Essentials of Holding Integration
At London Issuing we integrate and consolidate a company into one of our
holdings only if we are confident that the applicant-company will contribute to the holding
company’s reputation on the market. The company must have the resources to guarantee to
guarantee shareholder value maximization.
When assessing eligibility of an applicant-company, the key question asked by
London Issuing is always, «Do we really want our name to be associated with this company»?
An essential factor in making a decision in favor of an applicant-company is whether it
demonstrates strong leadership striving to implement best corporate governance practice and to
maintain effective communication with the market. Another advantage would be a sound strategy
and a viable opportunity to create shareholder value as well as an ability to competently
standardize finance and engineering.
Business Focus
Companies listed on the exchange are engaged in over forty different industries so most of the
firms will have no difficulty finding their own niche. It would be preferable for a company to
work in an area that shows significant medium-term growth. However, a company targeting a
non-dynamic or a negative-dynamic market could also be attractive provided it boasts a strong
leadership and works to increase its market share and active participation in the financial
sector consolidation.
For certain types of businesses, such as agrarian, resource-related, IT,
engineering or biotech companies — the most important factor would be their assets and a history
of effective asset management. Before investment funds decide to invest in a company they will
invariably consider the operation history of the holding company as a whole and of an individual
company in particular.
At the same time, regardless of the business sector, we will conduct a thorough
analysis of the company’s performance efficiency in previous years.
When considering a promising business/startup (which does not often happen in high risk
environments we base our decision primarily on the character of the leadership, its strategy and
the preliminary work it has undertaken.
Applicant-Company History
As we work with smaller and developing companies, we do not require prospective holding
participants to have a proven business history or a certain scale of operations; however, an
aspiring applicant for holding incorporation (with the exception of companies that have not yet
begun to generate profit, or possibly, extractive industries) is expected to demonstrate the
following:
- History of stable growth over the course of at least three years;
- Estimates indicating continuous increase in sales;
- Evidence of the company’s competitive advantages;
Stagnant growth or reaching a plateau is a disturbing sign for potential
investors.
Procuring funds during the initial public offering (IPO) to provide the company with order
processing resources, or to guarantee quality management before further expanding the business,
is a far more convincing argument in favor of supporting a company than mere increase in sales
and marketing.
A business is required to show a stable or growing net margin, while the total profit growth
must match or exceed the sales volume.
Of no less significance is strict adherence to the global economic standard.
Failure to demonstrate these dynamics shows a limited or insufficient capacity to guarantee
cost-effective sales. Even if the total profit growth rate matches that of the sales volume, we
have to make sure that direct costs are being correctly assigned to the products sold and do not
fall within indirect cost. This is why the total profit index should only be considered
alongside EBITDA and never as an isolated factor.
We conduct financial data analysis along with the company’s standardization reports for the
preceding period which constitute a very significant portion of its business potential
assessment. This information will be subject to a more detailed evaluation as part of the due
diligence process.
The EBITDA margin may be quite helpful because it is a common standard
demonstrating the effectiveness of core business activities; however, an accurate assessment of
such effectiveness should also take into account the cost of asset utilization. Considering this
indicator as an isolated factor may be confusing because at this point the costs could have been
excluded through capitalization. Therefore, the EBITDA margin [performance indicator] needs to
be considered along with sales volume, total profit, and net profit (or loss) before tax
margins.
We also analyze balance sheets to ensure they correspond to the reported results
of previous business activities. Increase in receivables turnover ratio may be a sign of debtor
quality issues or lack of financial control. It may even raise doubts about the credibility of
the sales volume data.
While analyzing the financial data for previous periods, we also focus on the
following:
-
Whether the previous period estimates proved right;
- Whether the company has unqualified audit reports issued by a recognized accounting firm;
- Whether the company accounting policy conforms to international financial standards;
- In the past, how successful the company was in attracting funds from outside investors and
whether its rating went up compared to the previous one with each new fundraising operation;
-
How closely the company’s technological facets conform to global technology standards.
