What is all the fuss about? In scanning recent headlines in financial newspapers, you might think there is a groundswell of companies ready to de-list from US equity markets, or stay away from them entirely. Some pretty shrill noises have been emerging from a variety of media over the past few months and, while it’s true foreign issuers are finding the new requirements under Sarbanes-Oxley onerous and costly, the hype surrounding de-listing is inflated.
As recently as mid-February, the online retail trading forum Motley Fool weighed in, noting that Electrolux was pulling out of Nasdaq. ‘And there’s been plenty of talk of foreign companies in particular being upset at the new regulations affecting their US listings, grumbling that they have perfectly good stock exchanges back home,’ noted one posting on the web site. ‘[I] wonder whether Electrolux’s de-listing is really a prelude to a more complete withdrawal from US equities markets – and if so, how many more foreign companies might follow Electrolux out the door?’
Major publications in the world of finance have pointed to O2 and United Business Media, among others, which voluntarily did away with their US listings in recent months. And media outlets are reporting that as many as 60 companies are thinking of either getting out of US markets or not bothering to list Stateside at all.
The reason the press is jumping on this story is because turning away from the US capital market is a much more compelling story than turning toward it. ‘Listings don’t make the headlines – de-listings do,’ notes Christopher Sturdy, managing director and head of global equities at Bank of New York. And while some notable de-listings have occurred and companies are complaining about the rising costs of complying with US regulations, the allure of the US equity market has definitely not gone.
Business on the up
In fact, the attractiveness of gaining access to US investors might be on the rise, with American shareholders increasing their appetite for foreign equity. The Federal Reserve recently reported a new high in the percentage of non-US shares in total equity portfolios at 13.4 percent in 2004.
‘We are beginning to see the return of retail investors to international stocks,’ Sturdy says. ‘We are hearing the merits of diversification and, in particular, international diversification. My own financial adviser recently recommended more international stocks as the way to diversify my personal portfolio.’
In tandem with the rise of retail interest in international equities is a reinvigorated global depositary receipt (GDR) market. Bank of New York’s review shows that total GDR offerings jumped from ‘anemic levels’ in 2003 to over $11 bn in 2004. Those are good global numbers, although western Europe lagged considerably. Meanwhile, trading on US exchanges hit a record high of $37.4 bn in 2004, according to the bank.
From an IR perspective, making the case for accessing US capital markets is quite different from how it used to be. Gone are the days when top management praised the success of strong American depositary receipt (ADR) programs in the States and went about their business. After years of recession, scandals and widespread caution, senior management is more closely scrutinizing returns against an active US program.
Costs for such a program have also skyrocketed, making IR’s job more difficult when trying to convince management that a US listing is necessary. ‘Since the market correction of 2001, there has been a significant slowdown in general new issuance,’ comments Akbar Poonawala, head of global equity services at Deutsche Bank.
At JPMorgan Chase, which also services ADR issuers, a similar view is shared. Zeroing in on the European and UK markets, Yxa Bazan, head of JPMorgan’s global ADR client business says, ‘For Europe, the ADR business has been mature for five years, ever since the internet bubble burst, as an outcome of generally fewer equity capital raisings. That said, the current trend shows an increased appetite from US investors for foreign equities.’
There is no doubt the cost associated with regulatory compliance in the US raises serious matters for foreign issuers. There is also some risk in operating in a highly litigious country. Companies now have to weigh carefully the pros and cons of listing in this market – and that has meant a few de-listings and a reticence to join a US exchange because of the rigorous listing and regulatory requirements in some cases.
Earlier this year, Bank of China and China Construction Bank abandoned plans for an NYSE IPO due to concerns over the governance obligations that Sarbanes-Oxley requires. Meanwhile, China Life Insurance and China Mobile, both NYSE-listed, are having to contend with a litigious US investor base.
Still, an argument can be made that the high standards for listing in the US actually help weed out companies that are not being straightforward with the Street, and therefore protect investors. When China Construction Bank decided to cancel its NYSE IPO, many noted concern surrounding the requirement that company executives sign off on financial reports. This was bad news for the banks involved in the deal but it might have saved US investors from heavy losses: the company’s chairman stepped down in March following reports the firm was under investigation for corruption.
Hurting valuation
There are also signs de-listing negatively impacts valuation – not surprising given that the US capital market remains the largest in the world. This is quite fortuitous for many foreign issuers. A recent study by Oxford Metrica, a strategic advisory firm, shows a significant drop in value waiting for companies that de-list – on average, a 15 percent reduction. It concludes that shareholders and institutions backed away because they were getting less information or because of perceived diminution of overall potential.
Looking at western European companies as a group, Oxford Metrica finds a more dire result. On average, these companies lose between 20 percent and 40 percent of their value when they de-list from the US market. With this figure in mind, many companies recognize that their pursuit of global growth is still connected to the US capital market and the listing debate might settle down.
Meanwhile, there are some real capital market changes. Small and mid-cap companies are now finding greater liquidity in home markets, partly because of much improved technology that lowers the cost and speed of transactions. In Germany and other countries the local market is strong and the systems are in place to allow big US institutions to buy and sell with confidence, something many were loath to do around ten years ago.
‘People don’t need to raise money in the US because institutions can buy efficiently in foreign markets,’ explains Poonawala. ‘Also, the efficiency of foreign markets has improved and those markets that are already efficient probably will get more efficient going forward.’
So one aspect feeds the other: money looking for a home finds it in an efficient market abroad, while capital raisers can tap deeper into local markets if necessary. And yet the strong reasons to have a fungible stock in the US will not disappear. For example, the need to give American employees shares they can easily trade remains an issue.
For small to medium-sized firms this argument might not make sense. They see the new, higher costs of registration and a US listing as just too expensive. But Shearman & Sterling attorney Antonia Stolper says this is not a structural change. Small companies may not come in, but then ‘most companies in the European markets are not listed in the US today, so why bother?’ she asks.
Regulators weigh in
However, if growth through expansion into the US is important, getting on the global radar is a concern, and local markets just don’t see the value that US investors do, then getting listed on the NYSE or Nasdaq is the way to go, whatever the cost. ‘Biotech, pharma, mining, some financial institutions, semiconductors – all these come to mind,’ Sturdy says, commenting on sources of new business for ADR listings. In his view, it is the US that has the investment experts who understand these businesses and are willing to put significant money on the table.
The position of the SEC is being carefully watched through all this. Even Sir Digby Jones of the Confederation of British Industry (CBI) recognizes that too much regulation by the commission could hurt valuation. ‘If too much time is spent on corporate governance and not enough on wealth creation, companies will de-list from the American exchanges,’ Jones stated recently while campaigning for the US to ease its stand on Sox Section 404.
The SEC responded in March, giving non-US firms more than a year’s grace for dealing with Section 404. ‘The commission recognized doing IFRS at the same time as 404 was too much to ask,’ says Stolper. ‘It is also very focused on the deregulation issue, and has concluded that there might be a hesitancy to list in the face of 404 if there is no exit strategy.’
Stolper is referring to the difficulties of deregistering in the US because, while it’s possible to de-list, the structure of US rules still requires registration and disclosure filings if a company has more than 300 US shareholders. Usually, people complain about hurdles that are too high. In this case, however, the hurdle is too low – a higher number of holders as a cutoff would make it easier for companies to get out of the requirements. Knowing that an exit is easier, companies might well decide entry is worth a try.
