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STOCK EXCHANGE GUIDE – Only the ambitious need apply

The capital markets of the US are the richest in the world. For many UK companies a stateside listing represents their coming of age as a serious global player. But which market to choose?

The main reason any company floats in the US is to gain access to what Adrian Merryman, an executive director of CIBC Oppenheimer, calls “the biggest pool of liquid capital in the world”. But having a US stockmarket presence is also an important factor in doing business in the States.

“Many companies go to the US markets to raise their profiles with prospective investors, employees, clients and strategic partners,” says Merryman.

That said, the key question is which market to join. The main choice lies between the long-established and highly regarded New York Stock Exchange, and Nasdaq, the thriving growth-company market. The third possibility, the American Exchange, is very much the third choice: fewer than two dozen companies from outside the US or Canada are listed on Amex and the exchange is now reported to be in merger talks with Nasdaq.

The New York Stock Exchange is a prestigious market for established businesses. It is also the giant of all stockmarkets with total market capitalisation of more than $11 trillion. Though Nasdaq claims most young high-growth technology companies, New York does have some of the more established IT players, such as IBM and Hewlett-Packard. “New York is viewed as the large cap market of choice,” says Merryman. “Nasdaq is viewed as the technology market of choice.”‘

Non-US companies opting for NYSE can either qualify using the same quantitative listing criteria as US companies or opt for alternative criteria. These specify, for example, that companies have net tangible assets of $100m and aggregate profits for three years of $100m, with no less than $25m in any one year. Joining the NYSE isn’t cheap. Most companies list American Depositary Receipts, a US security that repackages non-US shares. An initial listing of ADRs carries a minimum fee of $100,000, followed by annual fees up to a maximum of $500,000.

New York may be prestigious but the majority of non-US companies joining a US market choose Nasdaq, the world’s first electronic stockmarket. Last year 74 listed on Nasdaq, bringing the total of foreign companies to 454, more than on any other market. In total there were 491 Initial Public Offerings in 1997, raising more than $19bn. Although Nasdaq’s market cap of $1.8 trillion puts it some way behind New York in terms of value, it actually has more listed companies than any market in the world, currently totalling just under 5,500. Companies listed on Nasdaq are divided into two tiers. The Nasdaq SmallCap market caters for SMEs, while the Nasdaq National Market covers the larger cap companies.

Nasdaq isn’t a market for wallflowers. “Companies have to be ambitious and they have to be prepared to commit to it,” says Judith Lacey, Nasdaq associate director, international marketing. “They have to do roadshows and go and explain the company, talk to fund managers.” Putting in the effort can reap valuable rewards. “A lot of companies come to the US because they get better valuations,” says Lacey. However, high valuations can’t be taken for granted. “People say you get a high p/e rating for technology stock on Nasdaq,” says Ernst & Young corporate finance partner Clive Ward. “But that’s because of investor interest and you have to keep that up.” Merryman agrees. “European analysts and investors in particular tend to be more forgiving of earnings shortfalls,” he warns.

The Nasdaq stockmarket is run by a wholly owned subsidiary of the National Association of Securities Dealers, a securities industry self-regulatory organisation, which operates subject to the oversight of the Securities & Exchange Commission (SEC). The market is highly regulated. Each company that lists its shares on Nasdaq must have a minimum of three market-makers for the initial listing, though the typical Nasdaq stock has 11 and some have 40 or more. Any company listing its shares on a US stockmarket must register them with the SEC and then provide the body with regular reports on its financial condition. The good news for non-US companies is that they can opt to file these reports every six months while US companies must do so quarterly.

In August last year Nasdaq issued new listing requirements designed to strengthen the quantitative and qualitative requirements for issuers. Corporate governance regulations applicable to the Nasdaq National Market were extended to its SmallCap Market. Companies must meet increased threshold criteria on both markets to qualify for listing. There are several ways to qualify, for example, for the National Market: companies could have net tangible assets of $6m, a market value of $8m and pre-tax income of $1m; or net tangible assets of $18m, a market value of $18m but no pre-tax income.

Nasdaq hasn’t escaped controversy. In response to trading abuses by its dealers, most recently in 1996, it is overhauling its trading system and developing a central “limit order file”, an electronic noticeboard where investors post orders to buy or sell. More ambitiously, it is planning to add an automated trading system called OptiMark: this would allow investors to give complex buying instructions, for example, to buy 30,000 shares at one price but 60,000 shares at a lower price. “Nasdaq has always been seen as quote-driven, but this is a move towards being a mix of quote and order-driven, so it becomes a modern, forward-thinking market,” says Lacey.

Companies coming to Nasdaq have to pay an entry fee (currently $5,000 for ADRs on the National Market), plus fixed and variable annual fees up to a maximum of $8,000 a year. Separate fixed fees apply for the SmallCap Market. However, companies joining Nasdaq should be impressed by the market’s high-tech approach to its own business, which will give them access to detailed performance data. This information is so detailed and sensitive that access is password-protected and limited to two individuals per company.

Nasdaq appears to be on a sustained growth path and deserves serious consideration from any company approaching the US markets. Last year it became the first US market to trade more than one billion shares in a single day.

Nasdaq: Energis plc

Last December the National Grid Group floated its subsidiary Energis plc, a network provider of advanced national communications services in the UK. The global offer raised $358m and comprised 75 million new ordinary shares listed on the London Stock Exchange, and on the Nasdaq National Market in the form of American Depositary Receipts, each representing five ordinary shares. The offer price was set at 290p per share and $237/8 per ADR. The share offer was approximately three times subscribed.

John Beaumont, business development director, says: “The sort of strategic asset we have built in our network is much better understood in the US.

We built the state of the art national network in the UK. There are quite a few American examples and it helps when the investors have seen other successful companies.” Beaumont says the process of listing on Nasdaq wasn’t too cumbersome and was helped by the fact that the company was joining the UK stock exchange at the same time. “The fact that the two were simultaneous was helpful,” he says. Two prospectuses had to be prepared but essentially there was one set of due diligence. Communicating with US investors and advisers wasn’t a particular problem. “The fact that it’s a few further miles away from London, with modern communication systems, wasn’t an issue,” Beaumont says.

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