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European stock exchanges may be aggressively marketing to foreign corporates. But U.S. companies need a good business reason to list overseas.
Alix Stuart, CFO Magazine
September 1, 2002
Given the beating that global stock markets have been taking and the near-moratorium on initial public offerings, some American finance chiefs may be tempted to give up pursuing international equity altogether. But not World Wrestling Entertainment Inc. CFO August Liguori.
The Stamford, Connecticut-based company went public on Nasdaq three years ago and moved to the New York Stock Exchange two years ago. Now, Liguori is adding the possibility of a European equity offering to the company's long-term growth plan. Ideally, a listing will land the company on the "most global" and "prestigious" stock exchange in Europe, as a natural complement to WWE's international sales expansion strategy. "We find that when portfolio managers see the power of the brand being demonstrated [and get to] meet and greet the talent," he says, "they become pretty substantial investors. In the long term, we're hoping to replicate that kind of activity around the globe."
Exactly which European exchange will be the most global and prestigious when Liguori is ready, though, is an open question. After decades as member-owned fiefdoms separated by high cross-border trading fees, varying listing requirements, and unconnected clearing and settlement processes, "exchanges are becoming more like businesses," says Cornell University finance professor and American Finance Association president Maureen O'Hara. Nine exchanges, including the London Stock Exchange (LSE) and Germany's Deutsche Boerse, are now publicly traded companies, she says, and most other exchanges are looking to pump up their volumes through alliances, mergers, and acquisitions. The introduction of the euro as well as governmental efforts to standardize listing requirements and accounting rules across the continent by 2005 are only intensifying the race to be biggest and best.
Where the Action Is
To be sure, the major exchanges have already taken some significant steps toward a Pan-European securities market. Bourses in Paris, Amsterdam, Brussels, Warsaw, and Lisbon have all come together under the Euronext name in the past two years, "a wildly successful effort," according to O'Hara. Nasdaq, meanwhile, recently purchased a 50 percent stake in Nasdaq Deutschland AG, the product of the newly combined Berlin and Bremen exchanges, with the hope of complementing its still-struggling Nasdaq Europe. For its part, the Deutsche Boerse, owner of the Frankfurt Exchange, is pursuing a vertical-integration strategy: buying up the technology that settles and clears the trades to give it some control over where the new borders are drawn.
Also in the mix are some 20 new exchanges, including Athens's year-old NEXA Market, that have emerged since 1995, aiming to be Europe's version of Nasdaq. The result, says Gerry Beaney, partner in Grant Thornton LLP's London office, is that Europe has become a continent with "too many markets regulated in too many different ways and trapped by varying degrees of red tape, language barriers, and cost." And, he predicts, "the exchanges will have to consolidate to survive."
The big prize, of course, is the LSE. The exchange has already been courted by the Deutsche Boerse, Sweden's Stockholm Stock Exchange, and Nasdaq, and experts predict that one of these suitors--or another--might soon be successful in sealing a deal.
In the meantime, though, the LSE is trying to bring the world to itself by going straight to international companies that are looking to list, with the U.S. market a top priority. Boasting that "almost twice as much international trading [is] reported by firms in London than on Nasdaq, [the] NYSE, Euronext, and the Deutsche Boerse combined," the LSE has run two marketing tours in the United States so far, and is planning up to five more by next March. "Up until the end of last year, we were quite reactive. We've now actually hired people to go out and see if there are U.S. companies that would be interested in a secondary listing," says Charlotte Crosswell, head of North American business development for the LSE.
At press time, the LSE was in talks with between 20 and 30 American companies, mostly in the health-care and oil-and-gas sectors. It currently counts 8 U.S. companies on its small-cap Alternative Investment Market (5 of which have listed this year) and 53 on its main exchange.
Why such interest? "Sometimes it's just a stamp of approval, to be able to say, 'We're listed in euros,'" says Crosswell. But "some companies are saying, 'We're not raising all the money we want to in the U.S.,' and many of them are simply wanting to widen their shareholder base, since they are deriving more of their revenues from Europe."
Reasons for Listing
Indeed, those are the classic reasons any American company would want to consider dual listing. And the bigger and more liquid foreign exchanges get, the more critical it is for U.S. companies to look outside New York, says O'Hara. Now that the exchanges "are more competitive," she says, "where to list becomes a strategic issue for U.S. companies. They have to decide: 'Who do we want our investors to be, and how do we make our stock more attractive to them?'"
Experts caution that there also needs to be a sound business reason. "The first question any investor will ask is: 'Why can't they raise the money in their home market?'" says Grant Thornton's Beaney. "You have to have a good story, like trying to sell in an overseas market or having an investor base that's already there."
With international revenue growth tripling to make up more than one-third of its total revenues, $88 million Marlboro, Massachusetts-based Concord Communications is a typical candidate for dual listing. Like WWE's Liguori, Concord CFO Melissa Cruz has been weighing a listing in Frankfurt or London for the past several years. "The positive driver is that you get more local news coverage in Europe," she says, and garner interest from European domestic funds, rather than just funds that invest globally.
And in the wake of so many cross-Atlantic mergers, many see cross-listing as a natural step toward making existing foreign shareholders feel more comfortable, as Clean Diesel Technologies Inc. CFO David Whitwell did when he completed a $5 million offering on the LSE's small-cap Alternative Investment Market last December. A spin-out from Netherlands-based Fuel Tech NV, the $1.6 million Stamford, Connecticut-based company had most of its shareholders in the United Kingdom--where they were unable to easily trade on the U.S. over-the-counter market, on which Clean Diesel had listed in 1996. "When it came time to raise funds again," says Whitwell, "our investors asked us if we would move closer to them."
