Shortly after the Sarbanes-Oxley Act was passed by Congress in the summer of 2002, many pundits predicted a stream of foreign companies would head for the stock exchange exits and few companies would be interested in listing their shares in the U.S.
They were wrong. This year, the U.S. initial public offering market is staging a mini-recovery, and leading the charge are foreign companies.
According to Richard Peterson, Chief Market Strategist for Thomson Financial, 22 foreign companies have gone public this year, raising $4.8 billion. That’s up from just eight foreign IPOs in 2003, and 14 in 2002, the year Sarbanes-Oxley was passed. In addition, eight issues are reportedly in registration.
As a result, 2004 could be the busiest year for foreign listings since 2000, when 30 companies brought their shares here, says Peterson.
The largest number of these companies is based in China, Israel and Brazil.
In fact, telecom operator China Netcom Group Corp. Ltd. filed to offer as much as $1.5 billion in ordinary shares. If it goes forward, it will be the largest China offering.
Prestige, Technology, Transparency And Value
So why the surge in foreign listings?
For one thing, there’s investor demand. The companies that have already listed their shares here have enjoyed pretty good success; in fact, foreign IPOs are outpacing domestic ones. The average return for foreign IPOs priced in 2004 is 22.48 percent from their offer price. This compares to a typical U.S.-based IPO gain of 10.83 percent for 2004 issues, according to Thomson.
That being said, interest may be waning somewhat. Last week, Spanish information technology company Telvent raised $78.3 million—considerably less than it had expected—after the shares were priced at the bottom of their range.
Even so, there are other forces at work. Peter Kuo, senior vice president at investment bank Hambrecht & Co., who has been involved in what he deems is a fair amount of the China deals, says there have been two additional driving factors.
For one thing, the U.S. is still perceived as a prestigious and attractive place to list.
In addition, China’s own internal securities market is not as transparent as companies would like. Hong Kong or Singapore, the logical alternative, is “not as sophisticated to technology when it comes to their institutional base,” Kuo adds. Rather, Hong Kong is more comfortable with real estate and financial issues. “The U.S. has far and away better value, especially for tech stocks,” he notes.
SOX Impact?
But, wasn’t Sarbanes-Oxley supposed to scare foreign companies away?
Thain
Back in June, NYSE CEO John Thain said in a speech that foreign companies were indeed less likely to participate in U.S. markets due to Sarbanes-Oxley. “Unfortunately, the recent drought in foreign listings indicates a declining willingness or necessity to participate in U.S. markets,” he said.
Among the four causes that Thain identified was the internal control provisions of SOX, which take time, effort and resources. According to Thain, “The value proposition for overseas companies seeking to list in the U.S.—and to remain listed—changes fairly significantly when the costs of meeting our reporting requirements are so high.”
Thain also pointed to recovering overseas markets, a “European equity culture” that is gaining sophistication and strength.
However, a study released this summer by Broadgate Capital Advisors and The Value Alliance found that SOX has had a minimal impact on certain foreign issuers. Only 8 percent of the 143 respondents said SOX requirements would lead them to reconsider U.S. market participation, and only half said the U.S. has more rigorous governance practices than their company's home country.
According to Kuo, it’s possible that some of the foreign companies aren’t paying attention to stiffer governance requirements. “A lot don’t realize until they go through the process,” he concedes. In fact, provisions like Section 404 don’t even go into effect for foreign companies until around the middle of next year.
“Most of SOX takes place after they come public,” Kuo explains. “So, they don’t think that far out. The IPO is the event.”
How long will the trend among foreign companies going public persist? “As long as there is institutional appetite,” says Kuo.
Simultaneous Delistings
Now, while a growing number of foreign companies are going public in the U.S., a number of existing companies are moving to de-list. So far this year, at least 10 foreign companies have voluntarily left Nasdaq, and two have voluntarily delisted from the Big Board, according to published reports.
However, they don’t seem to be leaving because of Sarbanes-Oxley. Many of these companies are delisting because they have very few investors here and it is costly to service them.
For example, when German e-commerce software firm Intershop Communications AG announced earlier this year that it would delist from Nasdaq, it said in a press release it was due to low daily trading volume—less than 1 percent—and a low proportion of issued ADRs relative to Intershop's total outstanding shares, which amounted to less than 1 percent at the beginning of the year. [ADRs are American Depository Receipts, or certificates—issued by a U.S. bank—that represent shares in a foreign corporation].
Scandinavian telecom group TeliaSonera AB said it decided to delist from Nasdaq because trading volumes have been negligible compared to the trading on the Stockholm Stock Exchange and the Helsinki Exchanges, where the company is also listed. Of the total traded volume from January to December 2003, 91.8 percent took place in Stockholm, 7.9 percent in Helsinki and 0.3 percent at Nasdaq. “Due to the costs and the limited benefits of remaining listed on Nasdaq, TeliaSonera has decided to delist,” it stated in a press release.
So while Sarbanes-Oxley may not be scaring away foreign companies from U.S. exchanges, low trading volume and high costs might prevent them from staying.
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