The world’s biggest listing this year may be that of a British firm, but in Arm’s home market there’s much lament over its decision to sell shares in New York over London.
The Cambridge-based chip designer, controlled by Softbank Group Corp, unveiled its long-awaited filing for an initial public offering in the US on Monday. It’s the latest blow for the London Stock Exchange, which has seen more companies quit than join, and whose indexes lag behind European and US peers.
Strategists at HSBC Holdings have questioned whether the UK market is becoming more and more “irrelevant,” noting outflows from funds, weak growth and falling market capitalization weights of British stocks in global indexes over the last two decades.
This year could be the worst for UK listings since the global financial crisis, a fact which has caught the attention of Chancellor of the Exchequer Jeremy Hunt, the main market regulator as well as City and industry bodies seeking to loosen IPO rules to boost deal-making.
“We’re seeing a worrying de-equitisation across the London market from mega-cap to small caps,” said Rory Campbell-Lamerton, a fund manager at Church House Investment Management. “It’s fair to say that the current loosening of restrictions haven’t gone far enough to break the status quo.”
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Tweaks to the IPO regime encompass everything from allowing greater founder control over companies after listing, as is common in the US, to more recent discussions around a potential pension reform. The UK might have room to go even further though, some say.
Richard Fagan, head of UK Equity Capital Markets at HSBC, says the answer may lie in building an ecosystem of investors and analysts that fully value UK listings comparably with US multiples. He backs a sponsorship model for companies to help them navigate from startup to private fundraising to IPO with a single point of contact with the UK government.
“The proposed listing rule changes are very helpful but they are only one part of the solution,” he said.
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Nick Fowler, managing director of Equity Capital Markets at Lazard UK Financial Advisory, says some of the issues the UK has are “reputational,” which could be helped by better education of issuers and shareholders. Furthermore, boards “will need to be confident that they can act as autonomously as their US counterparts, and will want to know they are not at a competitive disadvantage regarding matters of governance and employee compensation,” he said.
Investor Pool
In its regulatory filing, Arm said the offering is being led by Barclays Plc, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Mizuho Financial Group Inc. The chip maker plans to start its roadshow in the first week of September and price the IPO the following week, Bloomberg has reported. The company didn’t disclose proposed terms for the share sale in the document, but it’s expected to seek a valuation of US$60 billion to US$70 billion.
While Arm’s decision to choose New York has stung London, it’s not just tech firms which are fleeing. Building materials supplier CRH Plc and gambling company Flutter Entertainment Plc are also pursuing US listings in a bid to lift valuations, lured by bets of a deeper investor pool on the other side of the Atlantic.
Economic malaise and limited exposure to high-growth sectors has meant that the FTSE 100 has declined 1.9% this year, compared with the Euro Stoxx 600 Index’s 6.8% gain. In the US, the S&P 500 is up 15% and Nasdaq 100 has jumped 37%.
To be sure, listing volumes in the US are also depressed, but even in a poor global IPO market, UK listings look particularly bleak. Less than US$1 billion has been raised in London this year, according to data compiled by Bloomberg, the least for any comparable period since 2009. WE Soda pulled its planned listing in June, citing extreme investor caution.
Still, not every British firm that has flown the nest has found success.
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“Small and mid-cap UK companies that go to the US can often not get enough investor attention there,” said HSBC’s Fagan. “For tech in particular, there’s a real argument to be made that there’s a scarcity value here that isn’t available elsewhere,” he said, adding that the UK market holds real potential for growth firms.
Sharon Bell, a strategist at Goldman Sachs Group, said that while regulatory changes are helpful, economic growth is needed for investors — both domestic and international — to pile money in the UK market.
The UK does have advantages such as a capital pool that’s deeper than most other markets, if not as deep as in the US, and a strong cohort of commodity firms that are gaining favor amid a global energy crunch.
“A re-engineering of the market can’t happen overnight,” she said. “Will the UK ever be as big as it was relative to where it was before? Maybe that’s questionable.”
