Join our community of smart investors

IP groups could be stronger together

The early-stage investment sector's largest player has made a takeover approach for a junior peer
June 2, 2017

The intellectual property (IP) commercialisation market may be headed for consolidation. Oxford-based IP Group (IPO) - which arrived on the UK public markets in 2003 - has made a £500m all-share offer for its Aim-traded peer Touchstone Innovations (IVO), which was founded out of Imperial College London in 2006.

Management at the former are hoping to create a market leader in IP commercialisation and considers the combination of the assets of the companies to "be greater than the sum of the two parts". It also pointed to the benefits for shareholders of a more diversified portfolio. The board revealed the news alongside announcing a £200m capital raising to finance the launch of an Australian office.

Touchstone's shareholders seem to agree there are benefits to be had, with 74 per cent already giving the nod of approval to the takeover. That isn't altogether surprising - there is substantial overlap between the shareholder registers of the two companies, including Woodford Investment Management, Invesco and Hargreaves Lansdown.

Touchstone's board is less enthusiastic and has rejected the all-share offer, which values the group's shares at 307p - just a 4 per cent premium to the closing price on the day before publication of the news. Management said agreement on terms and governance could not be reached prior to IP's announcement of its capital raising. However, that wasn't a flat no to a potential offer. The board said it considered the proposal not just because its large shareholders asked it to, but also because it had "certain merits".

Seeking a fair valuation for Touchstone and its peers is no mean feat. These IP groups specialise in investing in new ideas or early-stage companies, and placing a value on their portfolios is therefore speculative. That could be why this mini-market of investment-cum-technology companies has failed to take the UK investment world by storm.

During the past three years, Touchstone's share price has fallen to a point where it is roughly in line with its IPO price in 2006. Allied Minds (ALM) is also now cheaper than it was when it listed in 2014. IP Group has only fared a little better and has underperformed the FTSE All-Share index every year since it has been on the main market - except for 2014 and 2015 when the biotech bull market was in full swing.

The recent tribulations suffered by Allied Minds point towards the difficulties in assessing the value of these early-stage investment groups. Last month it cut investment in seven of its portfolio companies, primarily in the medical sector. At the time, interim - now permanent - chief executive Jill Smith said the investments were "unlikely to yield appropriate financial returns" as they reached commercialisation. The adjusted net asset value of its holdings fell to $416m at the end of April, from $536m at the end of December 2016. With some portfolio companies not yet generating revenue, management's ability to make the right investment call is crucial.

However, Allied Minds' share price perked up again last week, perhaps based on speculation that IP Group may come hunting for its shares in the absence of approval from Touchstone. Allied Minds also shares a number of shareholders with Touchstone's bidder.

Panmure Gordon analyst Dr David Cox said a deal between IP and Touchstone could give them the opportunity to dispose of "non-starters and keep the good stuff", resulting in a stronger portfolio.

"The value that these listed VCs [venture capital companies] have is that they provide investors with access to exciting, early-stage companies, they also provide guidance and expertise to these start-ups," he said. "However, the trouble with them is that some of them have a long tail of poorer assets in my view, with only the odd gem to be found."