New fishing grounds for the European investor

Easdaq – the European Association of Securities Dealers Automated Quotation market – is open for business. But the white-hot hope of European capital markets has made its entrance with a whimper rather than a roar.

When the market became “technically operational” in September just 15 companies had applied for admission – disappointingly down on the 25 officials forecast earlier in the year.

If Easdaq emulates its North American counterpart, Nasdaq – National Association of Securities Dealers Automation quotation market – it will be a rip-roaring success. But do enough people want it?

For the financial directors of smaller high-growth companies – at whom Easdaq is aimed – the market may seem like an attractive proposition.

Yet is there really the shortage of equity finance for growth companies that Easdaq’s founding fathers claimed when they set out to explore options in 1994?

Since then, several of Europe’s stock exchanges have brushed up their appeal for smaller companies and, in some cases, created special markets specifically aimed at smaller companies. In London the Alternative Investment Market (AIM) which opened in July 1995, is designed to enable young and growing companies to raise capital and have their shares traded on a regulated market.

In Paris, the Nouveau Marche, also aimed at small growing companies opened in February and offers a company with no track record the opportunity to get a listing under controlled circumstances.

So what kind of companies are choosing Easdaq – and why? A survey by Coopers and Lybrand in the UK, France, Netherlands and Spain found 48% of 475 companies planning to seek a stockmarket listing within three years were potential Easdaq candidates.

The largest groups of these were in manufacturing and electronics, but biotechnology and services were also strongly represented. Significantly, more than half the companies had market capitalisations of less than #30m.

At the time of writing, no British companies had announced their intention to join. But Chris Pickles, director of the European Association of Securities Dealers, says a British company is gearing up for a listing. “It could become the first if it moves fast,” he says.

Two Belgian companies – Innogenetics, in biotechnology and Artwork Systems, in pre-press software – and a German company, Creatix, in computer modems, had announced plans to seek a listing.

Why has Innogenetics, which specialises in synthetic skin, and was founded ten years ago by professors at Ghent University, chosen the unproven Easdaq over other routes to raising capital? There are two main reasons, according to Marcel Stappers, a joint managing director of stockbrokers KB Securities, which is helping to bring both Belgian applicants to the new market.

Firstly, Stappers says: “Innogenetics believes a pan-European market is more appropriate for their activities than a local market. They see it as broader than the domestic market.”

Secondly, the company is keeping its options open to float on the highly successful Nasdaq. “Making an application for Nasdaq is very time-consuming for management,” adds Stappers. “Because Easdaq largely parallels Nasdaq’s rules, it will be easier for the company to join the North America market when the time comes.”

Artwork Systems has chosen Easdaq for similar reasons. Around 95% of the company’s products are exported and, as a result, the company is not that well known in its own market which accounts for only a small portion of its sales.

“They wanted a pan-European market and they started to think of Easdaq even before the Nouveau Marche was available,” says Stappers. He accepts it would be both difficult and expensive for these companies – both with a similar capital value of around $200m – to have found there way to a public listing without the special kind of market that Easdaq provides.

But are there enough similar companies throughout Europe to make Easdaq a long-term success? There is no denying that Easdaq has been planned in careful and effective detail often modelling itself on Nasdaq. The market is based on four key characteristics:

It is an independent market focused on growth companies. Easdaq is an independent company which will run on a commercial basis. It will make its decisions with shareholders’ interests in mind. Easdaq’s directors believe this will benefit the market as a whole and increase its chances of operating successfully.

Easdaq will operate as an integrated market accessed everywhere from Europe. The plan is that potential issuers will have equally direct access to the market from the Arctic Circle to the Mediterranean. The key to this is the EU’s prospectus directive that allows a public offer of securities to be distributed throughout the 15 EU nations once approved by the regulators in the issuer’s home country.

Easdaq will be an open market that focuses on what it calls “information flow and a high degree of disclosure”. The key here is to make the market easily accessible to issuers, investors and intermediaries. Shareholders need to receive full information about their investments. To make this happen, Easdaq plans to ensure listed companies provide “timely disclosure of all material events when they occur and regular and frequent reports and updates.”

Easdaq plans to be a “quote-driven market with the active involvement of market makers combined with the benefits of an order-driven market”.

In this sense, it is similar to Nasdaq – a quote-driven, multiple market maker structure. But Easdaq also plans to develop an order matching facility to complement the quote-driven system.

It suggests: “The multiple market-maker system will help to ensure capital is committed to the market, investor interest is generated through research reports, analysts’ recommendations and constant communication in the market place and that the other side of the trade is affirmatively sought.”

With this sound planning behind it can Easdaq be a success? It is tempting to think so. After all, Nasdaq is the big success of US capital markets.

It lists 4,900 companies and trades almost as much value as the New York Stock Exchange.

But Europe’s record with secondary markets is not good. Bold ideas for capital markets, including London’s Unlisted Securities Market, Copenhagen’s Bors 3 and Amsterdam’s Officiele Parallel Market, all folded.