Applicant-Company’s Range of Activities
Despite the fact that the standardized financial reports serve as the most reliable and easily
verifiable business history, London Issuing will also consider other aspects of the company’s
previous activities when assessing its capability to manage its future growth. The following
factors will be taken into account:
- Whether the company has a history of successful acquisition or integration of other
organizations (this is a question of particular importance if the company claims to be
acquiring quoted securities to experience growth through acquisition);
- Rate of turnover;
- Adherence to health and safety rules and regulations, etc.;
- Conformity to quality management and other compulsory standards;
- Published reviews (both favorable and negative);
- Involvement in litigation;
- To what degree the company may be considered economically sound as a project to be
financed.
We judge a company, first of all, by the character of its leadership and the feasibility of
verifying its conformity to international mandatory standards. To a significant extent, the
financial data provide sufficiently clear evidence as to how the company is managed and thus how
competent its executives are. Despite the fact that a company’s commercial success attests to
quality leadership, in practice, they might be managing an inefficient company in a successful
business sector.
Strong leadership usually demonstrates the following attributes:
- Well-defined structure spearheaded by a well-defined leader;
- Availability of competent professionals in all areas including HR, finance, marketing and
sales. In most cases, a competent chief financial officer is critical success factor for a
listed company within a holding;
- Organizational stability — an individual staff member’s departure does not cause irreparable
damage to the business;
- Good staff working relationships. A competent managing director needs colleagues who are
able to question their decisions and are not intimidated by them;
- A company’s ability to generate timely, accurate, reliable, and comprehensive management
data, which helps create appropriate systems required for the company’s business activities;
- Ensuring conformability of the accounting policy adopted by the management to existing
international practice standards upheld in the sector and the consistency of its
implementation;
- The efficiency of the directors who are capable of inspiring their employees to implement
the working style expected in a public holding company.
As part of the company management assessment, we evaluate the competence level of the directors
and sometimes of other key managers. The directors are required to fill out a questionnaire in
which they provide data such as previous and current receivables, personal or business
bankruptcy or insolvency information as well as their personal history.
Applicant-Company Strategy
One of the most important questions we ask you before you access one of the holdings as an
economically sound project to be financed is whether your company has substantive competitive
advantages that it can leverage in the future to create shareholder value.
Competitive advantages may take various forms, including — but not limited to —
patents, copyright and other means of intellectual property protection.
Examples of the above-mentioned advantages may be the company brand, its
employees, the time and resources spent on system building, process creation and entity
generation or they may be a combination of all the above.
A company’s ability to use these advantages to promote itself depends greatly on
having a good grasp on the future. The following points shall be considered in relation to this:
- Is the company an important player on a large market or is it working in a niche that it is
able to control?
- Does the company have to rely on market factors it cannot control that may affect its future
growth? Those may include limited demand or short supply of resources that the company has
to rely on.
- Does the company’s success depend on a limited number of employees, customers or
suppliers?
- Are there any significant barriers to market access for new participants and what market
factors are related to these issues?
London Issuing considers fundraising and secondary stock turnover management one
of its most essential tasks. In collaboration with you and your broker, we will have to
determine if the investors are prepared to purchase the holding shares along with your company
shares.
Is it sufficient for executing a successful IPO, secondary market fundraising
and for maintaining effective stock turnover?
What are the advantages that your company is bringing to the holding when its shares are offered
on the stock exchange?
One of the important elements of stock market entry is an alternatives review
and determining that, despite the extra workload and costs that go along with the «project to be
financed» status within a holding, the stock market is the right choice for your company.
Those who are considering standardizing their business structures and becoming a
foreign investment project should begin with thinking through and appreciating the necessity of
eliminating alternative solutions, such as raising non-public funds, a trade sale, debt
financing and even an alternative market of capital stock. Although the official role of London
Issuing is to monitor adherence to rules and regulations, we also aim to offer advice on
corporate finance and standardization.
Did the company make a good choice?
Traditionally, turning a company into an economically sound project to be financed is seen as the
final stage in its evolution which signifies that the owner-manager is taking steps to leave the
business. In our case, the situation is different: entering the stock market becomes a source of
capital needed for future development and was initially created to solve the issue of
insufficient funds (so often faced by many companies).
Fundraising for a project to be financed, aimed at offering a holding company’s shares on the
stock exchange, as the existing investors’ step towards leaving the business sector, is the
reason why most investors will consider this quite unattractive.