Britain May Ease IPO Rules to Prevent $15 Billion Drain

As Avast Software NV (AVST) planned its initial public offering last year, Chief Executive Officer Vincent Steckler considered listing the Czech anti-virus software maker in London before finally settling on the Nasdaq Stock Market in New York. U.K. Prime Minister David Cameron doesn’t want that to happen again.

To attract more technology firms such as Avast, Britain is considering new rules that would make the London Stock Exchange (LSE) more attractive to startups. Taking a page from the Jumpstart Our Business Startups Act approved by the U.S. Congress this year, the government may cut the minimum stake IPO candidates are required to sell, from 25 percent to 10 percent.

“The U.K is looking into adopting elements of the U.S. JOBS Act, relaxing rules including equity listings,” Rohan Silva, a technology adviser to Cameron, said after meeting with entrepreneurs and investors at the prime minister’s Downing Street residence last month to discuss the government’s role in nurturing startups.

Europe could lose companies worth as much as $15 billion if the region’s 20 to 30 biggest IPO-ready technology firms were to list in the U.S., London venture-capital firm Balderton Capital estimates.

The British government sees a relaxation of IPO rules “as part of the broader effort to create a fantastic ecosystem for startups,” said Neil Rimer, co-founder of Europe’s largest venture capital fund, Index Ventures. “You really can’t be a contender for those businesses unless they have the ability to access public markets.”

AIM Listings

While London’s Alternative Investment Market already has looser requirements for startups, it has become a hub for companies that weren’t fully prepared to go public when they sold shares, Rimer said. That’s led healthier companies to shy away from it, he said.

For several years, Prague-based Avast had evaluated European exchanges such as Frankfurt, Amsterdam, and especially London, Steckler said. A key drawback he cited for a U.K. listing is the requirement that businesses offer such a big percentage of their shares. Companies that expect to expand quickly, such as his, often prefer to sell a smaller stake.

“You need investors who understand growth and not just a dividend business,” Steckler said.

European Slump

Avast shelved its plan to raise about $100 million last month after shares of AVG Technologies NV (AVG), another Czech software maker that listed in the U.S. in February, slumped 30 percent within weeks. Steckler said he’s still aiming for a U.S. offering when market conditions recover.

U.S. IPOs raised $45 billion in the past 12 months, down 31 percent from a year earlier. Tech listings, though, were up threefold, accounting for $18.7 billion as companies such as Facebook Inc. sold shares, according to data compiled by Bloomberg. IPOs in Western Europe dropped to $5.6 billion, down 88 percent. The technology sector, with eight offerings, raised 86 percent less than a year earlier.

The median price-to-earnings ratio for technology companies on U.S. exchanges is 18.5, according to data compiled by Bloomberg. The figure for tech companies on Western European exchanges is 14, meaning investors there assign a lower value to these companies than their American counterparts.

‘High Growth’

Alex Ham, co-head of corporate broking at Numis Corp., who has helped list tech outfits such as online bookmaker Betfair Group Plc (BET), said successful London IPOs of Internet clothing retailer Asos Plc (ASC), residential-property website Rightmove Plc (RMV) and biotechnology firm Abcam Plc (ABC) are encouraging. Such companies have started to attract more interest, he said, although there’s still a scarcity of “interesting, entrepreneurial high-growth businesses.”

U.S. exchanges have had their own struggles, and a listing there doesn’t guarantee a better return. Mail.ru Group, Russia’s largest Internet company, raised $912 million in a November, 2010 listing in London. Its stock is up 17 percent. By contrast, Yandex NV (YNDX), a Russian Web company whose search engine is more popular in its home market than Google Inc. (GOOG), is down 15 percent since its $1.3 billion Nasdaq IPO in May 2011.

Facebook’s IPO in May on the Nasdaq was plagued by delays and malfunctions that led Nasdaq OMX Group Inc. to propose to pay brokers $62 million in compensation. The stock had lost 49 percent of its value through yesterday.

Some European entrepreneurs who gravitate toward the U.S. say listing requirements aren’t the issue that’s driving them away. Yandex Chief Financial Officer Alexander Shulgin says bigger problems are scant support for the tech startup scene in Europe and a lack of willing investors.

‘Most Liquid’

“For us, the choice was very straightforward,” Shulgin said. “The U.S. market is the most liquid in the world.”

Barry Maloney, Balderton Capital’s founding partner, says Britain should instead focus on making it easier for entrepreneurs to start businesses to develop a competitive local Web industry.

“Make sure you can get visas to countries for skills you want to bring in,” Maloney said. “Make sure share options are taxed the right way. Make sure there’s broadband.”

The U.K.’s two largest parties have favored tougher immigration policies. Home Secretary Theresa May in June said that companies raising concerns about visa regulations were “sending a negative message. They should be doing their bit to show we’re open for business.” The U.K. is also behind other European countries in introducing faster fourth-generation mobile-phone networks.

Investor Experience

Axel Dauchez, the CEO of Deezer, a French music-streaming service with about 20 million users, said what’s most important for entrepreneurs wanting to go public are the number and experience of investors. If his company were to hold an IPO, he said he would choose the Nasdaq even though Deezer does no business in the U.S.

“Is it easier for me to be global coming from Europe or is it easier for me to be global coming from the U.S.?” Dauchez said. “There is a very clear answer in terms of access to capital: It is the U.S.”

To contact the reporters on this story: Amy Thomson in London at athomson6@bloomberg.net; Jonathan Browning in London at jbrowning9@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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