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Thursday, 19 October 2017

Wall Street shuffle

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Escaping trouble at home, seeking investors that understand new technology, finding a match or just trying to squeeze out an extra buck on valuation – the boats heading for New York are full of excited foreign management seeking the best for their IPO.

The first decade of the new century was one which directors of US-based stock exchanges would probably like to forget. While the nation’s banks profited from deregulation, its bourses sputtered. Sarbanes-Oxley (SOX), the constricting set of laws passed in response to the collapse of Enron and others, deterred a generation of foreigners from listing corporate vehicles in a country they once saw as a second home.

For the likes of the Nasdaq and the New York Stock Exchange the impact was profound.

China’s leading state firms shifted their allegiance from New York to Hong Kong and Shanghai, for fear of having their directors hauled over the coals for accounting lapses. European firms opted for listings at home, while those of Russia and and Central Asia plumped for IPOs in London. The Big Apple’s bourses, which once bestrode the financial world, had become provincial.

Yet it rarely pays to write America off. To paraphrase the political thinker Alexis de Tocqueville, the nation succeeds not necessarily because it is greater than its peers, but because of a willingness to repair its faults. In recent years, onerous SOX regulations have been eased, giving the directors of foreign corporates more comfort, and further streamlining the listing process.

And so far, it’s working. In the first 10 months of 2013, 192 companies raised US$51.8bn from new shares sales in the US, putting the market on a par with the sums generated during the first internet-heavy listing boom in 2000.

Back in the high life again

Bruce Aust, executive vice-president of Nasdaq OMX’s corporate clients group, is encouraged by what he is seeing. “We have had a strong IPO market so far this year, with well over a hundred IPOs” completed in the first 10 months, “a pace we have not seen since 2007”, he said.

But more evident and heartening are signs that foreign corporates are once again falling in love with the American dream. In the first 10 months of 2008, as the world economy stared into the abyss, foreign firms raised just US$841m from New York stock sales. That figure jumped, first to US$1.6bn over the same period last year, then to US$3.8bn through the first 10 months of 2013, according Thomson Reuters data.

Many of these listings are completed by mid-cap companies nestled in the technology and bio-technology space, sectors where Europe simply “can’t compete”, said Aust. That rings true of jurisdictions across the world: this year, tech and high-end healthcare firms from the likes of Israel, China, Cyprus and the Netherlands have rushed to sell shares on Nasdaq, despite the technical snafu that plagued Facebook’s 2012 debut.

But the foreign revival extends far beyond the tech space. The list of foreign companies completing stock sales in New York this year is compelling. Take the US$350m listing in September of Mexico’s largest low-cost carrier, Volaris, which recently launched flights to the US Southwest. Or the decision by Belgian chemicals firm Taminco to raise US$254m in a May stock sale. Or 58.com, a Chinese classified-ad firm often likened to Craigslist, which raised US$187m from its October listing on the NYSE. These deals are notable for their diversity.

Aviation, industrial chemicals, media and communication cover a broad spectrum. Mark Hantho, global head of equity capital markets at Deutsche Bank, points to the cross-section of corporates listing in the US. “There’s as strong a focus as ever on tech, biotech and healthcare firms, but we also we are seeing listing candidates from across multiple sectors,” he said.

Taking the long way home

There also seems little if any geographic continuity: this year New York has absorbed listings from East Asia, the Middle East and Latin America, and from both wealthy European states (Germany, the Netherlands) and those on the continent’s troubled periphery (Ireland, Cyprus). It seems almost as if the city is, through its revivified bourses, once again rediscovering the immigrant roots and values – “come one, come all” – that made it so powerful and potent a financial powerhouse.

The reason to make the long journey is the same as ever: its broad and deep investor base; world-class research; and, at almost every level of most sectors, a strong, easily-comparable peer group.

Whether you are looking for a stake in a blue-chip telecoms player or a mid-cap healthcare firm, US bourses present you with an array of potential investment opportunities, rather as a supermarket lays out its fruit, making it easy to see which apples are good and which are rotten. It could be decades before a rival city, whether London, Shanghai or Mumbai, comes close to presenting investors with such a deep bench of buyable stocks – if ever.

That metric clearly matters, and in ways that are seldom acknowledged. The Hong Kong Stock Exchange, a natural home for China corporates, has largely failed in its efforts to entice European and Russian listings, after a series of unimpressive debuts. Beijing’s desperation to make mainland firms list in Shanghai or Shenzhen is being tested to the limit, most recently by the growing belief that the Chinese online retailing giant Alibaba may pursue its US$13bn IPO in New York – due to its more flexible regulatory regime.

It is not just Alibaba that is feeling a shove from behind. The eurozone crisis forced many firms to scrap or rethink local plans: note Belgium’s Taminco. It abandoned plans to list in Brussels, opting for a safer route to market, courtesy of the NYSE. Another notable European loss was the decision by French online advertising firm Criteo to sell US$290m of shares on the Nasdaq exchange in late October. That decision – Criteo had mulled a domestic listing – caused a lot of hand-wringing in Paris where politicians lamented the “loss” of a French new-media company with impeccable political and financial connections.

European blues

Yet it is symptomatic of a broader issue that has long plagued Europe: an inability – or perhaps a reluctance – to foster and commercialise fast-growing companies. The US listing process, while intense and demanding, is relatively quick; plus the chances of anything going genuinely wrong are much smaller than on a European bourse.

While Europe is a natural home of the mega-corporate, it lacks a deep bench of listed mid and smaller-cap firms, crucial when seeking an equable valuation. The bigger companies have been able to access markets at home in 2013, but SMEs still struggle.

“The re-emergence of the European IPO is very impressive.” said Deutsche’s Hantho. “Having said that, there continues to be an active debate for the small cap growth listing location.”

Few doubt next year will be another stellar one for New York’s leading bourses. Rising interest rate expectations, as well as an improving economic picture in both the US and the eurozone, “bodes well” for IPOs and for the equities market in general, said Nasdaq OMX’s Aust. Hantho points to “strong signs” that retail and institutional investors are growing “ever-more confident” that the economic recovery has legs, pointing to a new surge in share ownership.

Not that New York and the US will necessarily have everything their own way. London’s IPO market has recently dazzled, thanks to stellar listings from the likes of Madame Tussauds’ owner Merlin Entertainments. If companies can be assured a rapturous reception at home will they still set sail for New York? UK software firm King.com will provide an answer early in 2014. The maker of top Facebook game “Candy Crush” is leaning towards a New York listing, but has not ruled out an IPO in its home city of London. If it does ultimately choose to head across the pond – a logical scenario for a leading global technology firm with a deep bench of US clients – it will be quite a coup for the Big Apple.

To see the full digital edition of the IFR Americas Review of the Year, please click here.

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com

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