Long before Salesforce.com (CRM), a fast-growing customer-relations software firm, filed to go public, representatives from the New York Stock Exchange and the NASDAQ stock market came calling. They were desperate to snag one of the hottest initial public offerings of 2004. NASDAQ promised to feature it in splashy ads as they had for tech giants Intel Corp. (INTC) and Yahoo! Inc. (YHOO) -- and broadcast the stock's debut live from the digital face of its seven-story Times Square office tower for 1.5 million viewers to see. The NYSE countered: Not only would it feature Salesforce.com in ads, but also host a lavish party for 500 on the trading floor with the doo-wop band Papa Doo Run Run. There would also be a bell-ringing ceremony in its historic 103-year-old Wall Street building. "It was a bare-knuckled competition," says a Salesforce.com person involved in the dealings. "[NASDAQ and NYSE] kept offering more and more little goodies."
Not so long ago, NASDAQ, a mecca for dot-com companies, would have been the obvious choice. Instead, Salesforce.com opted for the NYSE. Company officials said they felt the Big Board's prestige would impress customers. Meantime, the dowdy Chicago retailer Sears (SHLD) Holding Corp., which had held a coveted single-letter NYSE ticker symbol (S) for 100 years, jumped ship to NASDAQ in March after merging with Kmart Corp. A Sears spokesman said the new listing better fit its emerging image.
Competition for listings -- the most lucrative source of revenue for stock exchanges -- has kicked into high gear. On July 20, the NYSE scored big points by luring more than $90 billion in assets in 61 Barclays iShares exchange-traded funds away from the American Stock Exchange -- long the dominant player in ETFs. The NYSE also plans to launch a second listing brand to compete with NASDAQ stocks once it merges with Chicago's Archipelago Holdings Inc. (AX), scheduled for yearend. Its ArcaEx trading exchange will target new IPOs and some 1,100 NASDAQ companies -- about a third of the stocks the tech exchange lists -- that currently don't meet the NYSE's market cap and other standards. Catherine R. Kinney, co-chief operating officer of the NYSE, says the aim is to graduate small companies to the Big Board once they hit higher thresholds, such as revenues of $75 million and a global market cap of $750 million. NYSE is also eyeing some 675 large-cap NASDAQ companies that meet its listing requirements already.
There's no clear winner yet in the ding-dong battle. NASDAQ is heavily lobbying for some of the NYSE's most prestigious companies, aiming to win over the 28 blue-chip Dow Jones Industrial Index stocks that list there. Before 2003, NYSE rules made it practically impossible for companies to delist voluntarily. But since January, 2004, seven have also listed on NASDAQ -- including Walgreen (WAG), Charles Schwab (SCH), and Hewlett-Packard (HPQ) -- while just three NASDAQ companies have defected so far this year, down from a peak of 43 in 2002. NASDAQ is also heavily courting international companies, and it has hired new sales people to scour China, India, and Russia for new company listings. Says James J. Angel, associate professor of finance at Georgetown University's McDonough School of Business: "Both [exchanges] will stop at nothing to get listings from other markets."
Once, the exchanges mainly used market statistics to fight for listings. They would trot out reams of studies to prove they were more efficient and offered better prices for less volatility. That strategy is no longer enough. "Both the NYSE and NASDAQ do great jobs at trading stocks," says Georgetown's Angel. "You need a microscope to tell them apart on transaction costs." To be sure, they still trumpet their distinctive features. The 213-year-old NYSE, the world's largest equities market, sells itself as an emblem of tradition and prestige. NASDAQ boasts that it's the home of choice for innovative companies. These brand images still have drawing power: Google (GOOG), for instance, was lobbied by the NYSE for its IPO last August but chose NASDAQ. In fact, of last year's 235 initial public offerings by companies, NASDAQ got 147, NYSE landed 79, and Amex just 9. Still, the NYSE's corporate IPOs raised a total of $33.9 billion, more than twice as much as NASDAQ's, according to data provider Dealogic.
But these days, the exchanges are more Madison Avenue than Wall Street as they drum up slick pitches and launch new services. "This is a new phase in the war; it's marketing shtick," says Roger McNamee, co-founder and partner at private-equity outfit Elevation Partners in Menlo Park, Calif. Both exchanges arrange face time with big investors for companies. Each has a team that keeps tabs on existing companies and trolls for new prospects among investment bankers and venture capitalists. NASDAQ counters with offers such as low-cost executive insurance. On June 7 it launched a venture to distribute independent research paid for by member companies that don't have a big following by analysts. NASDAQ's latest gimmick: free listing for the first year. And as for those market ceremonies spotlighting the new companies, an NYSE spokesman boasts: "We have a real bell."
Far more than bragging rights are at stake. The 2,774 companies that trade on the NYSE generated 30% of the exchange's $1.08 billion in revenues last year; NASDAQ's 3,247 listings generated about 33% of its $540 million. The revenues come primarily from fees of all stripes. First-time listing fees, for example, are as high as $500,000 on the NYSE and $75,000 on NASDAQ. There are also annual renewal and trading fees, and others for transactions such as stock splits and mergers. Larry Tabb, chief executive of financial markets consultants Tabb Group, says that while exchanges are under enormous pressure to cut trading costs, "listing fees are a little less pressured by market influences and hence more lucrative."
Listings produce a scad of other revenues, too. Trading in listed stocks generates price and other data, which the exchanges package and sell to professional investors or data providers such as Bloomberg Financial Markets. NASDAQ has licensed listings to create proprietary products that garner royalties, such as the NASDAQ 100 Index -- a benchmark used by 400 mutual funds worldwide. The 100 index is also the basis for the QQQQ funds' ETF, the most heavily traded equity-based security in the world, on which NASDAQ earns commissions. Says Bruce Aust, executive vice-president of NASDAQ's corporate client group: "Listings are the ultimate goal."
PLAYING THE FIELD
Of course, companies realize that being courted by competing exchanges gives them negotiating clout. OptionsExpress Holdings Inc. (OXPS), the fast-growing online brokerage, which focuses on options trading, went public in Jan. 2005. It listed on NASDAQ in part because the fees were cheaper at $150,000 vs. the NYSE's $250,000. But the Chicago outfit wanted more exposure, so it also listed on ArcaEx. As a sign-up bonus, it got hundreds of thousands of dollars worth of free advertising and free access to a proprietary database that tracks which pension and mutual funds own in its stock. Chicago's Morningstar Inc. (MORN) had no choice but to debut its IPO on NASDAQ on May 5. Not only did the fund-tracker's market cap fall below the NYSE's minimum, but its profit numbers were also too low because it expenses options. Now, with $1 billion in market cap, it's a live candidate for an NYSE listing. Ultimately, the decision about where to list "comes down to economics and making sure that our stock is...available to the people who want to buy it," says Morningstar Chief Financial Officer Martha Dustin Boudos. "NASDAQ is doing that for us right now, but I would never turn down a better deal."
The exchanges are in no mood to let any prospect slip from their grasp. For years, the NYSE has kept in reserve a handful of its coveted single-letter listings for potential large-cap converts. Among them are M and I -- just in case one day Microsoft Corp. (MSFT) and Intel change their minds and defect from NASDAQ.
By Mara Der Hovanesian in New York, with Justin Hibbard in San Mateo, Calif., and Adrienne Carter in Chicago