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Strategic Finance

Shop around abroad for a share listing

Monday, 27 November 2006

Edward Russell-Walling recommends looking at what different stock exchanges have to offer as competition between them intensifies. For any company contemplating a foreign share listing, now is a good time to be shopping around. Competition between stock exchanges is intensifying and, as in any marketplace, that is good for the customer.

An organisation which has sales largely confined to its own market, and which is likely to stay that way, would do better to find a suitable domestic market on which to raise capital. UK companies are well-served in this department by the London Stock Exchange and its junior partner, the Alternative Investment Market (AIM).

But a growth company with a more international presence, or at the very least international ambitions, might consider supplementing or even substituting a domestic listing with a foreign one. This serves not only to diversify potential sources of capital but also as a public relations exercise, raising the company's marketing profile in the chosen region.

Companies thinking that way will find foreign stock exchanges are eager for their business. The world has been changing for traditional stock exchanges. Once, they were typically complacent, mutual, not-for-profit organisations that existed to serve the interests of their members.

Their members were stockbrokers or banks, and the companies that chose to list on them came some way down their list of important things to care about. And, since stock exchanges were invariably national monopolies, they had a stranglehold over listings for all but the largest domestic firms.

But things are not what they used to be. Globalisation has reared its head: technology has kicked in. Competition has emerged in the shape of platforms and structures that can bypass traditional stock exchanges. So the exchange has had to change its attitudes radically in order to survive.

Today, all exchanges want to be businesses. Many, though not all, have shed their mutual status to become listed entities themselves, with shareholders who want to see profits. Investors are pushing broker-dealers for lower commissions, or even no commissions at all. And the broker-dealers are passing those demands on to exchanges, pointing to much-reduced commission levels on electronic communications networks (ECNs), the exchanges' online competition.

The competitive power of ECNs is such that the New York Stock Exchange announced in 2005 that it would merge with the leading American ECN, Archipelago. Elsewhere, systems allow investment institutions to trade directly with each other, without taking the trouble to route their orders through a stock exchange. So the pressure is on the exchange to lower its costs, to improve its efficiency and to win more customers.

One important group of customers is still the community of brokers and investment bankers who trade on a daily basis, but they are a more or less finite quantity. The other group of customers - one that is receiving more attention these days - is listing companies, actual and potential.

The pool of potential listees has been growing beyond national boundaries. One reason is that more companies are driving into markets abroad and, as they do so, they are more open to the idea of raising capital in those markets. Another is that technology and culture-change have combined to boost considerably the number of investors prepared to invest in foreign equities. In Europe, the introduction of the euro weakened the hold of national exchanges on domestic listings. Together, these trends have driven foreign listings in all major markets ever upwards.

Only a few years ago, the overwhelming first choice for UK and other companies looking at an overseas quotation was the US - usually the New York Stock Exchange for the bigger multinationals and Nasdaq for nimbler, particularly IT-oriented, businesses. High-tech or fast-growing companies tended to feel their business would be understood only by a US investor base. And, hardly less important, valuations for that kind of business were substantially higher there than in Europe.

The equity bust that followed the dot.com boom made US investors less receptive to foreign floats, at least for a while. Closely associated with that, and much more influential on the long-term listings business, was the passing of the Sarbanes-Oxley Act. As the regulatory response to the corporate excesses of the 1990s, this legislation has tightened accounting rules and made bosses personally responsible for the veracity of their accounts.

Implementing stricter accounting rules costs money.

Barclays posted an $84m charge for Sarbanes-Oxley compliance, prompting Chairman Matt Barrett to voice his irritation. UK companies, he grumbled, already have the highest standard of corporate governance in the world.

Sarbanes-Oxley may cause resentment among foreign companies already listed in the US but it also appears to be turning away new candidates. New York Stock Exchange Chief Executive John Thain has warned that "excessive regulation" may deter foreign companies from listing on US exchanges and he is almost certainly right.

More and more Chinese companies, for example, are choosing the London Stock Exchange for a secondary listing after Hong Kong. This may owe something to history - Hong Kong's listing rules are based on London's, which makes for an easy transition - but some point to the off-putting example of China Life Insurance, whose $3.5bn flotation in New York was the world's largest in 2003. When accounting irregularities surfaced at the parent company, an investigation by the Securities & Exchange Commission followed swiftly.

Many mainland Chinese companies have histories of doubtful corporate governance and may be careful not to make the same mistake. Whatever the truth of the matter, one of the biggest listings in recent years, Air China, went to Hong Kong and London instead of New York. Ironically, the Chinese government encourages state-owned companies to list abroad because it approves of the discipline imposed by foreign investors - and the fact that other capital markets are much deeper than its own.

The New York Stock Exchange and Nasdaq have responded by applying to open their own offices in China. The NYSE already has a presence in Tokyo and Hong Kong, whereas Nasdaq closed its existing office in Shanghai two years ago. London, on the other hand, has established a representative office in Hong Kong.

London, and AIM in particular, has had a good run in attracting overseas companies recently. AIM now has more than 1,000 listings, of which slightly more than ten per cent come from outside the UK. The upside for domestic UK companies considering AIM is that these foreign additions enhance what is already considerable overall liquidity.

Euronext embodies the competitive pressures exchanges now face or, at least, one form of response to them. Several European stock exchanges including Paris, Amsterdam and Brussels joined to form Euronext as part of the rationalisation process that led to bids for the London Stock Exchange.

Euronext is in no doubt that US regulation has levelled the competitive playing field to some extent and it has beefed up its attempts to win secondary listings. It has been building a new team to woo non-European listings in particular and has been working up a new marketing strategy.

As Martine Charbonnier, Euronext Executive Director and Head of Listings, said: "There is an opportunity because the Sarbanes-Oxley rules are a costly constraint for foreign companies." An opportunity for Euronext, perhaps, but also for companies in search of capital.

Edward Russell-Walling is an independent writer and editor on finance, economy, politics and business affairs. He has worked for the Sunday Times, Evening Standard and Financial Weekly and he now contributes to titles such as the Financial Times, The Banker and New Statesman. He has edited magazines for, among others, Euromoney and the Economist Intelligence Unit.