If ever there were evidence that there is a truly a global economy, the fact that more companies are listing their securities in places other than the US is surely convincing proof. Is this an economic catastophe? In a word, no. Many, if not most, American companies are now generating 60% or more of their sales and profits from customers outside the US. What we are seeing is another data point in the chart of the Great Rebalancing. The US can not and should not expect to maintain the position it held for 35 golden years following WWII. What it can do is build on its expertise, intellectual capital, strong legal system, exceptional capital formation capabilities and massive industrial strength to extract greater profits from a broader set of markets. The question is not what is wrong with this development, but how to take advantage of it.
In fact, given the performance of the US financial services industry over the past decade, this may be a most welcome trend for the global and US economy. If one believes in reversion to the mean (as this space does), which is a fancy way of saying 'whatever goes up must come down,' financial services are overdue for a reduction in the percentage of US GDP they generate. And given US financial institutions' piggish, heedless behavior, as well as their ruthless determination to spend whatever it takes to keep regulation at bay, spreading global risk by generating capital from better managed markets should be a cause of relief.
It may well be that the reduced power of US financial institutions will spark a broader economic revival tied to more productive allocation of capital, one not so tied to banking and investment fees. That said, the US must not entirely fritter away its market edge. Failure to regulate potentially abusive high frequency algorithmic trading, exhorbitant listing and banking fees as well as the hegemony of mammoth 'too big to fail' banks and insurance companies has contributed to the US's listing demise.
Whether the US summons the wherewithal to address these structural problems in its own markets is doubtful. That it can and should take advantage of the emerging global markets is imperative. JL
Aaron Lucchetti reports in the Wall Street Journal:
"Executives from LinkedIn Corp., reveling in their enormously successful initial public offering last Thursday, rang the New York Stock Exchange's opening bell. Big money, big smiles, the kind of moment that made the NYSE the Big Board. The day's closing ceremonies told a different tale: The head of Sybase, in honor of a golf tournament it sponsored, rang the bell to end the day's trading. The firm, having been taken over by a European company, is no longer listed on the Big Board.
The steady decline in the number of stocks listed in the U.S. finally reached the point this year where both of the nation's big stock exchanges took dramatic action—NYSE Euronext agreeing to a foreign takeover, and then Nasdaq OMX Group trying unsuccessfully to bust that up and take over the NYSE itself.
A combination of mergers, fewer U.S. IPOs, lower listing costs abroad and a shift in how investors and stockbrokers do their jobs has driven down the number of U.S. stock listings by a startling 43% since the peak in 1997—all during a period when the number of listings outside the U.S. has more than doubled.
The result is some 3,800 fewer companies trade on the U.S. exchanges today than in 1997, according to consulting firm Capital Markets Advisory Partners. Abroad, there are nearly eight times as many listings as in the U.S., with Hong Kong, China and India among the leading venues.
We're losing the ecosystem that has helped buoy the U.S. economy over decades," said Kate Mitchell, co-founder of Scale Venture Partners, a Silicon Valley venture-capital firm.
The U.S. exchanges aren't competitive for some large global IPOs, according to Nasdaq Chief Executive Robert Greifeld. "You see companies such as Prada who in the past would list here in the States," he said in April, blaming in part a "fractured message coming out of the U.S." as the two exchanges compete fiercely against each other. Italy's Prada SpA plans to list in Hong Kong.
U.S. exchanges will certainly continue to attract some big IPOs. U.S. exchanges remain a draw for companies in industries such as social media, where U.S. investors are willing to pay a high price because they see a burgeoning profit opportunity. Looming in future years are public offerings from companies like Facebook Inc., Groupon Inc. and Twitter Inc. that are expected to be as splashy as LinkedIn's debut or more so.
Large consumer-product companies with many of their employees in the U.S. also tend to be more loyal to a U.S. stock listing. And several smaller IPOs are on tap soon, such as Spirit Airlines and Freescale Semiconductor Holdings.
But NYSE Euronext CEO Duncan Niederauer has acknowledged that the heyday of U.S. exchanges in listing newly public companies is long gone. It is one reason he has fought for the deal to be acquired by Deutsche Börse AG, he said in an interview last month.
NYSE executives say that being more global will make them more attractive for emerging-market companies looking to list their stocks somewhere in addition to their home markets, and also will position the NYSE to be a better partner for exchanges in emerging economies that want a joint venture or merger.
"The capital markets are global just like every other industry," Mr. Niederauer said. "No matter what happens in the U.S., there are 5,000 more public companies in China" coming to the market in the next 10 to 15 years. Mr. Niederauer is expected to be the head of the combined NYSE-Deutsche Börse if the deal is approved by shareholders and regulators. U.S. antitrust officials blocked Nasdaq's bid for the NYSE this month.
One of the leading reasons for U.S. exchanges' difficulty in gaining more listings is a prolonged slump in U.S. initial public offerings. The annual supply of U.S. IPOs since 2000 has averaged just 156, down 71% from the pace in the 1990s, according to Capital Markets Advisory.
Some U.S. start-ups that in the past might have turned to a U.S. exchange when they needed capital now list abroad, where fees are lower and they don't face costs such as complying with the Sarbanes-Oxley corporate-governance law.
Other closely held companies get capital by borrowing, rather than going public, amid today's historically low interest rates.
And many more private companies now simply sell themselves to a larger company. In technology, especially, cash-rich behemoths like Google Inc. and Intel Corp. are on the prowl, making offers that start-ups and entrepreneurs find hard to resist.
Skype Technologies SA filed for an IPO last August and was headed for a listing on the Nasdaq Stock Market, but this month the Internet phone company instead decided to sell itself to Microsoft Corp. for $8.5 billion.
