Blackfriar: Company flotation is a damp squib despite the fanfare

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Amid much fanfare, environmentally friendly washing machine company Xeros floated on the AIM market this week, marking the fourth Yorkshire firm to float in the past few months.

Yet unlike its predecessors, Sheffield-based software firm Servelec, Bradford-based double glazing firm Safestyle and Wakefield-based value fashion chain Bonmarche, Xeros proved a bit of a damp squib.

The group, a Rotherham-based spin-out from Leeds University, saw its share price slide 10.5 per cent to 110p on its first day of trading, wiping several million off its initial market cap of £80m.

There were rumours flying around that the fall was due to the behaviour of an erratic investor who was keen to offload his stake for personal reasons rather than dissatisfaction in the company, but the shares closed at 109p yesterday, down 11 per cent on the initial price.

The discount follows similar falls at Pets at Home, which floated last week. Yesterday shares in King Digital Entertainment, the maker of the wildly popular “Candy Crush Saga” game, fell as much as 15 per cent in their trading debut.

So, are these falls the first sign of fatigue in the IPO market as dozens of companies queue up to float as the economy shows strong signs of recovery?

Analysts said that Xeros was hard to value as unlike a retailer there is no real sense of how much the business can achieve going forward.

“That’s the problem with early stage businesses. It’s very reminiscent of the dotcom era. Often it’s hard to say what profits they will make,” said one Yorkshire analyst.

The dotcom reminder is a very important one.

At the start of the new millennium thousands of investors got their fingers burned because they forgot the old rule - never invest in a company that hasn’t made, or shows no immediate signs of making, a profit.

Xeros, which produces washing machines that replace most of the water with polymer beads, made a gross profit of £12,000 last year on the back of a £65,000 turnover. The company’s value lies in its ability to make profits in the future.

Another question that has come up about Xeros is whether its technology can be easily copied.

However the group is on firm footing here - it has filed a total of 27 patents relating to various aspects of its polymer bead cleaning system. The patents cover new methods to clean a wide range of textiles, synthetic fibres, plastics, leather, metal, glass, paper, cardboard and wood, giving the group great scope for growth

The real issue here is whether Xeros will prove to be the next Dyson or not. While Dyson revolutionised the Hoover industry with its bagless cleaner, for every Dyson there have been thousands of failures.

The question is whether Xeros can turn its technology genius into commercial success.

While universities spin out interesting, innovative technologies all the time, the difference between the winners and the losers, from an investment perspective, is their ability to commercialise, ie, sell, it.

Leeds-based oil exploration company Getech and another Leeds University spin-out Tracsis, a niche transport technology business, have been hailed as two “outstanding” university spin-outs.

Investors should look for strong leadership at the helm, leaders who will constantly question the return on investment.

Successful university spin-outs need hard-nosed business people to run them and operate them on a commercial rather than an academic basis.

In Yorkshire, all eyes will now be on Polypipe, one of Europe’s biggest manufacturers of plastic pipe systems, which is to return to the stock market next month.

Doncaster-based Polypipe’s turnover is below pre-recession levels, but its earnings rose nine per cent last year to £54m.

Polypipe has a tried and tested management team and Blackfriar is betting its shares will fly when they float next month.