City & Business: Float and lose, a game for all investors to shun

STILL they keep floating, still they keep flopping. The parade of stock market debutantes blushingly admitting they won't meet profits expectations grows ever longer. Yet many in the City behave as though nothing were amiss.

Sure, the advisers argue, there have been a few disastrous floats, but that's capitalism, that's why it's called risk capital. The vast majority of floats have gone smoothly, they insist.

Not true. As our analysis opposite shows, no less than 77 of the 132 new issues of the last year we've been able to track down are showing capital losses for their new investors. And for 27 of them, the share price fall since flotation has been more than 15 per cent. That's a pretty unacceptable failure rate. As our page 1 table shows, there's barely a top City adviser that hasn't been tarnished.

Rights issues too are claiming victims, as Eurotunnel continues to demonstrate so spectacularly. Shareholders who gamely injected pounds 850m of new money into the gaping Channel tunnel in May, have since waved goodbye to more than pounds 200m of it. Many more fiascoslike the delayed Eurostar trips last week and they are likely to see more of their investment vanish.

There are many explanations for this rash of third-rate paper. One senior fund manager blames the poor quality of financial analysis in this country.

City analysts simply don't come up to the standard of their Wall Street counterparts. It's therefore easier to sell them pups.

Another explanation is that the enormous effort of going to the stock market distracts floating companies' managements. For the three or so months it takes to go through all the regulatory hoops, managers inevitably take their eye off the ball. That can be dangerous, leading to lost orders or spiralling costs.

Another is that floating companies are too greedy. It's easy enough to dress up the profits figures for the year immediately preceding flotation. Costs can always be chiselled back in the short term without immediate damage to revenues. Companies previously backed by venture capitalists looking for an exit are especially prone to such massage.

Another is that the advisers to new issues can no longer see the wood for the trees. They are so mesmerised by the task of meeting the technical requirements of the float that they fail to ask themselves whether the business is any good. Every 'i' is dotted, every 't' crossed in the immaculate prospectus: the company, alas, is a heap of rubbish.

Each of these theories carries some weight, and may explain some of the recent new issue fiascos. But there is another factor. The decent floats have already been done. Any company halfway ready for quotation was groomed and dispatched long ago.

At City firms hit by the drought in equity and bond trading, there is inevitably pressure on the corporate finance department to drum up more fee income. So the cavalcade continues. It would not take many more duds for some sponsors to get themselves a reputation for lumbering investors with lousy paper.

Meanwhile, amazingly, there is still an appetite for new issues.

Institutional investors are still prepared to invest. True, some of the riskier issues have been pulled, but many more have been carried on. Only last week, TeleWest, the cable television company, resurrected its flotation plan.

It may be time for a pause, but while there is any demand for new paper, merchant bankers and brokers will continue to groom their clients for the stock market. Investors should refuse to play this game. It's not difficult.

As Nancy Reagan advised children tempted by proffered drugs, Just Say No.