Magazine article Management Today

Pick Up a Prospectus

Magazine article Management Today

Pick Up a Prospectus

Article excerpt

Flotation by the big players will be analysed to death by the professionals, says Alistair Blair. But what should investors look for in a smaller company's prospectus?

In 1720, the South Sea Bubble got going and set the public off in a great mania of speculation. Some genius issued a prospectus inviting subscriptions to 'A company for carrying on an undertaking of great advantage, but nobody to know what it is'. He is said to have taken [pounds]2,000 on the first day, following which he caught the next tide to the Continent and was never heard of again. His inspiration lives on. True, prospectuses now supposedly include everything that investors ought to know about the companies they are investing in. But a few pages of unread print aren't going to come between a good salesman and a gullible investor's wallet.

If the company is like the Halifax, the Northern Rock or any other flotation worth [pounds]500 million or more, you're not going to add much to your understanding of the enterprise by ploughing through every last page. Anything of significance should already have been tracked down by analysts and highlighted in the press.

But inevitably, professionals give smaller companies less, and less careful, attention. If the new issue you are considering investing in is worth less than [pounds]100 million, you should make it an iron rule to flick through every page in the prospectus, checking for certain vital details as you go.

There are a couple of obvious checks that even the most unobservant of investors should make as a matter of course. First, it is important to see how much brokers are being paid for the flotation. You should satisfy yourself that only a modest fraction of the overall sum is going to be spent on fees. A general rule of thumb is that the higher the proportion spent in fees, the poorer the company's prospects. Second, it is essential to check that the flotation is being underwritten. Some of the smaller scale attempts at flotation are not.

Of the shares being sold via the prospectus, it is also important to know how many are new shares, the proceeds from which will go into the company, and how many are existing shares, being sold by shareholders who will put the proceeds into their own pockets. You'll find this information upfront on a page headed Key Statistics. …

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