Banking & Capital Markets

Trading Spaces

NYSE is up, Nasdaq down. Will this reversal reverse any time soon?
Joseph McCaffertyAugust 5, 2002

Big and boring is in, fast and furious is out. Just look at the two largest stock exchanges. Only two years ago, some considered Nasdaq poised to take over as the premier ex-change. Now, even the stock market’s name is used to mean going down-hill, as in “the team ‘Nasdaqed’ and missed the playoffs.”

Nowhere is this more noticeable than in the initial public offering market. Through April, the NYSE had 16 of the 24 major IPOs this year. It was the first time in 10 years that the Big Board listed more new companies than did its rival.

It’s true that the companies currently going public tend to fit the typical characteristics of the NYSE–bigger and more stable. However, the dot-com bust and the telecom flameout have left a bad impression in the minds of many.

“There’s a perception that the Nasdaq is more volatile,” says Carlton Crenshaw, CFO of Fairfax, Va.-based Anteon International Corp. When Anteon went public in March, it chose the NYSE. “It brings some credibility to the companies listed there,” says Crenshaw.

As a defense company in the IT space, he says the company has peers on both exchanges and could have picked either one. Crenshaw adds that he had previously been CFO of two Nasdaq-listed companies, and “I was not happy there.” The reason, he says, is that during secondary offerings, arbitrageurs were able to manipulate the price of the stock, a problem that Nasdaq has since addressed.

In an effort to restore investor confidence, Nasdaq is making additional rule changes to crack down on unethical behavior. It will call for companies to hold shareholder votes for all stock-option plans for company officers and board directors, and has also threatened to delist companies that provide false information.

Some companies continue to believe in Nasdaq. Circle Group Internet Inc., a Mundelein, Ill.-based IT consulting firm, began trading on the Nasdaq OTC in June. “We’re a small company, so we still think Nasdaq is the right exchange for us,” says CFO Arthur Tanner.

Tanner doesn’t expect Nasdaq to be downcast for long. “It’s still a very sexy exchange. Investors will (keep looking) there for growth opportunities.”

Buffett’s Custom Convertibles

Warren Buffett’s Berkshire Hathaway turned some heads in late May when it completed the first-ever issue of negative-coupon convertibles. But other market-watchers were left scratching theirs.

The Omaha-based conglomerate issued $400 million in Squarz, a vehicle created by sole underwriter Goldman, Sachs & Co.

The convertible bond consists of a Berkshire senior note due in 2007 and a warrant to purchase Berkshire stock at a premium. The notes will pay holders a 3 percent coupon, but require 3.75 percent installment payments on the warrants. Hence the negative coupon.

“We’ve seen zero percent yield, so I guess negative coupon was the next logical trail to blaze,” says Robert Willens of Lehman Brothers. “And who better to do it?” he adds.

Willens says that the issue, while small, has tax advantages for Berkshire. The company gets to deduct the 3 percent interest it pays to bondholders, while the 3.75 percent it collects is not taxable. There’s another advantage as well. “It certainly sends a message that you are bullish about your stock,” says Willens. “It means that you expect the stock to trade through the strike price.”

In fact, the issue created quite a buzz on Wall Street. “The main reason for the unusual structure was to attract attention,” says Whitney Tilson, managing partner at Tilson Capital Partners LLC, in New York. “Buffett wants to remind Wall Street that he is looking for private companies to buy.”

In fact, during a conference call, Buffett, who normally keeps a low profile, admitted that raising awareness about the company’s interest in acquisitions was an objective. “If doing this deal causes one or two people…to think of Berkshire when it comes time to sell their business, then (the offering) will have more than accomplished its purpose,” he said.

The Oracle of Omaha, famous for keep-it-simple investing, puzzled some with the deal. “It’s a bit of a surprise coming from Berkshire,” says Ravi Arcot, director of Kynex Inc., a convertible-bond research firm in Fair Lawn, N.J. “It makes sense for them, though,” he adds. “Effectively, they get a very low cost of capital. But we’re not convinced it makes sense for investors.”