Devil's Advocate: A puff of steam in the IPO boiler

Now may be the best time for companies to take themselves to public markets, says Martin Brampton. We know that until now it was a risky proposition - but it could also be after 2004...

We are not returning to the days of selling companies for billions on the strength of distant revenue forecasts. All the same, there does seem a limited window of opportunity for floating off some IT companies on the world’s stock markets. Google is the most talked about candidate but many more are waiting hopefully for their time to come.

They might well have to be quick. Optimists are pointing to the recovery in major stock market indices from low points reached in the dot-com crash. Just lately, there have been quite a few reports of rising earnings from established companies. Enthusiastic vendors of financial paper are keen to talk up the new investment opportunities that are slowly appearing.

A lot has changed, though. A few years ago, it was considered rather pathetic for a technology company to give its shareholders a dividend. The rose tinted theory was that any decent company in the sector had lots of wonderful investment opportunities, so that growing the company was much more in the interests of investors than handing out old fashioned dividends.

That was the environment in which people started paying vast sums for companies that were making immense losses but claimed to have the potential to grow large. There was a tenuous link to dividends, since nobody can evade the rule that the market value of a company is the discounted total of all future dividends. But for most of these companies, the dividends were a long way ahead and more than a little uncertain.

Now we have Microsoft paying out dividends to its shareholders. It is certainly good for the company in stabilising its share price. A reliable dividend places a floor under the share price, since if the company is thought robust, its dividend can be used to calculate the amount of money that would have to be put in a cash deposit to earn the same return. The share is usually worth at least that.

However, by no means all companies have as robust a cashflow as Microsoft. Improvements in earnings are scarcely surprising, given the huge losses posted by major IT companies in recent years. Since Enron, it is widely understood that finance directors have a good deal of latitude to influence results. When there is no avoiding bad news, the obvious policy is to pile on the agony and declare as vast a loss as possible. Much of it can be attributed to so-called exceptional items, leaving a good base for future improvement.

Yet how stable are the wider economies in which IT companies trade most? The answer seems to be that they are not very stable at all. The US has shown resilience in the face of its various financial problems. One huge problem remains, though. That is the gigantic trade deficit that country is running, much of it attributable to rapidly growing trade with China. US consumers have an appetite for the increasingly sophisticated products being produced in China at extremely competitive prices. The trouble is, the US does not have the money to pay for them.

That has not been a problem so long as other countries have been willing to hold ever-increasing dollar investments of one kind or another. But this cannot go on forever and the correction may come at any time. It may well be painful.

The other concern is consumer confidence, until now bolstered up by debt. Both in the US and the UK, people have continued to buy almost regardless of financial constraints. Extra taxation should have reduced demand but has not. Again, this cannot go on forever, and when consumer confidence does waver, it can easily slip into a downward spiral. One man’s belt tightening is another man’s redundancy.

So, if you are running a company that wants to raise cash through stock markets, now is probably a good time to take the plunge. But if you are an investor, you will be looking for companies that have something pretty exceptional to offer. And we must all hope that our economy can stay on the tightrope.