VideoDeep into the largest financial shock since the Great Depression, it is easy to imagine that the rise of the Chinese and Indian economies and the resurgence of London as a financial center could tilt the balance of capital-markets power. America's biggest global banks, desperate to rebuild capital ratios, are surviving on life-supporting cash infusions from sovereign wealth funds. Huge chunks of the once-vibrant securities markets in the United States, such as collateralized loan obligations and asset-backed mortgages, are moribund. And prominent international bankers, like HSBC group chairman Stephen Green, are declaring the end of Wall Street's "center of the universe" status.
The numbers speak volumes. The combined domestic market capitalization of Nasdaq, the New York Stock Exchange, and the American Stock Exchange ($18.2 trillion as of last June) accounted for just 35 percent of the total on exchanges worldwide. That's down from 52 percent in 2001, according to the Committee on Capital Markets Regulation (CCMR), an advocacy group. While the market capitalization of exchanges outside the United States has grown 22 percent since 2002, U.S. exchanges have seen their collective market cap rise only 9 percent. And today, when foreign companies go public outside their home countries, they choose the United States much less frequently.
"As recently as the late 1990s, the U.S. market was the envy of all other markets in terms of its liquidity, its access to capital, and the strength, once a company had gone public, that being public provided," says Murray Beach of TM Capital Corp., a Westwood, Massachusetts-based investment banking firm. "Today that's not the case."
Weaker public markets in the United States could make it tougher for CFOs to attract well-capitalized equity investors — the ones that give venture-capital and private-equity shops a way to underwrite start-ups. A market with lower liquidity can also exacerbate and sustain price-deflating market crises and make issuing follow-on deals dilutive. And if U.S.-bred CFOs have to sojourn abroad and educate emerging-market investors on their company's prospects, the learning curve will be steep.
Many bankers and other capital-markets players dismiss the idea that the United States is no longer at the pinnacle of equity markets, or that hordes of U.S. companies are about to export their listings abroad. Nasdaq senior vice president Bob McCooey of the exchange's capital-markets group insists that "the gloom and doom we hear almost constantly is very overblown." Says Don Ogilvie, independent chairman of the Deloitte Center for Banking Solutions: "We have the best, strongest, and most innovative financial system in the global economy."
To CFOs and other executives, however, a possible demotion of the United States in the global pecking order is real. "We've lost our edge," asserts John Sauickie, founder of money management firm Titanium Asset Management Corp., which went public last year.
London Calling
CFOs have been voting against the United States with their feet. In the first half of 2008, of the 27 initial public offerings that CCMR identified as being executed by U.S. companies, 6 (22 percent) listed on a foreign exchange only, up from 8 percent in 2007. The big winner? London. During the first seven months of 2008, the London Stock Exchange (LSE) was home to 22 international IPOs that raised $5.8 billion. That was 3 IPOs and nearly $4 billion more than three of its biggest competitors — the U.S.-based NYSE Euronext and Nasdaq OMX, plus Germany's Deutsche Bourse — combined.
Experts credit the LSE's creation of the Alternative Investment Market, or AIM, to attract small, international growth businesses. The 13-year-old AIM offers minimal regulatory hassles and low-cost underwriting fees. Companies file financial reports only twice a year, and don't need to comply with the Sarbanes-Oxley Act.
Sauickie took Titanium Asset Management public on AIM in a $120 million IPO in June 2007. The process was faster and the upfront underwriting expenses were lower. Sauickie estimates his company's all-in cost was $700,000, roughly half the price tag of a U.S. listing. And as a special-purpose acquisition company (SPAC), Titanium found other advantages. In the United States, these shell companies with no operating assets are prohibited from talking with prospective acquisitions prior to their IPO. They also must spend at least 80 percent of IPO proceeds on their first deal. UK securities laws impose no such restrictions.
Chris Work, CFO of Resaca Exploitation Inc., a Houston-based oil-and-gas development company, says his company never seriously considered going public on a U.S. exchange. The company took its $106 million IPO to AIM last July. Beyond benefiting from lower underwriting costs and lighter regulations, he says, Resaca is now paying substantially less for directors'-and-officers' insurance than it would have in the litigation-happy States. Work also figures that if Resaca invests in foreign companies, its stock will enjoy a higher price from British investors, who, he says, with a long imperialistic history, tend to value the foreign reserves of small oil-and-gas companies higher than U.S. investors do.
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