How big do I have to be to list on the Australian Stock Exchange?

There are some 2000 companies listed on the ASX. The top 100 account for 75% of the market capitalisation of all companies, while the top 500 account for about 94%. This means that the remaining 1500 small companies account for only 6% of market capitalisation.

What do we know about most of these companies?

First, they are too small and lack critical mass to justify the costs of an ASX listing.

Second, they are typically too small to attract any broker/analyst coverage and attention by professional investors.

Size is a primary driver of liquidity, and small companies tend to have low share turnover and liquidity – and conversely, high share price volatility/risk. It simply doesn’t pay broker analysts to provide research coverage on them. This situation has worsened with the current downturn and increasing compliance costs.

What size does a company need to be to justify an ASX listing? It’s hard to give a one-dimensional answer.

But if pushed, we suggest that it needs to be a market capitalisation in the order of at least $100 million. So, the question facing small companies is how they are going to get from no-man’s land to “big cap land”.

Third, there will often be one or two dominant [vendor] shareholders and executives and the quality of the management team can, or tends to, fall away sharply beyond these personnel.

Fourth, their performance tends to be lacklustre or disappointing, partly because of their size but also due to other factors, such as the dependence on a few good people, and an inability to break out of the vicious circle of lack of size meaning lack of growth meaning lack of ability to employ.

Fifth, and perhaps most importantly of all, is that they don’t know what they don’t know. They don’t really understand the interplay of the factors discussed herein, and they don’t understand and can’t speak the language of the professional investment markets (as executed by professional investor relations exponents).

Sixth, a strategy, for those who do “get” the picture, is to undertake the requisite planning to identify M&A prospects and merge with or acquire competitors. However, this process can be time-consuming and may entail the risk of diverting key management from running the core underlying business. Further, many acquisitions/mergers don’t work in practice because of a lack of cultural alignment and an inability of key executives to work co-operatively.

It is because of these very factors that management of small companies can be caught up in a vicious circle. And they can’t grow, because they can’t grow. In some quarters it is argued that these corporate “small fry” essentially serve no purpose by being listed on the ASX, that they should consider privatising, selling their remnant intellectual property and/or selling the listed shell.

And here’s the rub: Many small companies simply can’t do this. Vendor shareholders may have raised some funds in the initial public listing, but these are rarely available to buy back the company.