As most analysts and casual observers assumed that Europe’s patchwork quilt of national stock exchanges and alliances seemed to be on the brink of further industry consolidation, a battle appears to be brewing among Europe’s top bourses over who becomes the leading lister of smaller companies across the continent.
It’s a battle that is likely to intensify following the migration on 5 December by the London Stock Exchange (LSE) of the AIM50 index, the top 50 stocks by market capitalisation on the Alternative Investment Market (AIM), and the 100 remaining main market small caps to SETSmm – a hybrid trading platform.
As of 20 October 2005, AIM had 1320 companies with 376 floats witnessed in the year to the end of September. With 78 international companies joining so far this year, the number matches Euronext’s Alternext and Borsa Italiana’s STAR segment combined. So talk of battle might be viewed as mumbo jumbo.
And, if the findings of an independent review of SETSmm trading of the largest 200 main market small caps that were recently transferred is anything to go by, benefits could be significant. In the first three months of trading, a 33 per cent reduction in spreads in small cap securities was seen by combining order books with the established quote-driven way, with private investors estimated to have saved over £2m through improved prices since July 2005 via the previous quote-only system. Trading volumes on SETSmm during September surged 25 per cent against June 2005.
Virtually within weeks of the LSE spearheading a push to champion the dominant pan-European platform for small- and medium-sized enterprises (SMEs) through its Nomad (Nominated Advisor) network, Deutsche Börse’s launch on 25 October of ‘Entry Standard’ – a segment of the Open Market with additional transparency requirements – came at a significant moment.
“In Europe, there is [definitely] something of a battle building on the mid- and small-caps market front,” says Luca Lombardo, Borsa Italiana’s director of mid- and small-cap markets responsible for the high requirement STAR segment. “If you consider the potential for each country in Europe, really the only way to grow is to attract more small companies to list on the market,” he adds.
SQS Software Quality Systems AG, a Cologne University spin-off, took what might be regarded as the unprecedented step of a listing on AIM in September – without first pursuing a listing in Germany. A spokesman for Deutsche Börse reveals that the exchange had been in discussions with industry participants for some months over gauging the need for the segment, which has listing requirements similar to AIM. But SQS must have been a clarion call.
The Frankfurt exchange believes there is potential demand for private equity companies seeking exits and Mittelstand companies where family owners need or want to sell out. It echoes a study from Oxford Analytica, which was commissioned by the LSE to quantify demands for smaller companies listings in continental Europe and the benefits of a pan-European SME platform.
“With the introduction of the Entry Standard as part of the Open Market, Deutsche Börse is extending its primary market offering with a focus on small- and medium-sized companies,” said Rudolf Ferscha, chairman of the management board of the Frankfurt Stock Exchange.
With listing fees set at €5000 per annum for companies joining, an initial batch including Design Bau and 11 transfers from the Open Market is expected to expand “to around 20” by the end of 2005, adds the spokesperson in Frankfurt. Companies seeking listing must prove a Deutsche Börse listing partner has been appointed.
According to a spokesman for the LSE, the intention is to turn AIM into a European growth market, with SQS seen as the “beginning of a very significant trend”. It is also one which exchange officials are working hard to execute. Europe’s other exchanges have not been sitting idly by watching events unfold, although you could be forgiven for thinking so on occasion.
Euronext’s Alternext, an exchange regulated market, was launched in May and currently has 14 companies and a market capitalisation of €573m at the close of business on 27 October. July saw the Munich stock exchange launch M:access, a market for Bavarian companies, and last month OMX kicked off the Nordic alternative market in Denmark to provide viable capital markets for small unlisted companies with a market value of up to DKr400m-500m (€50-€70m). OMX will also develop the existing Nya Marknaden in Sweden.
Estimates on how many companies in Europe could actually list in future suggests a rich vein. According to Martine Charbonnier, Euronext’s executive director of listing in Paris, a recent study has indicated that there are around one million mid- and small cap companies in the eurozone that have not listed yet, with “30 per cent being in the Euronext zone” - France, Benelux and Portugal. By a different set of criteria, Borsa Italiana believe there is a “matter of potential” for 2,000 companies in Italy, with exchange officials having met most of the small cap candidates.
“The creation of Alternext meets the needs of an entire community of interests...and we cannot ignore the potential,” adds Ms Charbonnier. Mostly French companies are on Alternext, but she says a number of Belgian companies have already been contacted. Listing fees on Alternext are around 30 per cent lower than on the eurolist, Euronext’s regulated market. Alternext is governed by a set of rules including admission and listing criteria adapted to the size of the company. Benefits for companies should mean a reduction in the cost of communication in terms of their reporting obligations, such as the need to publish a quarterly turnover, which is the case for Euronext’s regulated market.
 Elias: AIM is an important candidate | Michael Elias, chairman of the European Private Equity & Venture Capital Association’s (EVCA) high tech committee and managing director of Kennet Venture Partners, says: “A well functioning and efficient stock market for high growth companies in Europe would greatly improve the ability of venture-backed companies to raise the capital they need.” One measure of AIM’s success has been improved valuations for companies he says, which is attractive for venture capitalists wanting to sell to IPO their investments. |
Greater progress
In September, the EVCA produced a position paper calling for a pan-European stock market and greater progress on the issue. Mr Elias, who has been involved in a “desire” to try to create a single stockmarket in Europe for technology companies, adds that: “AIM has been an important candidate to becoming that single market, and particularly with it’s latest European initiative.”
