| |
Headline: New Market strives to stay ahead
Source: Euromoney
Date: June 2000
Author: Philip Moore
Biotechs and pharmaceuticals have so far dominated the SWX New Market, attracting institutional investors rare in other new technology markets. But while it may be ahead for the moment, the Swiss exchange is faced with strong competition from the fusion of growth exchanges in the rest of Europe, and the Nasdaq link-up. Philip Moore reports
Ed Peter, head of Swiss equities at Deutsche Bank's Zurich office, reckons Switzerland is "five years ahead of Germany" in corporate restructuring and the delivery of shareholder value. "Swiss companies have already gone through an extensive restructuring process which is one reason why the equity market here was re-rated quite substantially on the upside in the mid 1990s," he says.
Others agree. Analysts of the Swiss corporate scene say that for proof, investors need look no further than the recent track record of pharmaceuticals company Novartis - the product of the Ciba-Sandoz tie-up agreed in April 1996. At the time, it was the largest-ever corporate merger. Kevin Lyne-Smith, co-head of research at Julius Baer in Zurich, says that Novartis has been a test-case par excellence of a successfully executed merger. "Novartis has been very effective in terms of stripping out costs and it has hit all the targets it set out at the beginning of the merger process," he says.
For the time being, though, corporate restructuring among leading Swiss blue chips has left the market essentially a low-growth, defensive one. "We used to be the fourth-largest market in terms of value," says a local banker, "but we fell back a little last year because we remain dominated by so-called 'old economy' stocks."
But now the Swiss Exchange is eager to reposition itself as a market offering growth potential. Its SWX New Market was launched last July as Switzerland's answer to Germany's hugely successful Neuer Markt. The Swiss exchnage billed the new section as being "ideal for dynamic entrepreneurs and investors with a high risk/reward profile".
The first company listed on the SWX New Market was California-based Biomarin Pharmaceutical, and by mid-May, 11 companies with a combined capitalization of just over Sfr10 billion ($5.8 billion) had been listed. This included two from Israel and one from the Netherlands - all in the medical technology (medtech) sector.
According to an exchange spokesman, the SWX New Market hopes to have about 20 listed companies by the end of this year, which local bankers say is probably a realistic target. Certainly the response to a number of the market's IPOs suggests that there is considerable pent-up demand for small, growth-oriented stocks among local as well as international investors. In March, for example, when Zurich-based software company Think Tools listed its shares on the market via Vontobel at Sfr270 a share, they rose to Sfr700 on the first day of trading. When Day Interactive, a web information management company, listed the following month it shot to a first-day premium of 77%.
Demand of this magnitude coupled with a number of other Swiss-specific elements has led to expressions of confidence about the future of the SWX New Market. At Vontobel, senior vice-president and head of corporate finance Sergio Terribilini points to a number of competitive advantages that he believes the Swiss market enjoys over the Neuer Markt in Germany. "If you compare the listing requirements of the Swiss and German markets they are more or less the same," he says. "But with respect to the investors who are being targeted there are important differences. The German market is still very strongly influenced by retail investors, whereas the Swiss market as a whole is much more strongly focused on institutional support, and that holds true for the new market as well as the main board." In the case of Think Tools, Terribilini says that although retail demand was strong, some 80% of the transaction was allocated to institutions. Of this, the split was roughly 60:40 between Swiss and European investors.
Equity awareness
In Germany, the privatization of Deutsche Telekom created - almost overnight - a new army of enthusiastic retail equity investors. But the sale in Switzerland of Swisscom in 1998 never set out to hammer an equity culture into private savers. Nor, say local bankers, did it need to. "I don't think the Swiss are behind the Germans in terms of an equity culture," says Danny Schweizer, head of Swiss equities at UBS Warburg in Zurich. "Equity awareness in Switzerland is very high, which is why there was no natural need to try to distribute Swisscom to retail investors. A much higher priority with the sale of Swisscom was to secure a good price for the stock, because it was floated in very difficult market conditions."
Another advantage for companies listing on the SWX New Market, say Terribilini and other local bankers, is that entrants to the market are better off being big fish in a relatively small pond than the other way around. "Germany's Neuer Markt has become a bit overcrowded," he says. "That means that companies doing an IPO in Switzerland will enjoy much more visibility and hence incur much lower PR costs."
A third potential advantage of the SWX New Market, say local bankers, is that it has already established itself as something of a specialist market for companies in the medical technology and biotechnology sectors. Carsten ten Brink, head of corporate finance at UBS Warburg in Zurich, identifies this niche value as a key motive for listings by Israeli companies Card Guard Scientific Survival and Oridion Systems, both of which were led by his bank. "Both companies are in the healthcare sector," he says, "and long before the New Market was set up, Switzerland had a very strong track record in financing highly successful growth companies in the sector - be it in orthopaedics, dental implants, hearing aids and so on. The result is that on the buy side there is a great deal of expertise on the healthcare sector."
