By Richard Sharpe

March 2023

The decision to float the UK-based chip designer ARM in New York and not on the London Stock Exchange (LSE) is conclusive proof that the City is second best for IT shares.  ARM may not be the only IT company heading west.

It was not always so, as the Archives reveals.  The great success of the LSE in terms of IT companies was the privatisation of BT 41 years ago.  The privatisation of BT was ideologically driven, internationally pioneering and financially brave.  But, it worked: the government raised £3.9 billion through the sale, £14.7 billion in today’s value  – see here.

Lord Kenneth Baker, then the minister in charge of IT, recalled the privatisation in the archives:  “The only reason why that worked was that the Chairman of BT, a man called Sir George Jefferson, wanted to be privatised. He’d come from the defence world, running a defence industry company, and I was a Minister in charge of this nationalised industry called the Post Office. And as a Minister I had control over the wage negotiations for the staff, the pensions negotiations for the staff, I could appoint anybody I wanted as the Director. I was also responsible for the investment programme of the Post Office and everything management, it came to me as a Minister. And I said I happen to be a businessman so I rather like all of this, but quite frankly, most of my colleagues really had no idea at all about business and it was quite wrong for a Minister to be making those sorts of decisions about a great industrial undertaking. And George Jefferson, the Chairman of British Telecom, believed exactly the same. And with his support we were, over a period of three years, able to privatise BT.

Alastair Macdonald, a senior civil servant in the ministry in charge of the privatisation told the archives: “It wasn’t the Government’s role to set up a privatised BT so that BT should be a global player. It wasn’t in the prospectus, we see BT being a global player. It was rather, letting British Telecom, you might say, out of the cage of being a nationalised industry. And how it performed out of the cage would have to depend upon how astute their prospective purchases were, or their strategy, the money, and brutally, the quality of management that they had and what the competition were doing. And, what drove ministers without doubt was releasing the shackles on, on British Telecom… I can remember Norman Tebbit [then the secretary of state in charge] ringing Sir George Jefferson, the Chairman of British Telecom, a few weeks before the flotation, to say, ‘We have now agreed in government on the salaries of the main board members of British Telecom…I very much hope that this is the last time that we in Government will be setting the salaries of one of the biggest companies in this country.’”

The government got the cash from the float of BT.  The individual shareholders got the cash for the successful float of F International in 1996 as Dame Stephanie Shirley told the archives:  “By that time we had got stock out among the senior staff, and they wanted to see that properly valued. They wanted to buy using paper, which up to then we hadn’t done, and for that they needed to get a quotation. And it was, quite a nasty surprise to me, having handed over, you know, a significant chunk of the business, to then find that, they weren’t going to just hold it, they wanted to sell it. And, I assumed that they would have the same drive as I did, which was a question of control, rather than a question of making money. Anyway, that’s what they wanted to do, and that’s what happened.”  The float raised £60 million and made Dame Steve and others at the top of F millionaires.

Successful flotations on the LSE need not be in the billions or even top tens of millions of pounds.  For example, Sage was floated in 1989 for £21 million,

But sentiment seems to have changed, as shown by the decision of ARM’s parent.  Another blow to the LSE’s standing was landed last week when WANdisco, based in the UK and the USA, revealed that it is looking to a US listing.  WANdisco is an activation platform that accredits transactions at scale.  WANdisco says its products “data solutions enable enterprises to activate large volumes of unstructured data trapped in your internal and edge systems, making it immediately available in the cloud to leverage the latest advancements in machine learning and artificial intelligence- based cloud analytics.” It is currently traded on the LSE’s AIM market, the market for smaller, less developed companies.  It seems the LSE can’t even keep hold of those it has nurtured over the years.  But at the end of the week all this became moot as WANdisco asked to have its AIM shares suspended because it had found “significant, sophisticated and potentially fraudulent irregularities” in its accounts.

Why now is London not looking as good a home for IT company shares as New York?  The Times attributes the dimming of interest in IT shares on the LSE to the attitudes of UK fund managers.  “UK fund managers prioritise the cash from dividends.  This insistence of paying out starves companies of the capital they need to invest, stifling growth and increased productivity.”  In contrast the New York markets, the New York Stock Exchange and the NASDAQ, often focus on capital growth, the growth of the share price, rather than dividends.  (The Times March 4, 2023, page 29)  The fear is that a drip/drip of companies leaving the LSE will turn into a rout.

Few UK investors seem to be able to take a long-term view of a company’s value: this is certainly the view of Sir Martin Read who used to run Logica.  Companies are not valued properly on the LSE which leaves them open to takeover from outside the UK, as he told the archives below:

This is one reason why the UK was unable to build companies the size of Microsoft and Google.

Another reason why ARM would go to New York emerged last week in evidence given by the Financial Conduct Authority to the Treasury Select Committee.  The CEO of the Authority, Nikhil Rathi, told the Committee: “We have not, as a country, prioritised in these policy choices, retention of a UK capital market nexus”, unlike other countries.  In other words, the authorities did not make any conditions about where a future listing should be when it agreed to the sale of ARM to its new parent SoftBank in 2016.  The undertakings agreed to were for job retention and intellectual property only.

Yet the Treasury has launched a review of why the UK lags the USA in technology and life sciences: perhaps the horse has already bolted.

There is always one way to avoid the pitfalls of a relationship with the City: don’t go there.  You can even avoid overdraft facilities, as Sir Peter Rigby did when starting out;  “I went to my bank manager and said ‘I’m going to do this [start a company] and I probably need some support for a period of time. It’s not particularly capital-intensive but I do need to have a certain level of income.’ And he said, ‘Fine, you know, we’ll help you, and, and sign here. And I’d like a second mortgage on your house.’ And I said, ‘Thanks but no thanks.’ You know, you either back me, or I back myself. Because it’s me that’s taking the risk. And, so I didn’t utilise any banking facilities. I had saved £2,000.”  Sir Peter kept the company private and plans to do so: “our succession planning and our protection of our share ownership and so on is designed to keep it as a family business.”