of the retail shareholder. Count how many IPO share prices in African markets are actually higher now, after the event.
After the IPO the egotistical founding shareholder then slips back into his old ways. Illiquidity in the share slowly results in its share price being undervalued compared to the company’s asset value and peers. Dealing with retail shareholders and their rights, is a hassle at the best of times but more so when there are few shareholders accounting for a relatively small percentage of the issued share capital. This in turn results in low trading values, both as a percentage of issued shares and in nominal terms. Its easy to lose interest, for all of us.
Generally speaking there are no efforts by egotistical shareholders to engage their company’s shareholder base as potential customers of the business post IPO. Except, of course, when the annual report is delivered – or “if” the annual report is delivered to the minority shareholder. Some markets such as Kenya have dropped the requirement to deliver annual reports to shareholders.
Over time, as the share price declines as a result of illiquidity, and in order “grow shareholder” value, the company then embarks on a share buy back scheme whereby the company buys-out the same shareholders it sold shares to. Take this to the logical conclusion a listed company then systematically reverses the IPO process to the point where the company has to, or it “makes sense” to de-list.
The moral of the story is that directives of listed companies and potential listed companies and indeed regulators, do not provide enough strategic thought about why their companies should list and what the benefits are. “Building brand”, “better reputation” and all those cliches stand for nought unless the listing is used actively post IPO and this is where African listed company directors have their head in the sand (this is the polite version).
African capital market players need to look at what small listed companies or indeed companies that have small free floats are actually achieving by listing. A review of most African stock exchange listed companies’ websites show that the answer is “not a lot”.
Its so exciting looking at African markets’ potential until you actually see how many companies are actually “investable” – very few. This illiquidity paradox is serious.