Even so, Jacques Putzeys, chief executive of the Easdaq, is in a bullish mood. “There is an appetite to invest in growth companies, but potential investors don’t yet find an appropriate platform in Europe,” he says.

What kind of company will make a typical Easdaq listing? Says Putzeys: “The typical business will be a growth company that has good projections for the future in the sense that the price/earnings ratio could be very high for the potential investor.” Putzeys points out that there are plenty of companies with good niche ideas that develop a business with little competition. Often, such businesses – for example in information or communications technologies – already regard themselves as international because of their customer base. Putzeys reckons they will find Easdaq’s pan-European approach to market making attractive.

Leading figures at other European stock exchanges are, as might be expected, less enthusiastic. In the months leading up to the launch of Easdaq, several expressed their reservations.

“I am not sure yet whether there is a need for a pan-European market, as an extra European market,” says Sven Caspersen, chairman of the Copenhagen Stock Exchange. He argues that most of Europe’s stock markets already cater adequately for the kind of high-growth, mainly high-tech, companies Easdaq will aim at.

At the Amsterdam Stock Exchange, Thom Hodemakers, director of communications, was equally sceptical. “We have tried to discover again and again whether Easdaq has some added value but our opinion is that up until now we can’t see it,” he says. Hodemakers pointed out that the investor culture in Europe is completely different to that in the States.

Dutch companies listed on Nasdaq – including Advanced Semiconductor Materials and Core Laboratories – find a Nasdaq listing initially interesting but trading tends to tail off after time. But experiences do vary and high-tech companies sometimes perform better than the others. “After a while they don’t have such a good feeling as they had at the beginning,” he adds.

At the London Stock Exchange, Giles Vardey, director of markets development and marketing, acknowledges that Easdaq is trying to address a real problem in providing a greater variety of funding for European companies. But he points out that the London Stock Exchange’s AIM “is successfully fulfilling that need for UK companies”.

Vardey says: “Easdaq will have to deal with the widely differing legal and taxation structure of the different European countries as well as their traditionally lower level of equity investment relative to that in the UK.” He reckons the combination of the official list and AIM satisfy UK needs but adds: “We will watch with interest to see how Easdaq develops.”

In the final analysis, Easdaq could succeed if it can persuade enough of the high-growth companies it is courting that it provides the kind of liquid market for capital they would be hard pressed to access elsewhere.

The two keys to this will be attracting investors into the market and underpinning the working of the market with effective intermediaries.

Is there enough of the kind of free-booting capital that seeks the returns which makes investing in high-growth – and, usually, higher risk – companies available in Europe? Time will tell. But the investors behind Easdaq seem confident there is.

They point to a survey of 99 institutional investors from main EU countries.

Of these, 60 “expressed an interest” in Easdaq and said they would put at least a little of their money where their mouths are. On average, they suggested they might allocate about 3-4% of funds to the market – but this supposes there is a market with a rich variety of companies to invest in.

Wisely, Easdaq is setting the kind of high entry requirements that have underpinned Nasdaq’s success (see panel).

There is no denying that Easdaq is a well thought-out market. And so it should be, much of the structure and some of the rules follow Nasdaq’s well established examples.

But will enough companies use it to establish it as a European force?

The management team at Easdaq seem confident enough. They have overcome formidable obstacles to get this far. Yet Easdaq needs to reach a critical mass – and quickly – if it is to generate the liquidity, not to mention the general enthusiasm, to succeed.

Peter Bartram is a freelance journalist.

STEPS FOR ADMISSION AND MEMBERSHIP OF EASDAQ

1 Appoint and maintain an Easdaq-approved sponsor for the issue of securities.

2 Acquire at least two registered market makers.

3 Incorporate according to relevant laws of the “home” country.

4 Establish legal permission to offer securities to the public.

5 Acquire assets of at least ECU3.5m for admission. (Maintain assets of at least ECU2m thereafter.)

6 Confirm capital and reserves of at least ECU2m on admission. (After admission, maintain capital and reserves of at least ECU1m.)

7 Have a principal amount outstanding of at least ECU9m of convertible debt security on admission. (Keep it above ECU4.5m after admission.)

8 Have no restrictions on the transfer of securities to be admitted.

9 Undertake (where an issuer has not previously traded shares on a public market) that directors will not dispose of any of their shares for at least 18 months from the date of admission except through a public offering.

10 Publish or file financial information in accordance with International Accounting Standards (IAS), US Generally Accepted Accounting Principles (US GAAP) or accepted accounting standards of the issuer’s home country.

(In the last case, prepare a bridging statement in respect of the annual and bi-annual information to reconcile either US GAAP or IAS. Quantify differences between International Accounting Standards and the standards of the issuer’s country of domicile.)

11 Adopt Easdaq’s Code of Practice for directors and other executives concerning dealings in securities of their companies.

12 Undertake that original shareholders will not dispose of more than 20% of their shares for a period of time disclosed in the prospectus.

(This is for companies whose shares have not previously been traded on a public market.)

13 Issue an English language prospectus setting out information as specified in the Easdaq rule book.

14 Provide unaudited quarterly reports.

(ECU = #1.27).