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The big race

By Andrea Fox

Friday 25th November 2005

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Selwyn Pellett feels like a man who has just run a marathon only to be told after crossing the finish line that he has to do it all again tomorrow for New Zealand at the Olympics.

Pellett is chief executive of internet security company Endace, which in June became the first Kiwi company to list on the London Stock Exchange's alternative investment market (AIM). It was a gruelling process that the Kiwi company nearly backed away from and it has now been told that being the first New Zealand company makes Endace unofficially responsible for the listing valuation the London market gives to any other Kiwi AIM contender. And there are now other companies considering it. "Not only did we trailblaze, we now have the weight of future listings hanging on our shoulders," Pellett says.

The word about Endace's big responsibility came from one of its new UK shareholders during a "candid" post-listing conversation, Pellett says. The investor said it was important Endace did well or New Zealand could end up with the reputation Israel has on AIM, one of low-quality listings that lose investors money. The investor warned Pellett if that happened with Endace, all subsequent Kiwi companies would be discounted.

Endace has now been listed in London for several months, and Pellett and his team are hunkering down to achieve a highly aggressive growth mandate. The market expectation is that four-year-old Endace will double its growth and then double it again over the next two years. Given the company has averaged 72% compound annual growth since it started in 2001, the UK investors believe the target is achievable. Last year Endace placed second in the Deloitte/Unlimited Fast50 of the country's fastest growing companies.

The investor's warning follows what was a stressful listing process for the small Kiwi company.

Endace technology is some of the most sophisticated in the world, used by intelligence agencies and internet security specialists. But the company felt the British advisors for the listing process had a closer relationship with investors than Endace, which was treated very much as just another product. "Once you get into this process you are sausage going through a machine. The great thing is that sausages come out the end of the machine; the bad part is you don't get much say," says Pellett.

Despite ending up with a pre-IPO valuation almost half of what the company was led to expect at the start of the process, Pellett says he'd do it again in a "heartbeat". He's eyeing the same destination for sister company Prolificx, an electronic technology designer and manufacturer. But he adds the rider that next time he won't be so trusting. Endace's British advisor Panmure Gordon had a corporate advisory division and a sales division which Pellett claims seldom communicated and appeared to have different aims. Tim Linacre, Panmure Gordon CEO, says some information can't pass between the two sides of the business. "The sales desk are the poor people who have to go out and talk to institutional investors. In difficult markets they are the messengers who bring back the bad news. It's not different agendas; it's about talking to slightly different constituencies."

Pellett also accuses the advisors of working against Endace's British public relations people. As Endace's listing date drew closer the market began slipping and prospective AIM candidates were pulling out in fright at their valuations. If high-profile Endace had followed, it would have been a bad look for the advisors, he says. But Linacre refutes this, saying his firm worked well with the PR people. "You don't need a PR firm to tell the [company] story, but you do need a PR firm that can deal with the press - to make sure the press understands the story. The issue did go well, the share price has performed and the company is very well liked in London." Linacre adds the fact Endace did get away when other issues were being pulled all over London is "testimony to the business and management".

They were testing times but Pellett says the gains of the AIM listing made the pain all worthwhile. Endace's disappointing pre-IPO market valuation of £15 million was still four times that of its last reported annual revenue. So far its share price is doing well. It has increased to around £1.93 from the listing price of £1.62. With just over 14.5 million shares on issue, this gives the company a market value of £74 million compared to £61 million on listing.

Endace has 30 new UK shareholders and a new international network. The three company founders - technology founder Ian Graham (10.2%), Hamilton entrepreneur Neil Richardson (17.2%) and Pellett (16.2%) - along with sister company Prolificx (3.3%) have retained just under half of the company. There are also around 35 small New Zealand shareholders. The new UK shareholders together hold 43%. Of this, Artemis Investment Management has 9% and Aegon Asset management over 3%.

Richardson, chairman of Prolificx and a former chairman of -AgResearch and the Foundation for Research, Science and Technology, says he originally contributed $50,000 to launch the technology invented by Professor Ian Graham (the computing and mathematical sciences dean at Waikato University). Richardson claims not to know or care how many shares he now has and hasn't looked at the share price since listing. His claim is plausible. Endace does not pay a dividend on each share. The day it does it has said it will move to the UK to relieve shareholders of a double tax burden. The reward for shareholders like Richardson will be capital gain.

Endace raised £8 million (NZ$20.5 million) from the listing and at last has the cash to grow profitably. Although the company has had rapid growth from the outset, Pellett says it has lurched from loss to profit to loss, managing just four profitable months a year. It has now been able to double staff to 60, putting more people onto improving manufacturing quality and increasing the sales force. Marketing is also getting a big funding boost along with long-term research projects Endace could previously not afford. At listing time, it had 116 customers in 16 countries - Pellett says those numbers, too, are on the rise.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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