According to market research company International Data Corp, by 2002, the US share of the world’s internet users will be just 42 percent. That’s down from 56 percent last year. And, IDC says, one of the fastest growing areas of internet usage is Europe. With many European telecoms companies now offering free monthly access, and dropping their phone charges dramatically, more and more people are going online.
The battle for the custom of these European web surfers is already underway with US portals and dot-coms fighting it out with European telecommunications and media companies to dominate the market. How US companies can best compete with the local players, however, is still up for debate.
‘There are a lot of rumors about companies like AOL, AltaVista and Amazon listing their European assets,’ comments Marcus Boser, an investment banker with Deutschebank. ‘But it would be different for any of them to do a full spin-off.’ For Boser it is important to distinguish between listing a subsidiary and spinning off a new company. ‘In US parlance, spinning off means granting shares in a new company. No-one seems to be doing that in Europe yet.’
Felicia Vonella who heads up London-based communications firm Imagination’s investor relations practice, agrees. ‘There are lots of ways of gaining a presence in Europe without spinning off a new company,’ she says. ‘We’re seeing companies entering into joint operations, sharing content and seeking funds over here but not any full spin-offs, not yet anyway.’ Vonella sees joint operations as currently the most common tool for expanding in Europe. ‘An internet company might have expanded quickly in the US, but in terms of growing outside its home market, it may have come up against the issue of content. It may need to form joint operations with European providers to fulfil other markets’ content requirements and this could lead to the formation of separate European subsidiaries.’
Another way for US companies to gain a presence in Europe is to seek a listing on a European exchange. According to David Stuerken of Citigate Dewe Rogerson, this is something that is happening more and more, particularly with some of the new technology exchanges like Germany’s Neuer Markt. ‘A number of German companies have listed on Nasdaq over the last few years but now you’re starting to see it be reciprocated with US companies coming to the Neuer Markt.’ Stuerken puts this trend down to companies’ need to raise their profile in Europe. ‘To raise your profile you need to do media relations and to do media relations you need to have a hook. If you’ve got a stock exchange listing that provides the necessary hook.’
Adrian Rusling of Brussels-based Carson Kuhn Partners stresses that it is important not to overestimate the influence of foreign listings in Europe. ‘If there is a trend of any sort in terms of US companies and European stock exchanges, it’s been towards companies delisting. And with the flux that European exchanges are in at the moment, I think most US companies considering a listing would put their plans on hold at least until things had calmed down a bit,’ Rusling adds.
Raising cash
The main advantage of actually raising capital in Europe is the huge valuations that companies can command today. ‘Back in March, internet companies in Europe were trading at about 200 times their value whereas in the US maybe they were trading at about 20 times their value. It makes sense to try and get a piece of that,’ comments Deutschebank’s Boser.
The markets have, of course, since dropped somewhat, in Europe as well as in the US. But, Boser says, there are still huge differentials between the two continents. ‘If you look at a company like T-Online, it only caters to the German market but has practically the same valuation as Yahoo which operates worldwide.’
According to Rusling, there are a number of other reasons that US companies are increasingly choosing to raise capital in Europe. ‘The formation of a separate company in Europe can help the parent company speed up consolidation there. It provides the company with greater visibility, which should enhance their ability to expand; and gives them an acquisition currency. On top of that, forming a separate company isolates some of the risks to the company’s domestic US shareholders,’ comments Rusling.
From an investor relations perspective, Rusling suggests that a key question a company should ask itself if it is considering a spin-off is where the new company is going to be domiciled and which shareholders the company is trying to target. Says Rusling: ‘Large quantities of money are still managed on a geographical basis so domicility is an important question. Most investment managers look at European and US companies completely separately so if you have a company listed in Europe as well as in the States it could enable you to tap a whole different set of portfolio managers,’ he adds.
Richard Wolf, head of the New York-based PR agency Golin/Harris, is equally optimistic. ‘The European capital markets are in the best position they have ever been to provide companies with capital. And it’s no longer just the big name US companies. The markets in Europe are increasingly sophisticated, transparent and have an appetite for small and mid-sized high-tech and internet companies.’
