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The London Stock Exchange may eventually create a separate sector for the IT industry to stop the desertion of new listings to Nasdaq. But this could be a case of too little, too late.

The London Stock Exchange is slowly moving towards introducing ar for the IT industry to stop the desertion of new listings to Nasdaq. But this could be a case of too little, too late. separate market sector for information technology companies. It’s long overdue. The hope is that a higher profile for the British IT industry will stem the steady flow of technology businesses that abandon the City and float on the New York Nasdaq market instead. But a classification revamp, which the industry has wanted for ages, may not now be enough.

The Stock Exchange, in the form of its Financial Times joint venture FTSE International, hopes that a separate classification for IT stocks would encourage fund managers to pay closer attention to the sector and develop the expertise they need to value growing technology businesses properly.

The lack of a separate classification means that a networks group such as Azlan is lumped into the Business Services list along with dry cleaners and recruitment consultants. The Stock Exchange’s current umbrella headings say very little about what companies do. Alison Capps, marketing manager at investment bankers Granville & Co, says: “The ‘Support Services’ classification is a classic example of IT firms being all odds and sods. In this group there are companies such as Rentokil, which deals with rats and vermin, and Hays, a business group. They are in the same sector as IT companies such as Misys, CMG and Sage.”

UK technology companies have complained time and again that, because UK broker teams are focused on market classifications, London analysts do not understand their business. As a result, share prices do not reflect the companies’ true worth.

So new technology companies have looked instead to Nasdaq, home of Microsoft and Intel. The New York market and the analysts that follow it specialise in growing technology businesses. That is one of the reasons why 473 of the 5,520 companies currently listed have come from outside the US.

The Madge Networks story is a typical example of the problem facing London.

The company floated on Nasdaq in 1993 because it found it too difficult to raise money in the UK. Madge now employees 2,100 staff worldwide and has a turnover in excess of $400m. It is now capitalised at $330m.

Nasdaq has done so well to lure European technology companies that a number of specialist US brokers set up shop in London last year in the hope that they could spot the brightest prospects and lead them to New York. But rather than rest on his laurels, Nasdaq president and chief executive Frank Zarb was in London recently for the launch of a $10.5m autumn TV advertising campaign, aimed at attracting European companies to the so-called “Stockmarket for the 21st century”.

Zarb also wants to increase the number of Nasdaq market-making firms operating in London so that the market can offer investors extended hours, with opening times for London and New York.

So while the Nasdaq ads were running on TV screens across Europe, FTSE International was meeting to decide how best to create a new IT classification.

Unfortunately, the decision was that it can’t be done – or at least, not yet. “It has not proved possible to reach a consensus in the market as to the definition of an IT company,” a FTSE statement said. Consultation is continuing in an effort to “rapidly resolve this issue”.

While FTSE says watch this space, the calls for change are intensifying.

Independent research by Granville found that 70% of UK fund managers want a separate IT classification, with 30% saying that smaller IT companies are ignored under the current system. And a survey by the CSSA, the Computer Software and Services Association, found that 87% of its members would back such a move.

The Granville survey found that fund managers want an IT classification that includes software products, IT support services, information providers and recruitment agencies.

Richard Donner, director of Granville & Co, says: “A change in IT classification will make IT firms more visible in the investment community and give them a higher profile.” As a result, IT firms “will regard London as the place to do business”.

The Leeds-based software company BACG could be the next UK technology company to turn its back on London. The company already has a long track record of success. It is a leading supplier of specialist software solutions and consultancy to major retailers around the world, with a global operation employing over 400 people in the US, the UK, mainland Europe and South Africa.

Andrew Parker, company secretary of BACG, says: “British technology is not valued to the extent it should be. It is given a higher value in the United States, which is one of the reasons BACG will most likely float on Nasdaq when the time comes.”

Even if a separate IT classification is introduced, Parker has his doubts.

The problem is that such a move would not produce expert analysts overnight.

A UK broker is unlikely to let its analysts become VDU specialists, for example, if there are only a handful of London-listed screen manufacturers to follow.

“In America you have far more specialisation – people spend their whole lives looking at disk drive manufacturers,” says one UK analyst. “Because we don’t have that wealth of companies, people have had to generalise.” A change to the classifications will not change that.

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