New Issues Examined by Oliver Haill

In the last eight weeks, seven adventurous ventures have made their way over from the famously patriotic United States to list on these shores.

The chief reason for deserting their own proud nation’s exchanges appears to be the high cost of listing there. The introduction of the Sarbanes-Oxley (SOX) compliance procedures, to tighten up corporate governance post-Enron, has ramped up advisor costs and, added to that, Nasdaq has imposed higher minimum market capitalisation rules.

There are now 29 US companies traded on AIM – evidence that previously sceptical UK investors have begun to embrace speculative Yank offerings. Five arrived in March and they were a truly diverse selection: from established grocery products distributor Legacy Distribution, which raised no new money and commercial fish farming specialist Aqua Bounty Technologies, a venture which reeled in £20 million, to financial service outfit Peach (£12 million), Platinum Diversified Mining ($80 million) and payment processor Planet (£7 million).

A model investment

The two that touched down in April were equally contrasting companies, and both cited US compliance costs and a new-found faith in AIM as motivation, as well as the belief that an AIM listing conveys a strong ‘global’ image.

Of the two, Californian computer-modelling business Entelos disembarked first, with broker and adviser Evolution coaxing ‘blue-chip UK investors’ into stumping up £11.4 million. ‘For a small company in the US, annual costs could be between $1-2 million,’ notes CEO James Karis. ‘As a growing company that just doesn’t make sense.’

Entelos’ abstruse technology was originally conceived by aerospace industry boffins back in 1996 and has since been proved to save drug companies millions of dollars by reducing the massive costs of drug discovery and development. Karis explains: ‘If you want to research a new therapy or develop a new drug we build a model on the computer that simulates how the body will react.’

Although the process can take as much as 40 per cent off the cost of a clinical trial, Karis’ biggest problem was establishing credibility. Having now been signed up by the likes of Johnson & Johnson, Pfizer and Roche, the company is additionally working with the US drug administrators to demonstrate its procedures.

The new money will go mainly towards building models for additional ‘disease areas’ such as COPD (chronic obstructive pulmonary disease) and diabetes. Karis assures the company is ‘self-sufficient today’ despite making a net loss of $13.8 million in 2005.
With long-term contracts providing ‘80-90 per cent visibility a year ahead’, it has around $25.4 million of deferred revenue for the next two years and could reward a punt.

Coffin bursts onto market

Against a background of US online advertising revenues topping $12.5 billion during 2005 and UK online ‘adspend’ reaching £1.4 billion for the same period, nomad and broker Altium helped internet advertising company Burst Media attract some £37.9 million at 82p from UK investors (the bulk of this cash went to selling shareholders).

Led by co-founder Jarvis Coffin III, Burst effectively acts as the sales representative of a network of 1,850 web publishers, which together operate 3,400 websites. Examples include snopes.com, a two-man band whose urban legends website receives millions of impressions (an impression is when a web page is viewed).

Burst is paid by advertisers on a cost-per-thousand-impressions basis and claims that if advertisers use its entire network they can reach ‘one in three people online in the US’. Burst’s six sales office across America and one in London sell advertising across its network, arranged by demographics or by the 40 categories it can divide its sites into, such as automotive, careers, games or music.

Currently, almost its entire $21.6 million turnover in 2005 came from US advertisers, but 25 per cent of its web publishers and 30 per cent of its web traffic come from overseas. An operating profit of $3.4 million was made last year and Coffin advises that the £2 million Burst retains from the fundraising is mainly for acquisitions: ‘we’re very keen to do one this year and have a second in the pipeline by the end’.

Its market is growing impressively but is fiercely competitive. I’m always reticent when much of the money raised at IPO goes to exiting shareholders, but this is nevertheless one to keep an eye on.