He also says that when talking to representatives of the many fragmented exchanges in Europe, “everyone agrees that there should be consolidation…but what you are seeing is the opposite - fragmentation.”
Could Europe follow the Canadian example, where the nation’s exchanges agreed that all small caps would all be listed on the Toronto Stock Exchange? And, could AIM be just that platform to do the job?.
Dru Edmonstone, head of corporate broking at Seymour Pierce, the largest broker/adviser on AIM with 157 corporate clients, says that AIM is the very “envy of small cap bourses”. Compared to a number of other small cap indexes like the Neuer Markt in Germany which have “gone the way of the dodo”, AIM has not. AIM has benefited from various tax benefits - including capital gains tax (CGT) at 10 per cent for holding shares for two years, no inheritance tax and ability to set losses against future income tax liability. That’s not the case for the rest of Europe.
Mr Edmonstone, who applauds the recent AIM initiative to expand into Europe through its NOMAD structure, notes in contrast to the UK most of Europe - with a few exceptions - is “predominantly a debt rather than an equity culture”. While it is not impossible for UK fund managers to invest in small/mid caps in other European markets, he says the quality has to be high.
In terms of a battle being fought out among exchanges to attract small/mid cap listings, much hinges on the LSE’s future ownership. “AIM is certainly an attractive jewel for a European exchange wanting to acquire the LSE. It is also a road map to what they should essentially be doing,” Mr Edmonstone adds.
Mr Lombardo at Borsa Italiana argues that exchanges need “some point of strength” in order to attract companies. He says that specific models are working better than others. The UK model in the guise of AIM has a huge number of companies, but relatively low liquidity for many of the companies that are listed on it.
Despite Rudolf Mengen, SQS chief executive, asserting that capital market in London is “more attractive than in Germany”, trading volumes on AIM stocks are not universally electric. Recent trading in SQS revealed a mere two trades on 20 October compromising 7,425 shares for the grand sum £14,739, with the two preceding trading days seeing no trades reported whatsoever.
The picture is broadly similar for ACTA S.p.A, an Italian company that listed on AIM last month. It should also be pointed out that while the LSE tightened the rules in April for cash shells listed on AIM, by making them initiate an acquisition within 12 months. Estimates suggest there are 88 ‘clean’ and ‘dirty’ cash shells listed on AIM.
Mr Elias says that a “key determinant” for the success of any market is the quality of the companies listed on it, and for AIM to succeed it will have to raise the average quality of companies over time.
“While there may be [just] 69 companies listed on the STAR (50 traditional sector constituents and 19 high techs), STAR constituents witness an average trading volume per day in excess of €1m (c.$1.2m). And, these are companies that are more or less comparable with the those companies on AIM,” says Mr Lombardo who is also responsible for BIt’s Standard and Mercato Expandi (c.15 companies under €40m).
As of the end of September 2005, STAR had an aggregate capitalisation of €22.5bn and daily trading volumes of almost €110m - higher than the average for both Italian and international companies of similar size.
Another measure of success can be determined by the level of equity research produced for STAR companies, which at around 10 houses is high compared to AIM. Reflecting the growing interest among banks and investors for research on small- and mid-caps, independent boutique AQ Research in London is to add a Pan-Europe report on the thousand largest small caps early next year.
Launched in April 2001, STAR has more stringent requirements in terms of free-float, corporate governance and transparency than is the case for AIM. The battle, as Mr Lombardo sees it, is for BIt to increase the number of companies that “accept or satisfy” the higher requirements of the STAR segment. This is in terms of capitalisation (between €40m-€1bn), liquidity (35 per cent free float for newly listed companies), and transparency (e.g. four quarterly reports published 45 days after the end of quarter and financial information/documents on the company’s website in both English and Italian).
Increasing investors
He nevertheless acknowledges that it will be a challenge to increase the number of company listings at Piazza Affari, while for AIM it will be more about increasing the number of investors “committed in the secondary market” and attracting more companies from continental Europe. But with the performance of the AllSTARS index from the start of 2005 being up 37 per cent, and 78 per cent in the last three years, signs are promising for BIt.
Stock exchanges clearly need to satisfy the needs of different clients - issuers, institutional investors and brokers. As Mr Lombardo contends: “The higher you define the requirements, the better it is for the investors. However, if you have requirements such as those found on AIM, the companies can become very confident of a successful IPO but there may not be the requisite level of investor interest.”
Mr Lombardo regards France as being in a better position than Germany in any upcoming battle due partly to the number of institutional investor funds that invest in small and mid caps - more than 100 in the French market. He also believes Deutsche Börse is in “a strange position to win the battle for the small- and mid-caps market in Europe”, and will experience “greater difficulty” as they do not yet have a huge number of companies as well as lacking liquidity and a sufficient investor base. Fighting back against AIM’s tax breaks is not likely to be easy without European governments taking a more versatile approach.
