Capital Markets: Navigating the Exchanges

There have been concerns voiced about the U.S. capital markets losing market share. Earlier this year, the market capitalization of European equity markets surpassed those of the United States for the first time, prompting many to speculate that New York has lost its dominance as the financial capital of the world.

The argument is that our regulation is viewed as too costly, too time-consuming, and a deterrent for non-U.S. companies to list their IPOs or to place their established stocks on U.S. exchanges. There are secondary advantages for overseas exchanges. For instance, in terms of geography, the London Stock Exchange (LSE) is open when the U.S. markets are not, thus providing an advantage to the LSE and large exchanges that operate in other time zones, such as Tokyo, Hong Kong, and Dubai. Foreign markets have emulated those in the United States and some are now growing at a faster rate, which has led many companies to list in their local markets. Finally, competition has intensified among U.S. and foreign exchanges.

These and other factors are creating waves in the exchange seas that, for boards, could impact where IPO-minded companies and larger companies looking to tap into foreign capital consider listing their shares. Changes in trading regulations are also making it harder to follow trading patterns in stocks, which could make it more difficult for boards to spot potential activist investors.

Toward the end of the first quarter, Europe’s market capital grew to $15.72 trillion, exceeding the $15.7 trillion value of the U.S. markets. (Europe is comprised of 24 equity markets including Russia and Turkey.)

A number of factors combined to push Europe into the pole position: the declining value of the dollar, the strength of the euro (which has risen against the dollar in the last four years), acquisitions by European companies, the growth of Eastern European markets, and the increased profitability of European companies vs. U.S. counterparts.

In addition, regulation has in fact driven companies away. In recognition of this fact, the SEC enacted new rules in June that facilitate the delisting process for foreign companies. If a company’s shares in the United States trade less than 5 percent of the trading volume for all of its shares globally, then a company can deregister. British Airways, Danone, Telekom Austria, and Vernalis have all announced plans to delist their shares from the Big Board. BA’s CFO said it “no longer makes sense from a cost and administrative perspective” to have to adhere to U.S. accounting standards; delisting will save the company £10 million a year. Danone also cited low volume and U.S. accounting standards as reasons for its delisting. Both Telekom Austria and Vernalis cited the increased regulatory burden due to Sarbanes-Oxley (SOX) as reasons for no longer listing in the United States.

Emerging equities markets in Europe have grown dramatically and established markets such as Germany and France have been able to grow at faster rates than the United States. For example, equity markets in both Germany and France have gained from 130 to 150 percent since 2003, compared to 80 percent here in America. Emerging equity markets such as Russia and Turkey have faired even better, gaining 320 and 350 percent, respectively.

Essentially, the U.S. model has been replicated around the world quite successfully but perhaps at the expense of the U.S. markets. Furthermore, the increased equity market cap also reflects the underlying improvement in the fundamentals of European companies relative to those here. Overall, this growth has resulted in increased IPOs in local markets. It’s estimated that 90 percent of companies around the world choose to list in their primary market.

London Calling

Is London becoming the new financial capital of the world? In 2006, the number of new IPOs that went public on London exchanges exceeded the number of new issues on both the NYSE and the Nasdaq combined. In 2006, 250 companies bowed in London vs. 205 in New York. Furthermore, the total market value of London IPOs ($51.2 billion) exceeded those in New York ($46.8 billion). As of mid-July this year, London had the upper hand again. Some 137 companies chose the London exchanges for their debut vs. 111 for both the NYSE and Nasdaq. Both market share and the value of new deals in London exceeded those in New York.

London’s Alternative Investment Market (AIM) market has been attracting more new issues than the LSE or the New York-based exchanges. The main advantages of the AIM market are less stringent regulation and listing requirements than other exchanges. Lower listing fees and speed to market are also advantages. Typically, it takes an average of four months to get a company listed on AIM, much faster than other exchanges, which can range from six months to a year. Also, companies that choose to list on AIM only need to report earnings every six months vs. every quarter in the United States.