Fitch takes the money

Companies float on the Stock Exchange for several reasons, but the most common one is money. City backing puts cash into businesses and allows them to expand.

This can be a double-edged sword, as the City exerts pressure as well as issuing cash. Financial institutions are often accused of short-termism in their quest for shareholder approval, and company founders often attempt to “go private” again by buying back shares and de-listing from the markets.

Last week Fitch announced that it had reached an agreement with US group Lighthouse for a recommended cash offer, which, unless a rival emerges, will see it de-listed within months. When it went public in 1984, Fitch was the first listed design group.

The reason for the U-turn, concedes Fitch chairman and chief executive Martin Beck, is again financial. But he describes the deal as akin to swapping one set of shareholders for another.

Under the agreement, Lighthouse pays 62p in cash for each issued, and to-be-issued, ordinary share in Fitch. Shareholders still benefit from their final dividend payment, in a deal which values Fitch at 26m.

Beck says the market for small public companies is difficult, especially on the London Stock Exchange where Fitch is listed. “The way the UK market is shaped makes it very difficult to be small… it is very discouraging,” he says.

Fitch has been eager to expand for some time, but has been held back by two factors: the value of its shares was too low for “paper” acquisition deals, based on the mutual exchange of shares, and it had too much debt to raise sufficient cash to buy other companies outright. Or, as Beck puts it: “Fitch is a consultancy with the potential to expand, but we have been constrained by the illiquidity in its shares and a low stock market valuation which has deterred us from raising new equity.”

“That’s not to say we weren’t growing. We were, but surely not at the pace we should have been growing. We knew something had to happen,” he adds.

Fitch decided not to become part of a larger group, such as WPP Group, because the board felt the consultancy should be the platform for expansion, not part of an existing corporation. “We want to see how big we can make the design world,” says Beck.

Lighthouse, a fund not a company, seemed an ideal way to proceed. “We had the will, now we have the way,” Beck adds. He admits the chief motivation is money: “The main reason is to free up the opportunity for growth.”

A spokeswoman for Lighthouse, formed last autumn and based in Chicago, says the group is looking for a broad portfolio of service companies to enable cross-selling opportunities.

It will retain individual companies, rather than forming a Lighthouse conglomerate. “We acquire marketing services companies and we saw Fitch as a valuable network and an ideal platform to expand. We have a number of companies we are hoping to acquire soon,” she says. “We are not looking at consolidating Fitch with someone else, it is a stand-alone business.”

Lighthouse chairman and chief executive officer Terence Graunke says, “We can continue to grow and expand Fitch’s successful global design and marketing consultancy platform and offer greater depth and enhanced services to Fitch’s clients.”

There will be minimal changes at Fitch: the Fitch plc board will no longer be needed, meaning all three non-executive directors – Des Gunewardena, Philip Ling and Bernard Roux – will be out of a job. But there are expected to be no staff redundancies.

Organic growth of Fitch will continue, with some major acquisitions planned in the longer term. “The US is a big market. But we are just as devoted to the UK and Europe. We are an international company,” says Beck.

Although he cannot put exact figures on how large the assets at Fitch’s disposal will be, Beck says that Lighthouse has over $100m (62m) in equity funding, plus “significant bank holdings”. That equates to a lot of spending power.

Fitch management will also hope that they enter the next chapter of expansion with newly invigorated employees. Fitch staff are among those who can cash in their shares, making a smart profit. “They will be incentivised going forward,” says Beck.

Of course, in the financial world, what is done can usually be undone. The idea that Fitch will seek to grow sufficiently that it can re-float, and enjoy the benefits of being a large public company rather than suffer the problems of being a small one, has been considered, admits Beck. “Every investment needs an exit strategy,” he says.

Staff reactions

One senior staff member at Fitch who has shares in the company says her first reaction was ‘yippee!’.

‘When the announcement was made I think everyone had a really good feeling about the deal,’ she says. ‘I liked it for two main reasons – obviously, personally those of us with shares do nicely out of it, but it’s also good for the company because it means we can grow further.

‘We’re all having to remind ourselves that we can’t start spending the money because there’s no guarantee the deal will happen, but…I’m optimistic that it will go through.’

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