HOPE FLOATS?

By Tandeep Minhas, partner at international law firm Taylor Wessing

The seemingly endless enthusiasm for tech company IPOs has, we are told, come to an abrupt halt. Over the last month or so we have seen shares in the newly floated Boohoo drop below its flotation price of 50p, while Just Eat and AO World have also suffered similar problems. Even well-established tech giants such as Facebook, Twitter and LinkedIn are taking a hit. The momentum of investment in the tech industry may be stalling,but the comparison drawn with the dotcom bubble is a lazy one.

The infamous bursting of the dotcom bubble in the early noughties occurred due to the realisation that many of those companies consisted of not much more than a flimsy idea with hope tacked on. This cannot be said for the majority of companies operating in the tech industry today:many ‘tech companies’ are simply traditional businesses operating through a digital medium,whereas companies involved in technological innovation are the product of years of careful R&D. Whilst the hype about ‘tech’ may be dwindling, price readjustments need not prophesise doom for the entire sector.

The label ‘Tech Company’ can be misleading; it is seemingly applied to any company which has some technological element, however small. The term can give a mystifying veneer to companies, masking their bread-and-butter business credentials. For example, the tech label has been stretched to cover e-commerce businesses such as Asos. WhilstAsos operates online and has various technological interfaces it is, in essence, a retailer andby the time of its IPO it had a credible trading history, an existing customer base and was already a household name. Such companies are no more than the upgraded versions of traditional businesses. The price fluctuation in the market is more like a corrective process, valuing these companies in isolation from the tech hype -such correction does not render them valueless.

What is more, many’tech companies’ in the traditional sense (eg. a company whose business is the creation of unique systems or technological processes) should not be dismissed in the same breath as the dotcoms of yore. For example, the digital consumer engagement company Eagle Eye, which this month announced its intention to float on AIM, has 38 patents, a blue chip customer base and 10 years of research and development to its name. The potential profitability of these companies is not just a figment of the imagination. They are credible investments even in the absence of hype; this could not be said for many of the companies floating at the time of the dotcom bubble.

This does not mean that there hasn’t been some overvaluation. There has. And it is right to hesitate when companies have a market capitalisation far beyond their trading profits(at IPO Just Eat was valued at £1.5bn when its profits for 2013 were just over £10m). But this is the nature of hype – it distorts value.It is also the nature of hype that it comes in fits and bursts.

As the tech hype subsides, the market will readjust prices to reflect true value and in some areas this will mean losses. However, this process of correction should be a good thing, as optimism will then be replaced with critical analysis. Investors will look beyond the glitz and assess the commercial strength of these businesses in their own right. Unlike hoards of dotcoms, many tech companies have solid businesses that will withstand the evaporation of hype. Clearly not all tech companies will be successful, but that is the nature of the market.

Tandeep Minhas is a partner in the corporate finance practice at international law firm Taylor Wessing. In 2012 she was part of the team that advised on the AIM IPO of blur (Group) plc, operator of the Global Services Exchange, and she is currently advising Eagle Eye Solutions Group, the digital consumer engagement company, on its flotation on AIM on 16^th April 2014.

Tandeep Minhas, partner at Taylor Wessing

Tandeep advises on all aspects of corporate finance M&A work, including public takeovers, fund raisings and IPOs, company and business acquisitions and disposals, joint ventures and reorganisations.

She has specialist knowledge of the public markets in the UK and has advised on numerous flotations and secondary fund raisings on both the Official List and AIM, acting for companies and corporate finance/broking houses, nomads and sponsors. She has particular expertise in advising international companies and investment entities on their London listings.

On the M&A side, she has advised a wide range of real estate clients from blue chip corporates to high profile entrepreneurs on real estate-related corporate transactions and joint ventures.

Tandeep sits on the Technical Committee of the Corporate Finance Faculty of the ICAEW and is a regular speaker at training and business development events organized by the London Stock Exchange.  She has also spoken at conferences in India on raising capital on the London markets and carrying out M&A transactions in Europe.

She is a Trustee and Vice Chair of Rich Mix, an arts and cultural centre with charitable status in Shoreditch.