Investors who bought shares in Ionica at £3.90 ($6.40) during the innovative UK telephone company's public flotation led by SBC Warburg Dillon Read in June, have soon regretted that decision. Just four months later in November, Ionica issued a warning of a slowdown in sales. It announced a first-half loss of £77.2 million. Worryingly, problems of insufficient base station capacity, a delay in implementing a crucial software programme as well as the company's own imposition of new credit controls on customers, had together slowed its drive to sign up new paying subscribers. The news sent the share price tumbling to £1.56.
A partner in one of the leading law firms specializing in securities markets says: "There is no doubt that, in America, if you get a dramatic share price collapse like that, someone gets sued."
In fact, Ionica was always going to make a loss. With its extensive roll-out programme and high capital expenditure, it was not predicted to make profits for up to eight years. But these early problems were not expected. Only one banker at SBC Warburg Dillon Read is allowed to talk about the floatation, and he refused to speak for attribution. He defended the decision to bring Ionica to the stock market. "We brought a company that is in its early stages of development. Any investor must look at the possibility of success in the long term." So the recent problems on delayed software supply, such a crucial aspect of a business priding itself on using innovative technology, were not known? "Of course not. The due diligence was done thoroughly. And anyway, it was rammed down investors throats that this was a potential risk."
Indeed, the prospectus, typically for such a document, does provide plenty of cover for company and lead manager. It clearly states that "There can be no assurance that the company's network will be completed within the necessary time frame (if at all) or as to the ultimate cost thereof." There are numerous other disclaimers as to the fate of Ionica.
But the Ionica case points to a worryingly grey area in English law which a committee formed by the London Investment Bankers Association is now studying: the question of whether a company issuing securities or its lead bank should take responsibility for the accuracy of projections contained not in the prospectus but in broker's research accompanying a new issue.
In a highly regulated market like America, this is a non-issue. Brokers are forbidden from producing research in the months before they lead a new issue for a company. In the UK, there is no such rule and the market works by nod and wink. The prospectus may be the official document for selling shares but the real juice which investors look for is either in the written research pieces or delivered over the phone by the lead bank's analysts. While Ionica is a mainboard listing, problems can also arise when small companies from under-researched sectors come to markets such as London's Alternative Investment Market (Aim).
"Some profit illustrations look as if they have been written on another planet," says Roger Cox of Small Company Investor publication. For instance, skateboard manufacturer Snakeboard International raised £3 million on flotation in November 1996 on the back of profit illustrations of £1.7 million. Within three months it had already issued two profit warnings, and has had to resort to an emergency loan of £200,000 from non-executive chairman David Lloyd.
Aim has had its fair share of bad publicity. Recent events show that investors on the main stock exchanges must also be wary. Robert Minto