Mary Lisbeth D'Amico
AIM is seeking to grab the reins as Europe’s premier exchange for growth stocks. But don’t write off the other exchanges just yet.
It’s no secret that capital-hungry European companies are plagued by lack of a single, liquid market where they can raise money. So a recent announcement 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?
A
study by independent UK consulting firm Oxford Analytica concludes that
the positive impact on EU GDP of a common European trading exchange for
growth companies would be around half a per cent annually, or nearly
€50 billion additional to the European economy each year, according to
AIM.
Even companies with no plans to launch an IPO are affected by the lack of an appropriate market. According to a September 2004 report commissioned by EASDAQ and conducted by then MIT Sloan School of Management student Robert 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 other options than to tap the NASDAQ. Yet more stringent regulations introduced since the Sarbanes-Oxley Act was passed are making that increasingly difficult, and few European companies have actually launched recently on the NASDAQ – only nine so far since the start of 2004.
Still, according to the study, the 79 market participants interviewed - investment banks, fund managers, VCs, and companies formerly listed on EASDAQ - were split on whether a single exchange for Europe is necessary. More than half felt that European companies should seek a listing on a local exchange, then move to the NASDAQ if they need to grow further.
But that AIM will be the solution to European venture’s problems is not a foregone conclusion. Numerous others players are still wrangling for the title of Europe’s high-growth exchange and not all market participants agree that AIM is the one.
"I don’t think AIM is Europe’s answer to NASDAQ," says Wolfgang Hanrieder, managing director with the Carlyle Group in London. "We could use something much more liquid and pan-European."
Gaining momentum
Few dispute that AIM is one of Europe’s most successful exchanges for small- to medium-sized companies. Since its launch in 1995, around €29 billion has been raised, and in 2004 nearly 100 million shares were traded with a value of £18 billion, according to AIM. The London Stock Exchange can rightly crow that AIM is gaining momentum - this year alone, 389 companies have joined and about £3.39 billion in fresh capital has been raised.
Its advocates also point out that AIM is becoming less UK-focused than it was. Currently about 200 of its 1322 listed companies hail from outside the UK, although only 37 are from the European Union. Still, of those, 17 have joined since January. Among them are SQS Software Systems, the first German company to have its primary quotation on AIM, and Italian fuel cell company ACTA.
Now AIM plans to try to convince more Continental European investors to join forces with it. About 90 per cent of its investor base still comes from the UK, notes Martin Graham, director of market services at the London Stock Exchange and head of AIM. It is also actively recruiting more non-UK nomads-the financial agents who pick and groom potential listees. Thus far it only has one Continental European nomad, SBC Bank in Belgium.
All well and good. But never underestimate the national rivalries and fragmentation of Europe. This should ensure that for some time that there will not be one exchange for Europe, however badly needed.
Rival exchanges
For one, the Euronext trading platform, which brings together the Paris, Brussels, Lisbon and Amsterdam 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 of European Securities Exchanges, Euronext saw electronic orders in the first 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 valuations of under €150 million, according to Martine Charbonnier, executive director of listing and issuers at Euronext in Paris. However, in May, Euronext also launched its own small-company exchange, Alternext, that Charbonnier says provides an alternative to companies that cannot meet the listing requirements of the main exchange. In its current form, Alternext hardly provides true competition to AIM, however, listing only 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 includes stock exchanges in Copenhagen, Stockholm, Helsinki, Tallinn, Riga and Vilnius - launched an alternative market for the Nordic region, also with looser listing requirements. In Germany, the Deutsche Börse recently introduced an Entry Standard segment geared to SMEs, and even the tiny Munich stock exchange has announced its own small cap market segment called M:access.
For AIM, however, these other efforts are just a distraction from the work at hand. "Europe needs one market," says Graham. "France and Germany do not have a very good record of maintaining small-cap markets," he snipes. Germany’s Neuer Markt in particular was hit by dozens 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 NASDAQ shuttered the debt-ridden exchange in 2003, founding member Jos Peeters, also managing partner of Belgium’s Capricorn Venture Partners, later bought rights to the name and the assets of the pan-European exchange he helped found. He is drawing up a new business plan for a reworked EASDAQ and says he is currently in negotiations with a number of financial institutions.
Peeters paid off the roughly €30 million in debts of the old exchange, partly by selling EASDAQ’s trading software back to NASDAQ, but keeping an option to use it outside North America. He even owns a huge network of servers with enough computing power to run numerous exchanges.
The new improved EASDAQ as envisioned by Peeters would have tighter regulations that would require companies that list to have at least two market-makers and publish a full prospectus. They would also be required to disclose price sensitive information and movements in the holdings of significant shareholders.
While many see Peeters efforts as downright quixotic, he is convinced that the self-regulated AIM is not the pan-European exchange he first dreamed of when helping found EASDAQ in 1995.
"AIM does a wonderful job but it tries to be everything to everybody. We need a quality market; quality is more important than quantity," says Peeters.
The last obstacle for European VCs
He is not the first to gripe 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 in London and also chairman of the European Venture Capital Association's (EVCA) High-Tech Committee. Graham responds that AIM has tightened its rules over the past year, for example by not allowing shell companies as issuers and by taking tough action against nomads that are too soft on their companies.
In spite of AIM’s shortcomings, EVCA has now officially lined up behind the exchange’s efforts, urging industry participants to rally around AIM, rather than falling back into factional rivalries.
"This is the last obstacle for European VCs in creating a good ecosystem in Europe - we have failed miserably to create a viable exchange," says Elias. "Either one exchange needs to broaden its scope, or a consolidation needs to happen. And AIM is the most successful of these exchanges," he concludes.
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