Scotland: Stock market listed company losses like 'slow death'

Business Editor

THE decline in Scottish companies listed on the London stock market in recent decades has been likened to a “slow death” by one expert, with another flagging Brexit as a key current factor at a UK level in the loss of big corporations.

Scotland's quoted company landscape looks very different indeed from that in the mid-1990s, and the change has not been for the better.

Back in those days, it included two firmly Scottish-based clearing banks in Royal Bank of Scotland and Bank of Scotland. These institutions carried with them proud histories and real clout and, crucially, their decision-making took place in Scotland.

Royal Bank, after its successful acquisition of NatWest in 2000 following a hostile bid battle, came close to collapse as the global financial crisis got under way in earnest in autumn 2008 and had to be bailed out to the tune of tens of billions of pounds by the UK Government. Now rebranded as NatWest, the institution is run from London by chief executive Dame Alison Rose.

In what turned out ultimately to be another lamentable sequence of events for the economy north of the Border, Bank of Scotland merged in 2001 with Halifax to form HBOS. The enlarged entity was based in Edinburgh. However, HBOS came unstuck as the global financial crisis took hold and was swallowed up by Lloyds in a rescue takeover.

It would be difficult to overstate the effect on Scotland of losing the headquarters of the two big, formerly Edinburgh-based clearing banks.

Other major names in corporate Scotland which graced the stock market screens in recent decades but do so no more include Stakis, Kwik-Fit, ScottishPower, and Scottish & Newcastle, which were all acquired, and General Accident, which was swallowed up in a merger deal.

More recently, other big names such as Stagecoach and Aggreko have been acquired. US private equity outfit Apollo made bid approaches to Aberdeen oil services company John Wood Group over recent months but ultimately decided not to make an offer.

The loss of major quoted company headquarters is clearly not a good thing from the viewpoint of Scotland’s international reputation, or for the nation’s economy and workforce.

However, experts have highlighted the fact that this is a broader UK problem.

Ross Brown, professor of entrepreneurship at St Andrews Business School, said: “There is strong empirical evidence for the ‘slow death’ of the Scottish-incorporated company being listed on the London Stock Exchange and other junior markets like the Alternative Investment Market, which has less onerous reporting requirements. Consequently, Scottish-incorporated companies have decreased markedly in recent years due to a lack of new initial public offerings (IPOs).”

He warned that “while going somewhat unnoticed, this trend has significant consequences for the Scottish economy in the years to come”.

Jeremy Peat, vice-president of the Royal Society of Edinburgh, highlighted Brexit and “bad and erratic economic [and] fiscal management and policymaking” under the Conservatives at Westminster as “two blindingly obvious reasons at the UK level” for the loss of big companies.

He said Brexit is “causing many in financial services, manufacturing, etc to relocate to the continent or Ireland”, observing: “This clearly makes economic sense for many.”

On UK economic and fiscal policymaking, Mr Peat added: “How can businesses plan effectively when they have to deal with the vagaries of [former prime minister Boris] Johnson ¬- not to mention the Truss [short-term] but longer-impact nonsense. The outlook is for weakness and continuing uncertainty. For starters, interest rates could stay higher for longer than across the EU, US, etc. More good reasons to depart these shores.”

Mr Peat noted that, in Scotland, the “uncertainties are exacerbated” by questions around whether there will be another independence referendum and, if so, when and what would happen in the event of a “yes” vote.

David Clark, investment director at Saracen Fund Managers in Edinburgh, said: “I do not believe that this is a ‘Scottish’ issue per se, but more of a UK one.”

He added: “The issue, for me, is more one of the investment climate at present being unfavourable for companies to come to the London market. As asset allocators have shunned the UK for years and small and mid sized companies in particular, there is little incentive for managements to seek a UK listing if their companies are likely to enjoy only a paltry valuation in an otherwise unpopular market.

“There needs to be a sea change in the perception of the attractiveness of the UK market among market participants and the global asset management industry. Until further capital can be attracted to the UK, and it [can] be seen as a market replete with opportunity for the discerning investor then I fear little will change. As such, we are seeing companies shun the UK IPO market and even some talking of moving their listing to New York or elsewhere to chase better valuations.”

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Reflecting on what had accounted for the dramatic erosion of the number of publicly listed companies in Scotland, Mr Brown said: “First and foremost is the fact that many Scottish-headquartered listed firms have been acquired during the last 20 to 30 years. Household names such as ScottishPower, Scottish & Newcastle and more recently Aggreko have all been acquired by overseas firms.

“Another key factor creating this problem is the lack of firms replenishing the stocks of listed firms in Scotland via new IPOs. In recent years, many of Scotland’s most successful growth-oriented firms have been acquired prematurely prior to them becoming public. Consequently, very few firms scale sufficiently to warrant inclusion as a publicly listed business.”

He cited as an illustration of this Peebles-based tyres business Blackcircles’ sale to French giant Michelin for £50 million, “instead of floating on the stock exchange”. Mr Brown flagged as another example the sale of Edinburgh-based flight search engine pioneer Skyscanner to Ctrip of China.

Noting the “shortfall of listed companies now looks like it’s becoming an enduring trend”, he flagged “a number of reasons this may be cause for concern for both businesses and policymakers in Scotland”.

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Mr Brown said: “While an IPO does not create a new firm, it does create significant liquidity for the firm and the employees, and other shareholders who own shares of the newly listed firm. The IPO also affects investor wealth if the firm’s stock price increases after listing, and it affects firm ‘wealth’ by raising new capital.

“IPOs also generate entrepreneurial multiplier effects for recycling into new ventures, [and] work for intermediaries and suppliers associated with the IPO. Plus, in the longer run, IPOs enable firms access to stock markets for significant levels of expansion finance.”

He added: “For an economy to flourish it needs firms in all size classes and ownership structures. Yet Scotland’s firm distribution is become increasingly pyramid-like with very few substantial PLCs inhabiting the economic landscape and lots and lots of fairly small corks bobbing on the sea. While the economic development mantra over the last two decades in Scotland has been on producing more of these entrepreneurial start-ups, insufficient focus has been applied to scaling up firms into significant larger corporate entities capable of undertaking IPOs.”

Mr Peat declared the “loss of big companies matters in several ways”.

He said: “Such big companies provide a stable labour market and career path for many. Without big [companies] people have to move more to progress and this adds to the risks for many. I know employment paths are generally more fluid these days but many people value security highly, even at some potential cost in terms of pay. One result could be more of those from Scotland with high skills moving away in order to optimise career paths.”

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Mr Peat added: “These big companies are often heavy procurers of goods and services, and a good deal of such procurement tends to be from local sources. HQs moving outwith Scotland will generally mean a marked reduction in procurement from within Scotland, and another loss of dynamism.”

He also flagged his view that the loss of big companies from Scotland could inhibit start-ups. He noted those taking risks with start-ups like to think “there is a way forward for them”, in terms of finding alternative employment, if their venture “fails to ignite”.

The University of Glasgow’s Graeme Roy, as well as highlighting implications for staff in takeovers of Scottish companies, observed: “There are several more subtle concerns with the loss of headquarters, beyond the obvious loss of decision-making being based within a local/regional economy.”

Mr Roy, professor of economics at the University of Glasgow’s Adam Smith Business School, added: “It tends to be the case, for example, that high-value jobs are associated with the location of a headquarters, not just direct management but finance, R&D (research and development) and strategy roles. These tend not to change immediately but can change over the long run with knock-on implications for the wider economy and public finances. There are also reputational benefits [and] costs with the association of hosting [and] losing headquarters.”