By Nick Mayes
Will the new European Nasdaq index, which plans to open in the fourth quarter of 2000, signal the end for the other pan-European markets? Many believe that a European version of Nasdaq will be able to deliver where the two previous attempts at a pan-European bourse have failed. Easdaq, the Brussels-based exchange established three years ago is set to fall way short of the 100 companies it wanted to attract by the end of the year – it currently lists just 53. Although the Euro.NM, a link-up between the junior markets in France, Germany, Belgium, the Netherlands and Italy, has attracted IT and technology companies in droves, many have failed to attract the serious investment they had hoped for.
Denis Campbell at mergers and acquisitions expert Regent Associates, says: If a venture capitalist wants to sell a 10% or 15% stake in a Neuer Markt company it will often have to take a huge drop on the listed price. I have seen stakes of that size change hands at less than half the listed share price. Even raising cash can be problematic for Neuer Markt-quoted companies. Institutions refuse to buy into offers at prices which are vastly inflated by ignorant private investors. I have seen Neuer Markt companies fail to acquire in the USA because companies won’t take their paper.
Nasdaq’s plan is to create a pan-European Internet-accessible, high-performance, low-cost trading platform linked on a global basis with Nasdaq in the US.
Nasdaq-Europe will be a private, for-profit company operating out of London. The NASD (National Association of Securities Dealers) will be the lead and managing partner of Nasdaq-Europe with News Corporation’s e-partners, Softbank Corp and Vivendi’s Viventures Capital as original founding shareholders. Although Nasdaq is keeping tight-lipped about the exact set-up of its European venture, it is believed that applicants will be required to meet the stringent entrance regulations that US Nasdaq companies must meet and that it is hoping to attract companies already listed in the US to go for a dual listing.
These two features are absolutely crucial to Nasdaq Europe. One investment analyst says: If applicants have to meet US GAAP accounting regulations, investors will take the index a lot more seriously than they have done the Neuer Markt and Nouveau Marche. The problem with these markets is that they have let a lot of low-quality companies filter through their weak regulations, which has put off a lot of the major investment groups from the US. To successfully apply to join Nasdaq’s small cap market, a company must have net tangible assets of $4m or a market cap of $50m or a minimum net income of $750,000 in the last fiscal year or two out of its three most recent fiscal years. It is also required that the public float is worth a minimum of $5m. Compare this to the Euro.NM, where no minimum asset value or minimum level of profitability is required. A Euro.NM applicant must meet the targets of a minimum 5m euros ($5.15m) public float and a value of shareholder equity prior to flotation greater than 1.5m euros ($1.55m).
The Euro.NM has had no difficulty in attracting applicants. The average size of company listed on the Euro.NM is 255m euros ($232m) and the average amount of capital raised is 27m euros ($27.9m). More than 200 companies are now listed there, with the bulk on Frankfurt’s Neuer Markt which accounts for 85% of Euro.NM’s total capitalization. Consequently, EuroNM’s investor base consists largely of German private clients looking for cheap shares in small German companies for their pension portfolios. Joachim Fleing, investor relations director at Heyde, a German systems integrator which floated on the Neuer Markt last year, says: Over 70% of our free float went to private German investors who are happy to sit tight on their shares. The rest of the company is held by management, which has a nine-year commitment to hold their stock. There is no movement at all.
With such relatively lax entrance regulations, too many no-hopers slip through the net. Neuer Markt companies are over-valued at three or four times their US competitors. They are often generally less attractive, many are resellers rather than technology innovators. Some have their fingers in far too many pies and are ill-prepared to face serious international competition. However, Easdaq borrowed the imposing of tight trading regulations used by Nasdaq US, but has failed to attract both applicants and investors. An Easdaq applicant must have minimum total assets of 3.5m euros ($3.61m), reserves of at least 2m euros ($2.06m) and a market cap of over 50m euros ($51.56m). Some 20% of the company is required to be publicly held after the IPO. But by the end of the first half of 1999, Easdaq listed just 46 companies, with a total capitalization of 20.6bn euros ($21.24bn). The average size of Easdaq companies is 406m euros ($418.63m) and the average amount of capital raised is 46m euros ($47.42m).
Easdaq has been blighted with other problems. Though located in Belgium, Easdaq has not been identified with a particular national market and has missed out on the fervent backing of national champions by private investors which has powered the Neuer Markt. It has also failed to deliver the same easy-to-use online trading interface which Nasdaq US offers. Although these factors may have put off some potential applicants, Easdaq’s low number of entrants suggests that there simply isn’t a large number of European companies capable of meeting the entrance requirements drawn out by both Nasdaq US and Easdaq.
Therefore, the success of Nasdaq Europe may hinge on whether it can attract its listed US companies, which already proved that they can meet stringent entrance regulations, into Europe for a dual listing. There is a clear demand for this with a lot of US software vendors seeing it as an ideal way of raising their profiles on the other side of the Atlantic. But most dual listings have attracted minimal interest from US investors, with recent Neuer Markt IPOs from US e-commerce systems vendor BroadVision and data management software vendor Poet Software going out like damp squibs. The arrival en masse of quality US stocks onto Nasdaq Europe however, may bring over the US investment groups which have so far shunned Europe and may also produce knock-on interest in European stocks on Nasdaq Europe.
But is there room for three pan-European exchanges? Easdaq has been fighting back in recent months, announcing a new trading system to be launched in the first quarter of 2000 and introducing a scheme whereby companies can trade their shares through Easdaq, without issuing additional shares or raising any equity on the exchange. The first company to do this was Nasdaq-listed cancer technology research firm Impath. Lauren Ptito, vice president at Easdaq, acknowledges the criticism: We know that things have been a bit sluggish. But we have attracted high-profile money makers such as Morgan Stanley and Goldman Sachs in the last three months through these new ventures and we hope this will boost both volume and liquidity.
Thomas Streimelweger, CEO at S&T, an Austrian IT services group which has been listed on Easdaq for two years, says: These are steps in the right direction, but it has still not learned its lesson from the success of the Neuer Markt. It succeeded with private investors because it had a tie in with CNN Europe to have regular reports and profiles on its quoted companies. Easdaq has not marketed itself aggressively enough.
The first real signs of trouble have appeared at the Euro.NM, with several postponed flotations in the last six months, particularly on the Neuer Markt, where investors are beginning to tire of over-valued, unattractive stocks. For years American and British observers have predicted a huge correction on the Euro.NM where shares routinely trade at 3 or 4 times the levels of the USA and the UK. Eventually prices will crash for all but the very well managed, such as document management outfit SER and those with real technology advantage such as e-banking specialist Brokat Technologies AG. But the fall in values may take 3 or 4 years, reflecting the fact that software, and IT services in particular, are often not global markets.
There is a niche for a European version of Nasdaq. Some European companies will see a listing there as a route to the US Nasdaq and the arrival of quality US stocks will refuel interest from private European investors as well as dragging heavyweight investment groups across the pond on their coat-tails.
This article originally appeared in ComputerWire’s weekly M&A Impact news and analysis service.
