Mary Lisbeth D'Amico's fortnightly funding column looks at the contenders for Europe’s premier exchange for growth stocks.
ByMary Lisbeth D’Amico
Mary Lisbeth D'Amico's fortnightly funding column looks at the contenders for Europe’s premier exchange for growth stocks.
AIMis seeking to grab the reins as Europe’s premier exchange for growthstocks. But don’t write off the other exchanges just yet.
It’sno secret that capital-hungry European companies are plagued by lack ofa single, liquid market where they can raise money. So a recentannouncement by the London Stock Exchange that it will push its Alternate Investment Market
(AIM) as Europe’s premier exchange for small, growing companies might sound like what so many have been waiting for.
Why one exchange?
Astudy by independent UK consulting firm Oxford Analytica concludes thatthe positive impact on EU GDP of a common European trading exchange forgrowth companies would be around half a per cent annually, or nearly€50 billion additional to the European economy each year, according toAIM.
Even companies with no plans to launch an IPO are affected by the lack of an appropriate market. According to a September 2004 report commissionedby EASDAQ and conducted by then MIT Sloan School of Management studentRobert Abbanat, without IPO pricing to measure themselves against,valuations of trade sales in Europe remain significantly depressed.
As it stands today, European companies that want to grow have few otheroptions than to tap the NASDAQ. Yet more stringent regulationsintroduced since the Sarbanes-Oxley Act was passed are making thatincreasingly difficult, and few European companies have actuallylaunched recently on the NASDAQ – only nine so far since the start of2004.
Still, according to the study, the 79 marketparticipants interviewed - investment banks, fund managers, VCs, andcompanies formerly listed on EASDAQ - were split on whether a singleexchange for Europe is necessary. More than half felt that Europeancompanies should seek a listing on a local exchange, then move to theNASDAQ if they need to grow further.
But that AIM willbe the solution to European venture’s problems is not a foregoneconclusion. Numerous others players are still wrangling for the titleof Europe’s high-growth exchange and not all market participants agreethat AIM is the one.
"I don’t think AIM is Europe’s answer toNASDAQ," says Wolfgang Hanrieder, managing director with the CarlyleGroup in London. "We could use something much more liquid andpan-European."
Gaining momentum
Few dispute that AIM is one of Europe’s mostsuccessful exchanges for small- to medium-sized companies. Since itslaunch in 1995, around €29 billion has been raised, and in 2004 nearly100 million shares were traded with a value of £18 billion, accordingto AIM. The London Stock Exchange can rightly crow that AIM is gainingmomentum - this year alone, 389 companies have joined and about £3.39billion in fresh capital has been raised.
Its advocates alsopoint out that AIM is becoming less UK-focused than it was. Currentlyabout 200 of its 1322 listed companies hail from outside the UK,although only 37 are from the European Union. Still, of those, 17 havejoined since January. Among them are SQS Software Systems, the firstGerman company to have its primary quotation on AIM, and Italian fuelcell company ACTA.
Now AIM plans to try to convince moreContinental European investors to join forces with it. About 90 percent of its investor base still comes from the UK, notes Martin Graham,director of market services at the London Stock Exchange and head ofAIM. It is also actively recruiting more non-UK nomads-the financialagents who pick and groom potential listees. Thus far it only has oneContinental European nomad, SBC Bank in Belgium.
All well andgood. But never underestimate the national rivalries and fragmentationof Europe. This should ensure that for some time that there will not beone exchange for Europe, however badly needed.
Rival exchanges
For one, the Euronexttrading platform, which brings together the Paris, Brussels, Lisbon andAmsterdam stock exchanges as well as the UK derivatives market, Liffe,claims the honor of being Europe's "leading cross-border exchange",based on its annual trading volume. According to the Federation ofEuropean Securities Exchanges, Euronext saw electronic orders in thefirst nine months of this year of 56.9 billion shares worth a whopping€1.3 trillion.
A portion of the companies on Euronext's"Eurolist" exchange are small-to medium sized companies with valuationsof under €150 million, according to Martine Charbonnier, executivedirector of listing and issuers at Euronext in Paris. However, in May,Euronext also launched its own small-company exchange, Alternext, thatCharbonnier says provides an alternative to companies that cannot meetthe listing requirements of the main exchange. In its current form,Alternext hardly provides true competition to AIM, however, listingonly 14 companies valued at around €600 million.
Beyond that, the waters are muddied by numerous local and regional initiatives. In October the OMX- an association of northern European trading platforms that includesstock exchanges in Copenhagen, Stockholm, Helsinki, Tallinn, Riga andVilnius - launched an alternative market for the Nordic region, alsowith looser listing requirements. In Germany, the Deutsche Börserecently introduced an Entry Standard segment geared to SMEs, and eventhe tiny Munich stock exchange has announced its own small cap marketsegment called M:access.
For AIM, however, these other efforts are just a distraction from thework at hand. "Europe needs one market," says Graham. "France andGermany do not have a very good record of maintaining small-capmarkets," he snipes. Germany’s Neuer Markt in particular was hit bydozens of insolvencies before it closed its doors in 2003.
Don't declare the ill-fated EASDAQ,once also known as NASDAQ Europe, dead either. Although NASDAQshuttered the debt-ridden exchange in 2003, founding member JosPeeters, also managing partner of Belgium’s Capricorn Venture Partners,later bought rights to the name and the assets of the pan-Europeanexchange he helped found. He is drawing up a new business plan for areworked EASDAQ and says he is currently in negotiations with a numberof financial institutions.
Peeters paid off the roughly €30million in debts of the old exchange, partly by selling EASDAQ’strading software back to NASDAQ, but keeping an option to use itoutside North America. He even owns a huge network of servers withenough computing power to run numerous exchanges.
The newimproved EASDAQ as envisioned by Peeters would have tighter regulationsthat would require companies that list to have at least twomarket-makers and publish a full prospectus. They would also berequired to disclose price sensitive information and movements in theholdings of significant shareholders.
While many see Peetersefforts as downright quixotic, he is convinced that the self-regulatedAIM is not the pan-European exchange he first dreamed of when helpingfound EASDAQ in 1995.
"AIM does a wonderful job but it tries tobe everything to everybody. We need a quality market; quality is moreimportant than quantity," says Peeters.
The last obstacle for European VCs
He is not the first togripe that the quality of AIM's companies leaves much to be desired."Some of the companies on AIM need to clean up their tarnished images,"agrees Michael Elias, managing director of Kennet Venture Capital inLondon and also chairman of the European Venture Capital Association's(EVCA) High-Tech Committee. Graham responds that AIM has tightened itsrules over the past year, for example by not allowing shell companiesas issuers and by taking tough action against nomads that are too softon their companies.
In spite of AIM’s shortcomings, EVCA hasnow officially lined up behind the exchange’s efforts, urging industryparticipants to rally around AIM, rather than falling back intofactional rivalries.
"This is the last obstacle for EuropeanVCs in creating a good ecosystem in Europe - we have failed miserablyto create a viable exchange," says Elias. "Either one exchange needs tobroaden its scope, or a consolidation needs to happen. And AIM is themost successful of these exchanges," he concludes.