While he was initially reluctant to take on the project, which meant finding a UK stock-transfer agent that could connect with the company's U.S. agent and amending his GAAP-compliant financials for some specific UK requirements (like audited forward-cash balances), Whitwell found the process to be more rewarding than he expected. Compared with the OTC, "the LSE is a broader exchange," notes Whitwell, and "we've had more volume." Besides the cash in the bank, the move garnered the company an additional 20 or so investors and a concession from preferred-stock holders to convert their shares to common stock, boosting Clean Diesel's market cap from $5.4 million to $22.5 million.
New York Rules
Still, most U.S.-based CFOs can afford to be somewhat circumspect about global exchange consolidation, at least for now. After all, they have the most-liquid markets in the world to fall back on. Says Beaney: "The fact that 149 [European Union] companies are listed on Nasdaq compared with 41 U.S. companies listed on new markets across Europe clearly illustrates the different appeal of various markets." EU residents also poured $280 billion into U.S. stocks and bonds last year, according to the Securities Industry Association, compared with the $14.7 billion U.S. investors put into EU securities.
The superior liquidity of the United States, says Concord's Cruz, is the main reason she's decided against dual listing for now. "We have 17 million shares on Nasdaq, and would do another offering for perhaps 4 million shares in Germany--so why wouldn't a German investor just trade on Nasdaq?" she asks.
Cross-listing also isn't without cost. In addition to the logistical problems a company faces in coordinating investor relations across time zones, as well as the language problems and currency risk, the fees associated with listing can be significant. London tends to be the most expensive of the major EU exchanges, say experts, largely due to the relatively high professional-service fees in the city. Clean Diesel, for example, paid about $250,000 last year for auditing, legal, and listing costs, and will likely pay between $50,000 and $75,000 annually. In general, the LSE says listing costs (including legal, public relations, and accounting fees) run about 6 percent to 9 percent of the offering, plus the ongoing costs.
Those fees are pushing a number of companies to rationalize their listings. NYSE-traded The Gillette Co., for example, pulled its shares from the London and Paris markets during the past decade "because of the fees and bureaucracy involved in listing," according to company spokesman Stephen Brayton. The only international listing it has chosen to keep is on the Deutsche Boerse, in part because of the company's German Braun division--"and also the fact that the Frankfurt exchange has a reasonable fee structure," he adds.
To be sure, U.S. companies are finding other ways to appeal to European investors. Concord's Cruz says she has begun visiting European investors, typically in the UK, about every six months in lieu of listing. Others have participated in similar trips organized by their investment banks or by U.S. exchanges. Sybase Inc., for example, traveled with Nasdaq and NYSE representatives several times during the past three years to meet with European and Asian investors, and is planning another trip this fall. "There is a tremendous opportunity overseas, especially with foreign investors looking for ways to diversify out of their local currency base," says John Cummings, director of investor relations for the Dublin, California-based technology firm.
European laws also let many high-demand foreign shares trade without any action on the company's part; in some cases, the company may not even be notified of the move. London's market trades shares of 140 U.S. blue chips, for example, many of which have never listed.
Exchanges, of course, point out that such efforts aren't enough for most smaller companies. "If they really want to attack the retail market, they do need to fully list," says Crosswell. For many companies, the ideal is a global exchange that allows them to list once and solicit funds from investors around the world.
When that will become a reality, however, is anyone's guess. Nasdaq is striving to be the first global exchange within three years, and offer seamless electronic trading in local currencies--an initiative that might be difficult to complete given its revenue difficulties. The other promising initiative--a 10-country Global Equity Market project that includes the NYSE--is still sputtering after two years in existence.
In the meantime, U.S. companies will just have to globe trot--at least until a sustained market rally materializes.
Alix Nyberg is a staff writer at CFO.
Where U.S. companies are listing globally.
Mkt. Cap (in U.S. $Trillion)*
U.S. Cos. Listed**
|Deutsche Boerse (Frankfurt)|
|London Stock Exchange (LSE)|
|Tokyo Stock Exchange|
Y' Includes Amsterdam, Brussels, Lisbon, Paris, & Warsaw
*As of 6/30/02
**Numbers are approximate, as of 8/02
Sources: World Federation of Exchanges, the exchanges
In Asia, regional stock exchange consolidation is occurring much more slowly than in Europe. Although the East Asian and Oceania Stock Exchange Federation has been aiming to establish a regional stock exchange in Asia since 1990, the group has so far remained a loose affiliation of individual exchanges. "Asian countries are not as well regionally integrated as Europe, and the establishment of a regional stock exchange is some way off," says Vince Hooper, a professor of finance at the University of New South Wales in Sydney. And while markets in China, Hong Kong, and Singapore have boomed with domestic listings, they've largely been closed to outsiders, thanks to government regulations, making consolidation far more difficult, says Maureen O'Hara, a finance professor at Cornell University and president of the American Finance Association.
There are some hopeful signs in the wider Asia-Pacific region, however, including an agreement between the Singaporean and Australian exchanges to allow the shares to cross-trade, which took effect last December. Exchanges in Australia, the Philippines, Hong Kong, and Tokyo have all taken first steps toward merging with others in recent years by demutualizing, or going public. But none so far has formed major alliances. In fact, a planned merger between the Australian and New Zealand exchanges fell apart early last year.
Macroeconomic problems combined with market illiquidity have further disillusioned U.S. companies. Philip Morris Cos., for example, pulled its shares from the Tokyo Stock Exchange in May on the grounds that the $150,000 annual listing fee wasn't worth the few trades investors executed there. It's apparently not alone--fewer than 15 U.S. firms remain on the exchange, which has lost more than 50 U.S. listings since 1991. --A.N.