High-tech, low marks

Fund managers and analysts in the City are questioning the need for Techmark, the stock exchange’s new market for high-tech companies, discoversAdrienne Margolis

In view of the Government’s wish to promote high-tech companies, e-commerce and the `knowledge-based economy’, the stock exchange probably expected a warm welcome for its plans to set up a new market, Techmark, dedicated to technology companies.

But the proposal has had a mixed reception. In its third annual survey of City opinion on the IT sector, investment bank Granville found that 70% of the 40 institutions polled thought a dedicated market like Techmark was unnecessary.

The funds feared a separate market would be too volatile, and would repeat perceived failings of the alternative investment market (Aim) – on which companies raise equity but do not get a listing – by failing to realise the sector’s growth potential.

The stock exchange, meanwhile, argues that while London is already a world class market for technology stocks, it is important to support smaller companies in the sector. Techmark, which opens this month, will list companies of any size which are already listed on the main exchange. New ones will need a market capitalisation of at least £50m to join.

`The idea is to provide greater visibility for innovative companies,’ says a stock exchange spokesman. `Investors will be able to identify technology companies more easily, and there will be clear benchmarking. There will be a higher turnover of stocks, and the market will attract higher quality companies.’

Techmark is envisaged as a `market within a market’, regrouping companies from a wide range of sectors. Its creators believe investors want to look at specific attributes like technological innovation, as well as company size and sector. It will list around 170 companies from the main exchange. All companies in sub-sectors including computer hardware, computer services, the internet, semiconductors, software and telecommunications equipment will be listed.

For other sub-sectors predominantly associated with technology – such as aerospace, defence, electrical equipment and pharmaceuticals – an independent panel of advisers will assess companies’ eligibility.

But, critics argue, there are already plenty of capital sources for high-tech companies. They can go to the well-established Nasdaq in the US, the slightly shakier Neuer Markt in Frankfurt, or to Easdaq, the new pan-European market in Brussels.

Rather than nurture a new market, the fund managers questioned by Granville said the stock exchange should make changes to help growth companies. `The greatest problems are at the venture capital level, and this will not be resolved by the creation of a new market,’ Granville’s report concluded.

One successful internet company shares this view. `The exchange should focus on making flotations more transparent and ensuring that investors have access to the best possible information,’ says Tim Jackson, founder of on-line auction business QXL. `That is Nasdaq’s greatest selling point.’

Another problem is with the definition of technology: it will take in a broad group, from computer software to biotechnology to e-commerce. `Techmark will need to be sufficiently different to attract business,’ says Graham Spooner, national director of corporate finance at accountant HLB Kidsons.

Venture capital usually helps companies worth up to £1m. Aim attracts those worth £5-25m. `A big black hole is opening up for companies under £50m seeking funding,’ says Katie Morris, chief executive of Cisco, which represents smaller quoted companies.

She believes Techmark is not addressing the most important issues. `Not all small companies want venture capital,’ she argues. `And they can only get on the equity market by getting private investors to back them in the early stages.’ In the UK, she adds, equity is considered second rate, because debt finance can be set against tax.

`Techmark is an interesting concept, but it will not revolutionise things like Nasdaq did,’ says Neil Burrell, head of the pan-European equities desk at analyst Framlington. He finds it odd that the new market will take in conglomerates like Glaxo Wellcome, as well as companies with a market capitalisation of around £2m. He is also concerned that the definition for eligibility is too broad, potentially allowing in `any company that spends money on R&D’.

Even so, Burrell expects the exchange to get a huge response from the companies it has contacted about joining Techmark. `Any companies involved in R&D will want to be quoted,’ he says.

If this is the case, companies due to be listed are keeping very quiet about it. The Engineer contacted a dozen, including British Aerospace, Fairey Group, Orange, GEC and Logica to see what they thought of the plans for Techmark. Of the twelve only pharmaceutical giant SmithKline Beecham and computer services group Sema were prepared to comment. Both companies welcomed the new market.

Further details can be found at: www.londonstockexchange.com

{{Companies listed on the new market include:

Aerospace: British Aerospace, CobhamComputer hardware: Calluna, PsionComputer services: Logica, Morse, Sanderson Group, Sema GroupDefence: Ultra ElectronicsElectronic equipment: Amstrad, Fairey Group, GEC, Oxford Instruments, Pace Micro Technology, Racal Electronics, RenishawPharmaceuticals: AstraZeneca, Glaxo Wellcome, British BiotechSemiconductors: ARM HoldingsTelecoms: BT, Cable & Wireless, Telewest, Orange, Vodafone}}