A Bay Area technology company called BigFix Inc. worked on an IPO for nearly three years and had even selected a Nasdaq ticker symbol. But amid a choppy stock market last summer, plus an earlier hiccup in the company's growth rate, it dropped the plan and accepted a buyout offer from International Business Machines Corp.
"The public markets aren't built for small companies right now," said Dave Robbins, former CEO of BigFix. He said he worried about getting a good stock valuation because investors are fickle about the prospects of a company such as BigFix compared with major competitors that sell software to information-technology departments.
"In such a large and crowded market, we'd have to be constantly telling our story," Mr. Robbins said. "We couldn't get to the point where we could pull the trigger" on an IPO.
Just five large corporations gobbled up 134 private U.S. companies last year, nearly equal to the entire crop of IPOs on the nation's two big exchanges, research firm Dealogic reports.
For start-ups, going public in the U.S. also has lost some of its appeal in an era when many investors and stockbrokers are less focused than in the past on stock-picking—preferring to just compete with broad market indexes by trading baskets of securities such as exchange-traded funds.
In addition, big asset managers such as pension funds and mutual funds wield ever-larger portfolios, making most new public companies too small for them to bother with. This makes it frustrating for small companies going public to get the attention of investors, to say nothing of securities analysts.
Today only about 15% of start-up companies backed by venture-capital firms eventually go public, compared with more than 90% in the early 1980s, according to the National Venture Capital Association.
This has economic implications. "Companies going public have generated a lot of jobs and economic growth," says Jay Ritter, a professor of finance at the University of Florida. "The prolonged drought in IPOs [in the U.S.] raises concerns about whether an important engine of growth in the U.S. economy has come to an end."
When privately held U.S. companies do proceed with IPO plans, some now look abroad. HaloSource Inc., a water-purification company, is based in Seattle but last fall chose to list its shares in London.
Because it doesn't trade in the U.S., HaloSource has a lower cost of regulatory compliance, is less exposed to shareholder suits and pays less for directors' and officers' liability insurance, according to James Thompson, chief financial officer. "The savings are pretty significant," he said.
Small U.S. public companies' costs to comply with securities law rose about $1.7 million, to roughly $2.8 million a year, after Sarbanes-Oxley passed in 2002, according to a 2007 study by law firm Foley & Lardner. However, complying with the law, which helped boost investor confidence after the accounting scandals of the early 2000s, has become less costly in recent years as companies get more used to dealing with it.
HaloSource's annual listing expense abroad also is lower. The company did its IPO on the London Stock Exchange's AIM market, where companies pay an annual listing fee of about $8,600. Nasdaq fees range from $27,500 to $99,500, depending on the number of shares outstanding, and at the NYSE the range is $38,000 to $500,000. The U.S. exchanges, while adding some investor-relations and marketing services, haven't been cutting their fees to compete with foreign markets, instead sticking to fee schedules they file with regulators.
London's AIM market—which, besides its lower fees, doesn't require companies to have a minimum value or to sell a minimum portion of themselves—aggressively courts non-British companies. It has managed to list 45 U.S. companies, worth about £3.2 billion ($5.2 billion), mostly over the past five years.
"AIM has become a much more mainstream market," said Marcus Stuttard, who runs the emerging-company exchange. "We've allowed small companies to come to the market at a reasonable cost."
In all, 74 U.S. companies have done IPOs in foreign countries since 2005, raising about $13.1 billion, according to Dealogic. That is a small fraction of the more than 650 U.S. companies that have gone public on U.S. exchanges since 2005. Still, such capital raising abroad was much less common before.
In 1997, when all of these dynamics were less pronounced, the number of U.S.-listed public companies totaled more than 8,800.
Nasdaq OMX's stock listings in the U.S. are down 50% since then, to about 2,760, partly, of course, because of the bursting of the dot-com bubble. The NYSE has had a slimmer decline, down 12% to 2,312 companies, holding up better partly because it acquired the American Stock Exchange in 2008.
The shrinking pie has deepened an already-fierce rivalry between the NYSE and Nasdaq for new listings. Both wooed real-estate tracker Zillow Inc. by offering a one-letter stock symbol, said people familiar with the matter. Zillow, which declined to comment, chose Nasdaq, according to a regulatory filing Monday.
Earlier, the NYSE, after beating its rival to list Rosetta Stone, helped offer a free trial of the language-lesson company's software to CEOs of all Big Board companies.
Despite their mutual enmity, the exchanges have jointly pushed for federal legislation to make it more attractive for small U.S. companies to go public, by loosening disclosure requirements for those companies. In addition, some venture-capital investors recently met with Treasury officials to discuss ideas that would make going public more appealing to U.S. companies, said people familiar with the situation.
U.S. regulators and politicians are sifting through a variety of ideas to try to turn the tide, including a relaxation of Sarbanes-Oxley requirements for smaller firms and steps to encourage securities dealers to publish research reports about, and trade, small stocks.
The IPO market "is not as robust as it has been during some periods in the past—or as we'd like it to be," Securities and Exchange Commission Chairwoman Mary Schapiro wrote in an April letter to Rep. Darrell Issa (R., Calif.).
Nasdaq this month won SEC approval to launch a "venture" exchange for small companies that don't meet Nasdaq Stock Market listing requirements, such as having a majority of independent directors. It was the first so-called junior market allowed by U.S. regulators since the American Stock Exchange launched one in the early 1990s, only to see it close amid criticism of its lax listing standards.
Regulators wrestled with Nasdaq's pitch for more than a year, trying to make sure investors would be safe from companies that might use the new exchange to take advantage of investors. SEC officials allowed the exchange to proceed after Nasdaq agreed to impose stepped-up surveillance, such as detailed background checks of executives of listed companies.
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