Stock Exchange
September 10, 2024

By -

Rick Solomon

During 2024:

  • 54 companies have been removed from the ASX at the request of the company; and
  • 11 companies have been removed from the ASX by the ASX

By comparison, there were just 13 new listings on the ASX in the first six months of 2024, one fewer than the same period last year.

Delisting a company from a securities exchange offers a range of strategic and financial advantages that can align with the company’s long-term objectives, particularly when weighed against the constraints of remaining publicly listed.

Hallmarks of a Company Looking to Delist

Fundamentally, companies chose to list on a stock exchange for two key reasons and with two goals in mind: firstly, to access the public markets for capital and secondly to provide liquidity for their shareholders.

For large companies these goals are generally achieved on an ongoing basis so the rationale to list and, more importantly, stay listed makes a lot of sense.

However, for smaller companies they often come to the grim reality that notwithstanding their stock market listing, capital is not available to them and that their shares end up highly illiquid, trading “by appointment”. Faced with this reality, many come to the painful realisation that the ongoing costs and compliance associated with remaining listed and not a worthwhile or prudent use of shareholders’ funds.

Companies looking to delist from a stock exchange generally share a number of common characteristics. These include:

  • Limited liquidity in the company’s shares and a large bid/ ask spread
  • A large number of unmarketable parcels yet a concentrated register
  • Limited trading in the company’s shares, low volume and low value
  • Significant share price fluctuation exacerbated by low volume/value
  • Undervalued securities not reflective of the underlying enterprise value
  • Modest cash reserves which are difficult to replenish
  • Great difficulty raising new capital at sensible pricing
  • No broker coverage or investment market interest
  • No institutional investor interest and no market support
  • Difficult engagement with stock exchange management
Stock Ticker

Below we analyse some of these characteristics.

Lower Costs

One of the primary benefits of delisting is the significant reduction in compliance costs and the regulatory burden that accompanies being a publicly traded entity. Listed companies are required to meet stringent reporting and governance standards, including detailed financial disclosures, regular shareholder updates and adherence to a robust corporate governance framework. Detailed reports covering, for example, remuneration and corporate governance principals and recommendations will no longer be required to be produced nor will the myriad of governance charters that can be found on the websites of all listed companies. By delisting, a company can alleviate these obligations, thereby freeing up both financial and management resources that can be redirected towards core business activities.

In doing so, it also enables the company to preserve its limited cash reserves.

Greater Operational Flexibility

Delisting can provide the company with greater operational flexibility. Public companies operate under the intense scrutiny of investors and market analysts, which creates pressure to deliver short-term results, typically reflected in quarterly earnings reports. This focus on short-term performance can sometimes hinder management’s ability to implement long-term strategic plans. By moving out of the public market, management is able to take a more focused and patient approach to achieving long-term business objectives without the distraction of market sentiment or the need to satisfy a broad base of shareholders and stakeholders.

Delisting also allows for greater control over the company, particularly when it is combined with privatisation. When a company goes private, ownership is typically consolidated among a smaller group of investors, resulting in more streamlined decision-making processes. This greater ownership concentration often leads to more agile management, as decisions can be made without the need for extensive shareholder consultations or approvals.

Furthermore, delisting provides a company with the opportunity to engage in strategic restructuring or repositioning. As a private entity, the company can pursue mergers, acquisitions, divestitures, or other significant corporate actions with more freedom than a listed entity would, especially if they are not immediately earnings accretive. In addition, private companies can often explore alternative financing arrangements or capital-raising initiatives with private investors, which might be more complex or restricted under public market rules.

Delisting can also serve as a defensive strategy against hostile takeovers. Publicly traded companies, especially those with undervalued stock, are more vulnerable to unsolicited takeover bids. By removing shares from the public market, the company reduces its exposure to such risks and can retain greater control over its ownership structure.

Reduced Volatility

Another significant advantage of delisting is the protection it affords from market volatility. Listed companies are subject to daily price fluctuations driven by external factors such as investor sentiment, economic conditions, overnight market movements and geopolitical risks, which may not always accurately reflect the underlying fundamentals of the business. By delisting, a company can insulate itself from these market-driven dynamics, reducing the volatility in its valuation and enabling a more stable business environment.

Indices

Patient Capital

Finally, companies that operate in industries requiring long-term capital investments or research and development efforts often benefit from the freedom that comes with delisting. In such sectors, the ability to implement long-term projects without the pressure to generate immediate returns can be crucial. Delisting allows management to take a more deliberate and strategic approach to capital allocation and investment in growth areas that might not deliver short-term gains but are critical to the company’s future success.

With a growing pool of available private capital, unlisted companies now have many more and varied options from which to source capital as compared to the public markets. Examples include family offices, PE funds, sophisticated investors and strategic partners.

While delisting presents many benefits it also entails, at least theoretically, trade-offs, such as the loss of access to public capital markets and decreased liquidity for shareholders. Therefore, companies considering this option must weigh these potential disadvantages against the strategic advantages that delisting offers in terms of flexibility, control and long-term planning.

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