Wealth warning over City floats

NEARLY two-thirds of companies that have come to the stock market in recent years now have lower profits, research shows.

Far from being the promised land, a share float can cause management to take its eye off the ball and fuel a spending spree that damages the bottom line.

A report by accountant Ernst & Young says that only 39% of a sample 200 companies floating between 1998 and 2002 now have higher profits, even though 82% have increased sales.

The finding will be a stark reminder to firms eyeing a listing following the recent rally on the FTSE 100 index, which has enticed directories business Yell and reinsurer Benfield to float over the past three months.

David Wilkinson, E&Y's IPO leader, said the research showed a new Plc often suffers a sharp profits dive in its first full year, given higher costs and disruption to the day-to-day running of the business.

'Flotation has not brought the immediate success that many companies would have expected or indeed promised in the over-optimistic environment of 2000,' he said.

'Not all the companies that made it to the market were fully ready, either in terms of a robust enough business model or having the critical mass to float. An IPO should be viewed not as a one-off cash-raising transaction or a quick win but as a long-term business transformation process, and many of the benefits take time to emerge.'

E&Y's report, IPO - A Route to Growth? shows that 466 UK companies floated between 1998 and 2002, raising £21bn in the process. The dot com boom was behind half the activity in 2000.

While the high number of failed software companies helps to explain the poor profits record, pubs operator Punch Taverns, health and fitness outfit Topnotch and temporary offices firm Regus also suffered.

Property giant Canary Wharf is among the best post-IPO performers with a profits jump of £289m since the last full financial year before it floated four years ago. Little-known New Barnet-based aerospace procurement firm Aero Inventory has seen its profits jump 5267% through an expansion drive that followed its 2000 listing.

Of the 466 firms to float, 65% are still listed on AIM with just 21% on the main market. Ten are now suspended while 54 have delisted.

THE company once touted as Britain's answer to American online auction giant eBay, QXL Ricardo, has gone from being a £1.7bn stock market star to a business relying on tax rebates to stay alive. Four years ago, QXL took advantage of the tech boom to go on an acquisitions spree in 12 European countries and snap up Germany's Ricardo for £668m. But now its annual pre-tax losses stand at £18.7m.