Risky business
IPOs do not, of course, come without the risk of failure. Take the recent case of Lycos Europe, for example. A joint venture between US internet firm Lycos Inc and German media giant Bertelsmann, the company presented its IPO in Frankfurt in March this year. According to David Stuerken of Dewe Rogerson, which handled investor relations for the Bertelsmann side, the IPO was only a capital increase; existing shareholders didn’t get any cash for the deal (so, by Boser’s terminology, it wasn’t a proper spin-off). ‘The reason for the flotation was to get enough cash to increase the company’s marketing strategies in Europe so that it could overtake Yahoo as a leading online platform. The company also wanted to have an acquisition currency in case, in the future, it wanted to buy other internet companies in Europe,’ comments Stuerken. One of the lead managers of the IPO adds, ‘Bertelsmann had always had a strategy of spinning off subsidiaries to realize their full potential. Lycos Inc in the US was very similar. It had always claimed that there was a lot of value in its subsidiaries not captured fully in the company’s share price in the US. To spin off Lycos Europe would prove this locked in potential.’
And initially it did. At the time of the float, Lycos Europe had a higher market capitalization than its parent company Lycos Inc and its shares at a starting price of s24 were 33 percent oversubscribed. The timing of the IPO was, however, terrible. Shortly after the flotation on March 22, the markets crashed taking Lycos Europe’s share price with them. It has not fully recovered since. According to one market commentator, this is not the company’s fault, nor does it mean that the decision to do an IPO in Europe was the wrong one: ‘Lycos Europe is very sound strategically, also in terms of business development, and it has a strong shareholder base. Any uncertainty that exists, exists independently from the company story.’
Other US companies might well, however, be put off by the Lycos Europe flop. Comments Imagination’s Felicia Vonella, ‘In a way it’s a null point because a move made by Lycos probably isn’t going to be followed by small internet companies. They are going to have different strategies which maybe are not so risky.’ By way of illustration, Vonella points to the recent announcement that US auction site Priceline.com has set up Priceline.com Europe as a much more typical way forward for smaller US companies in Europe.
Priceline.com thinks it has a unique business model; customers say what price they want to pay for a product and the company finds it for them. Products for sale range from flights, hotel rooms and rental cars to long distance telephone calls and even fuel. The company claims to be able to get customers 30-50 percent savings on published prices. According to a Priceline.com spokesperson, Elaine Marshall of Connors Communications which handles the company’s communications strategy in Europe, management felt that the business model was easily transferable to the European market. ‘The site is based on two premises: firstly that people will be flexible about products, for example dates and timing of flights if they can make a saving. Secondly, that businesses like airlines always have excess inventory to get rid of. These premises hold as true for Europe as they do for the US,’ argues Marshall.
The company has achieved some success in the US and analysts predict it will make a profit this year or at least early next. According to Marshall, there is no reason why the idea should not experience the same success in Europe. ‘The growth potential in Europe is enormous and the time feels right to be there,’ she adds. ‘The company is not going to replicate every area that it’s used in the US but it will take the concept and adapt the idea to the needs of the European market.’
Timing is everything
Comments one market commentator: ‘Whether the time is ripe for a company to spin off its operations has to do not just with market conditions but also the stage of development the company has reached. In the early stages when the business model is being developed and proven, it might be a good idea for the parent company to protect it from the vagaries of the market.’ Rather than an IPO, initial funding for Priceline.com Europe has come from General Atlantic Partners, one of the parent company’s primary investors. Priceline.com will not initially hold an equity stake in Priceline.com Europe either although it will have the option to do so in the future. ‘Talk of an IPO is premature. We’ll launch first and see how the company does,’ comments Marshall.
Sportsline.com has taken a similarly cautious approach. Last year it launched Sports.com, to provide sports coverage over the internet in Europe. Comments head of investor relations Larry Wall, ‘We felt that there was huge market potential in Europe, maybe even more than in the US in terms of people’s interest in sports, the amount of different sports around and the number of teams. We felt there was a real need for a particular product, that there was virtually no-one else doing it and that we were ideally placed to provide it.’ The company initially conducted a private investment round with existing shareholders. ‘They recognized the model and saw how it would work in Europe as well as it had in the US.’ Then at the end of 1999 and beginning of 2000, the company did a second round with some new investment managers as well as current shareholders and managed to raise an additional $52 mn.
‘We’ve tried very hard not be a US company setting up in Europe. Yes, we’ve taken advantage of the business model in the US but we’ve implemented it with a vastly European staff,’ comments Wall. Sports.com is based in London but has offices all over Europe in Paris, Milan, Hamburg and Barcelona. On top of this there are sportswriters and reporters in different companies covering particular events that appeal to different markets. ‘We’ve recognized that the site needs to be country-specific rather than pan-European,’ adds Wall.
As for an IPO, Wall says there is no question of doing one at the moment. ‘The timing depends on a lot of things: the state of the investment climate both for the internet industry specifically and in general, in Europe and in the US.’ The company is not ruling out the possibility of an IPO further down the line, however. ‘If market conditions are right and the company is in good enough shape we’ll definitely do it but we’re not at that point right now.’
