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The risk of investing in Williams

NEWS STORY
09/02/2011

As Pitpass exclusively revealed free for the English-speaking world to read on Monday, Patrick Head, the 64 year-old engineering director of Williams, will be retiring from the team. Williams has not yet confirmed this but Head himself has. "I am pretty sure that I will stand down as Director of Engineering," Head told Reuters the day after Pitpass revealed the news. He added that he is likely to depart "over the next couple of years." It comes as a huge blow to Williams just weeks before it is planning to float on the Frankfurt stock exchange because Head is hardly an insignificant part of the team having steered it to nine constructors' championships. So what does it mean for the float? Pitpass' business editor Chris Sylt will explain.

On 21 January Williams announced that it was considering a stock market flotation and the team released a detailed Q&A with its chairman Adam Parr about it as well as a statement from Frank Williams. Neither document mentioned Head's impending retirement and the team has still not released a statement about it.

Interestingly, Parr touched on the subject of retirement in his Q&A when he was asked "is retirement a current consideration for Frank?" and he replied "no. Retirement is categorically not on Frank's agenda. Anyone who knows Frank knows this." One can only but wonder as to why he didn't take that opportunity to mention that whilst Frank is not planning to retire, Patrick will be gone within the next two years. And it's not as if Parr didn't know because, as Pitpass also revealed on Monday, Head will be providing the majority of the shares which will be floated.

"Even after the listing I will be a significant shareholder, around five percent, and I plan to retain that until I do retire," Head said on Tuesday. He currently owns precisely 27% of the team so 22% of his shares will be floated. It should build up a nice retirement fund for him unless he decides to plough the money back into the team although there is neither evidence that he will do this nor evidence that the team needs the money.

It remains to be seen whether investors will be happy about the majority of the proceeds of the flotation going to Head rather than the company. Likewise, Head's departure from the team is sure to put off some investors and they may be more than a little irked that Williams decided not to mention this in its press releases about the float, particularly given his glittering track record.

Head has been an integral part of Williams since the day it was founded in 1977 and until as recently as 2009 he was the only other shareholder in the team alongside Sir Frank. So finding out that Head is leaving just a few days after the flotation was announced is a bit like being offered the opportunity to invest in Laurel and Hardy and then being told that one of them won't be involved with the deal.

One wonders why Head did not want to sell his stake to a private buyer, since this would most probably have attracted a premium over proceeds from a float. No doubt the reason will come out in due course. In the meantime, we have the answer to the question of why Williams is floating - it will indeed "secure the future of the team," as Parr said in his Q&A since it will find owners to replace one of the current shareholders.

The press release distributed by Williams on Friday confirming the float contained a small detail which answers the very big question of why Williams is floating in Frankfurt. The press release states that "the first day of trading on the Entry Standard segment of the Frankfurt stock exchange is expected on 2 March 2011." The detail is so small that the uninitiated reader may miss it but boy is it important.

The Entry Standard segment of the Frankfurt stock exchange differs from the main exchange (and those of many other European markets) in several utterly crucial ways. The FAQ of the stock exchange says it all:

"Companies can choose from a number of different methods for listing on the Frankfurt Stock Exchange. By options for a listing in the General Standard, companies accept the continuing obligation to comply with the minimum legal standards for investor protection and transparency which have been harmonized across Europe. Companies which wish to go further and provide the highest level of transparency, particularly for the benefit of international investors, can opt for a listing in the Prime Standard. Companies which would like their shares to be included in trading with few formal obligations opt for the Entry Standard. In the latter case, investors must be aware that major transparency requirements and investor protection regulations that have been standardized across Europe do not apply."

In a nutshell, the Entry Standard is not regulated and lacks the stringent transparency requirements and investor protection regulations which are found in the main European stock exchanges. What does this mean for investors? Again, let's let the Frankfurt stock exchange do the talking.

The 'Tasks and advantages for market participants' clearly notifies investors that the Entry Standard has a 'higher risk due to lower transparency level.' This doesn't mean to say that investing in Williams is high risk but it does mean that the risk of investing in Entry Standard companies in general is higher than those on the other Frankfurt exchanges. So why did Williams choose it?

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