European company IPO in US – so last century
This week UK cyber-security firm Sophos confirmed it would list on the London Stock Exchange. Press reports of a $1.5-2bn valuation would make it the biggest ever UK tech initial public offering (IPO). The biggest in Europe was eRetailer Zalando at $7bn in Germany last year.
It’s good to see.
Some European tech CEO’s are enticed by the bragging rights of a Nasdaq listing. Many US investment banks are keen to promote this idea because they make higher fees from a US listing than a European one.
To be fair, 15 years ago it was likely that domestic US funds were less able to invest on foreign stock exchanges, but this is not the case today. The US market is so over-covered that many fund managers look overseas for less well-researched or understood investment ideas, and most European exchanges are considered to meet the regulation and disclosure hurdles that domestic fund rules will require, and some are even owned by Nasdaq.
Stock market listing location should not affect valuation
A stock exchange, whether in the US or Europe, is like a utility, it provides a pipe to low cost liquidity and a regulatory wrapper to ensure investors are protected. The exchange is not a marketing tool and it would be highly unlikely in an efficient market across well-regulated exchanges that valuations differ simply because of the exchange a share is traded on. This fact is widely ignored and in fact contradicted by some investment banks pushing a Nasdaq listing (fees to bank c. 6-7% of the shares sold) versus a local European listing (fees to bank c. 2-3% of shares sold).
It is true that a simple comparison of tech valuations does show US stocks to be more richly valued, but this is not comparing like with like because there are no Apples, Googles, Twitters, Facebooks, or Amazons in Europe. If you compare SAP, ASML, ARM, Telecity, Nokia or Ericsson to their US peers, the European stocks all have higher valuation multiples most of the time. this is not because they are European but because they happen to be better businesses (higher growth or return on capital) or are seen to have more attractive competitive positions.
Ongoing cost is high
Aside from the cost of listing, there is also much higher director liability, and the higher administration cost of complying with Sarbanes-Oxley legislation for companies wanting to pretend to be a US tech stock. And companies that do this often forget to adjust their “look and feel”. Once listed in the US, they are competing for investor attention with relatively sophisticated IR machines that report quarterly within 3-5 weeks of the quarter end. Companies that don’t do this get orphaned (Velti is an example of a hot-sector stock that moved from AIM to Nasdaq, and has now filed for bankruptcy – they made classic mistakes in my opinion which I’ll write about in future).
OTC listing is low or zero cost
And it is possible to have your shares trade in US dollars without the expense of a US listing and SEC registration. US brokers will set up OTC versions of overseas stocks often without involving the company concerned. They make money on the spread and FX. Quite large companies are listed in the US in this way:Marks & Spencer, BNP Paribas, Roche, and Allianz for example. It’s a hot and misunderstood topic and I’ll write about it in more detail in future too.
US market interest seems to be waning
Slowly it seems the tide is turning on listing European companies in the US. Fewer companies seem to be considering it, and it does feel rather “last century” to see a private company citing “Nasdaq IPO” at the end of its slide deck.
The bottom line is that a good company will get a decent valuation and following on either side of the Atlantic. In fact arguably the dearth of European Tech success stories makes those few exceptions to the rule even more desirable to local investors. This seems to have swung the case with Sophos.
Andrew Griffin spent almost two decades as a technology equity analyst before working in investor relations, corporate development and market intelligence for a UK listed software company. In 2015 he set up Oakhall to help European public and private companies.