Similar logic underpinned the IPO of the third non-Swiss name to have listed on the new bourse, Amsterdam-based medical technology company Jomed, which in 1999 posted a net profit of $2 million on turnover of $44 million. "It made sense for Jomed to list on the market," says a spokesman for the issue's lead manager, CSFB, "because it has sizeable operations in Switzerland and because all the relevant comparables in the med-tech sector are listed in this market."
The same banker says that Switzerland itself has a large reservoir of companies in the med-tech and biotechnology sectors that could follow the likes of Jomed on to the New Market. "A figure I heard recently is that there are about 200 privately held biotechnology companies in Switzerland," he says. "Of course not all of these will be successful or be candidates for a stock market listing, but if just 10% of them launched IPOs we would be looking at quite a substantial market."
Biotech black holes
Those sceptical about the New Market, however, argue that elements that are perceived domestically as strengths may, in fact, be serious weaknesses. One German fund manager, who looks after investments on the Neuer Markt worth in excess of e2.5 billion ($2.7 billion), says that his interest in the Swiss market is minimal precisely because of its emphasis on the medical technology and biotechnology sectors. "To me, biotechnology is a fad that can come and go very quickly," he says. "At least with high tech you have growth, revenues and earnings potential. You can actually see progress with high tech, whereas some of the biotechs are like black holes." Of course he may be reconsidering that opinion now.
Bankers involved in the Swiss IPO market dismiss objections of this kind on two counts. First, they argue that the companies that have listed on the SWX New Market do have very tangible growth prospects. "If you look at the example of Actelion, which we brought to the market, it already has two very exciting products in clinical phase-three tests," says the CSFB spokesman. "When the company passes certain milestones and approvals it is going to be tremendously profitable. It produces life-saving technology."
Second, they say that the new Swiss market has no intention of establishing itself as a single-industry exchange, but that it could attract a wide range of sub-sectors of what has been dubbed the new economy. "I think we'll see a lot of spin-offs of small, highly specialized companies that at the moment are controlled by larger organizations but need to be given more independence," says a Zurich banker. "One example that virtually nobody looks at is Swatch, which controls about a dozen small technology companies. One of these is now entering into the mobile phone battery market and has superior technology to many of its Japanese competitors." Units such as this, he adds, will be ideal candidates for a flotation on the market, not least because public quotations will allow them to offer incentives to highly prized staff through employee share-option schemes.
That may be so, but there are other reservations about the long-term viability of the SWX New Market. The most important of these is the danger that it will become increasingly marginalized if and when Nasdaq Europe pools its resources with the Neuer Markt in Germany and techMARK in the UK to establish a platform for trading small, growth-company shares that will dwarf all other European markets. Although some Swiss bankers say that a number of Swiss companies quoted on the Neuer Markt are now thinking of moving their listing to Switzerland, this is not on the agenda for Fantastic Corporation, a Zurich-based software company that listed on the Neuer Markt last year.
"When we were preparing for our listing we knew that the Swiss New Market was going to be launched," explains Fantastic's head of investor relations, Jurg Bollag, "but the timing would have meant that we would probably have been the first company quoted on the New Market with a story to tell that is not simple for investors to understand. We felt that investors on the Neuer Markt were much more sophisticated and I have no reason today to believe that we made the wrong decision. Even after the recent correction our share price is still about five times higher than it was at the time of the IPO.
"I think that what has happened with London and Frankfurt getting together creates even more of an incentive for Swiss companies to list on the Neuer Markt," he adds. "It will be a more liquid market and it will also be a euro-based market, and obviously when German or other European institutions invest in the Swiss market they are incurring a currency risk."
Terribilini at Vontobel replies that the currency issue was barely mentioned by investors during the Think Tools roadshow, and a banker at CSFB says the same about the Jomed offering. "In large-cap stocks the currency element might be a consideration for non-Swiss investors," he says. "But quite frankly with a small-cap stock that can fluctuate by 20% or 40% a year the potential for currency fluctuations of perhaps 2% a year maximum loses all of its relevance."
A spokesman at the Swiss Exchange puts an even more positive spin on the currency issue. He says that if it wanted to the Swiss Exchange could very easily list Swiss stocks in euros; it has no intention of doing so, he says, because the Swiss franc in itself is an "asset". Judging by the recent performance of the euro, maybe he has a point.
|