Within weeks of the SEC’s decision to ease the delisting requirements of foreign companies with illiquid US stock listings, a number of large European companies packed their bags – including Adecco, the world’s largest temporary employment agency, and SGL Group, one of the largest carbon fibre and graphite manufacturers.
According to senior investment bankers, more are likely to follow.
The new SEC rule will allow any foreign company to deregister if it can show that the average daily US trading volume in its shares has been no greater than 5% of its global trading volume over the past 12 months.
According to the SEC, about 29% of the 1,200 foreign companies with a US listing, or about 360 companies, could fit the bill.
But while many foreign companies are planning their departure, British sugar refiner and artificial sweetener manufacturer Tate & Lyle announced this April that it would have its shares traded in the US, not on one of the big exchanges but on the Pink Sheets, an OTC trading system best known for shell companies and nano caps.
Sweet arrival
Tate & Lyle has become one of the first large foreign firms to join the Pink Sheets’ new segment for high-quality international companies, called International Premier QX. The new segment which, unlike the rest of the Pink Sheets, has some minimum reporting requirements, has been designed to bring attention to the highest-quality companies listed on overseas exchanges that want the benefit of access to US domestic investors without incurring the costs and regulatory burdens required of a stock exchange listing.
Companies on the International Premier QX and on the Pink Sheets’ other new segments, collectively known as OTCQX, will also have broker sponsors, similar to the Nomads of the London Stock Exchange’s AIM market.
Senior investment bankers on both sides of the Atlantic, however, believe that Tate & Lyle is more likely to be an exception that proves the rule than the start of a new trend.
"For companies that are reluctant to take on the costs of Sarbanes-Oxley or the other costs associated with maintaining a US listing, this could be considered an in-between solution," says Akbar Poonawala, head of global equity services in Deutsche Bank’s global transaction banking business in New York. "But companies thinking of going down that route need to have their eyes open. There are limitations to who invests in OTC stocks and they risk being less liquid than listed shares. Newcomers will need to evaluate what level of investor relationships they will need in order to ensure a liquid programme."
US exchanges are working overtime to find new ways to gain a greater share of the global listings business despite their regulatory handicap, from buying European exchanges to developing new listings regimes.
Junior
The American Stock Exchange, which has been actively courting foreign companies with a package of investor relations services to help find liquidity in the US, recently announced its intention to develop a junior market similar to London’s AIM.
"There are a lot of small companies with no choice of marketplace other than the OTC Bulletin Board, where they don’t get much guidance about how to grow," says John McGonegal, senior vice-president of equities at the American Stock Exchange. "We want to bring the benefits of our specialist auction market and our service philosophy to them."
Amex, however, faces a number of obstacles before it can launch its junior market, including a need for legislative as well as regulatory change.
Europe-based ECM bankers doubt that the efforts of US markets and exchanges to attract foreign listings will be enough to give it the edge over London soon.
"London is in a virtuous cycle right now when it comes to attracting international listings," says Craig Coben, managing director in equity capital markets at Merrill Lynch. "The City has emerged as a huge centre for fund managers. With the cost concerns of a secondary listing in the US and London’s proximity to emerging sources of new issues such as emerging Europe and the Middle East for which London is a more convenient location, this is unlikely to change any time soon."
Preferred destination
For some companies, however, the US is likely to remain the preferred destination.
"London has become a terrific market for growth companies," says Bruce Huber, managing director of Jefferies, a global full-service investment bank for growth companies. "In the US, a company now has to be two to three times the size before it can expect reasonable liquidity and a research following from going public, and absorb the higher costs of Sarbox and other regulatory compliance.
"The key to serving today’s growth companies is to properly match issuers and investors, and a global perspective is fundamental. Big ideas with massive growth prospects are still best financed in the US with its greater concentration of specialist investors – we are much less likely to see a company like Google go public in Europe. UK and European investors are keen investors of listed growth companies, perhaps even more so, but they have a greater focus on earnings and company fundamentals than top-line growth. Banks need to guide clients towards the right market for them."