Craneware IPO: in rude health

Craneware was one of the few companies to float last year and its share price has grown steadily since

Keith Neilson is clear about the most gruelling aspect of floating Livingston-based software company Craneware, where he is founder and chief executive, last September.

It was the pre-float “verification” — a mind-numbing process that involved him and senior colleagues burning the midnight oil on several occasions last summer. One of the things he had to do was to stand up every single word in the 60-page Aim admission document.

The Craneware team of Neilson, finance director Sandy McDougall and operations director Gordon Craig had to endure several grillings from a McGrigors legal team led by corporate partner Anna Brown, either at the software company’s Livingston headquarters or at McGrigors’ swankier Tollcross premises. The tight schedule meant the group was working until 3am on several occasions, fuelled by Chinese take-aways and takeaway pizza.

“It’s a necessary evil but it was fairly horrendous thing to have to go through,” says Neilson. He says before Craneware could claim it supplies its financial software systems to hospitals, he had to define what both “software” and “hospitals” meant. It may sound like a pedant’s paradise but this is the stuff on which successful deals are built.

Craneware’s board, chaired by former Wolfson Microelectronics’ finance director George Elliott, only pushed the green light on an Aim float last June, after they had ruled out other options including a trade sale and another round of private equity funding.

Given the fragile state of the markets in the weeks after the decision was taken, it was brave. However Anna Brown says Neilson and his team never wavered once they had made their decision. “Good, cash-generative businesses that are market leaders in their field always get away,” says Brown. “However they did recognise that the quicker they brought Craneware to market the better, just in case of further turbulence.”

In the end, the initial public offering, in which the company’s founders threw in an additional £840,000 to ensure their personal stakes were not over diluted, defied market conditions. The shares were listed at 128p on 13 September 2007, the day that BBC News revealed that former building society Northern Rock had sought emergency funding from the Bank of England in its capacity as “lender of last resort”. This gave Craneware an initial market capitalisation of £31.9m and enable the firm’s three venture capital backers — 3i, Scottish Equity Partners and Lothian Investment Fund for Enterprise — to exit having made an estimated seven times return on their investment.

Olly Scott, a director of stockbrokers KBC Peel Hunt, which acted as nominated advisors on the IPO, said: “Despite the difficult market conditions, we priced the issue at the top end of the range and also raised more money than initially planned — this was a great result for all concerned and a testament to Craneware and the team. By evaluating trade and private equity offers for Craneware alongside the IPO valuation, KBC Peel Hunt gave all the shareholders comfort that the IPO price was fair.”

The float gave Craneware £5.4m to fund its expansion in the US market, where its core product the Chargemaster Toolkit is in demand from US hospitals. The product enables hospitals to boost the efficiency of their billing and helps reduce the number of mistakes in the invoices sent out to patients and health insurers. The inaccuracies traditionally found in such bills are infuriating for the US government’s Medicare system and US medical insurers.

US legislation is now moving in the Livingston-based  company’s favour, with the Washington DC federal government increasingly pressurizing hospitals to shape up their invoicing after a several high-profile scandals in which Medicare and other federal health programmes were ripped off.

Craneware claims to have about a 50% share of its market niche and also says the market is growing at about 25% a year. In a trading update earlier this year, the company said the Chargemaster Tookit is being used by nearly 900 hospitals in the US — and that it signed up 96 more in the six months to December 2007. Pre-tax profits in that period rose to £1.6m up from £766,000 in the same period last time, on sales of £8.7m.

Neilson says the main impetus for the float was to enhance the company’s ability to expand through acquisitions, as well as organic growth and new product development.

Craneware’s decision to float and stick to its knitting of supplying to US hospitals is paying off for its stock market investors.

Despite the jittery market in the summer of 2008, Craneware’s shares surged in late June on news the company had signed a contract with San Francisco-based Catholic Healthcare West for its Chargemaster Toolkit suite and the newly-launched Pharmacy ChargeLink product.

By mid-July the shares had climbed to 212.5p, meaning that they have surged by 66% since the float, to give the Livingston-based company a market value of £53m.

Neilson is also showing early signs of joining the ranks of Scotland’s business heroes. He was recently named as the Ernst & Young Entrepreneur of the Year 2008 Scotland and also received the Young Achievement Award from SBAAT.

However the company does face the problem of being heavily exposed to the US dollar which makes it vulnerable to exchange-rate fluctuations. It is also exposed to changes in US health policy. The Aim admission document that was pored over in the wee-sma’ hours last summer also warned of the risk that companies with bigger brands and greater name awareness could invade its turf.

This article was published in Scottish Business Insider’s Deals & Dealmakers Yearbook 2008, published in August 2008. Copyright Ian Fraser 2008