Picogiga, a French semiconductor maker with $11 million in annual revenues, has the kind of hot-growth profile that makes investment bankers weak in the knees. Picogiga is the global market leader in gallium arsenide wafers used to make chips for the booming cellular-phone and digital- TV markets. Its sales are rising by 40% a year, and profits are expected to be up 20% in 1996. But despite its stellar record, Linh T. Nuyen, a Vietnamese emigre and Picogiga's chief executive, long had little hope of taking his 11-year-old company public. Picogiga was simply too risky and obscure to merit an initial public offering.
Until now, that is. In a few weeks, Nuyen expects to launch a $14 million IPO on France's recently launched small-capitalization bourse, the Nouveau Marche. "It's very important for smaller European companies to have their own markets to raise money close to home," he says.
MARKET SAVVY. Picogiga is not the only small, Continental high-tech company suddenly finding itself able to go public at home or on overseas markets. As networking technology, the Internet, and multimedia give rise to a new generation of companies with global growth prospects, the market's bias against risky European technology stocks is undergoing a dramatic change. From San Francisco to London, investors are flocking to the Continent to get in on the next technology success story.
Though the number of Eurotech IPOs is still small in comparison with the U.S., the emergence of a new class of hot startups in growth industries is what Europe desperately needs. Agile, entrepreneurial, and market-savvy, they could become a key force for reinvigorating Europe's industrial base in the 21st century and ameliorating chronically high levels of unemployment.
The number of early success stories is mounting. Lernout & Hauspie, a Belgian speech-translation company that makes software that helps computers translate written text in one language into speech in another, went public on America's NASDAQ stock market in December at $11 a share. It's now trading at $45.50. Holland's Axxicon, a world leader in compact-disk molds listed in Amsterdam in September at $11.17 a share and is now trading around $32. Then there's Virtuality Group. A British virtual-reality company that makes headsets and software, it's expected to earn more than $9 per share this year after turning a modest loss in 1995. So far this year, its stock is up 8%. "There are great opportunities for investors," says Christian Deblaye, executive vice-president at Compagnie Financiere Edmond de Rothschild in Paris, who is considering starting a fund targeting high-tech European smaller companies.
The growing number of high-tech IPOs is creating a virtuous circle that gives Europe's startups even more visibility. Investment banks are publishing more research about small companies. And investors, intrigued with the prospect of high returns, are allocating more assets to small-capitalization stocks. Indeed, the nature of small-cap investing in Europe is changing as more tech companies go public.
CHANGING LANDSCAPE. In the past, investors had to search far and wide for growth companies, and many fund managers simply placed small-cap funds in undervalued companies in mature industries. Now, the number of small, listed technology companies is starting to alter the investment landscape in Europe. In France alone, a dozen new funds are being created to invest in small, fast-growth companies, especially technology issues. Germany will launch six new funds this year. And existing small-cap funds are at the receiving end of an unprecedented wave of cash. The $56 million Invesco European Smaller Companies Fund, a U.S.-based fund launched a year ago, saw investment inflows rise by 67% in April over the previous month. "It's striking," says the fund's manager, Claire Griffiths. "A year and a half ago, it was hard to find names of [technology] companies you felt confident investing in."
Some 25% of her fund is invested in tech stocks and an additional 20% in information technology and other services. The fund's larger holdings include Dutch software superstar Baan, Austrian hosiery maker Wolford, and French engineering consultancy Altran Technology. Other investors are eyeing Scandinavia and Switzerland. "Companies in smaller countries tend to be more international from the start," says Michael Kraland, president of Trinity Capital Partners, a Paris-based small-cap research group. Even cautious Germany has established its first mid-cap index focusing on growth issues. "German midsize companies are diamonds," says Peter C. Conzatti, manager of a $133 million small-cap fund at SMH Investment in Frankfurt.
The Continent's ability to win over high-tech investors is a far cry from the 1980s, when an earlier wave of small-cap IPOs went sour. But Britain has already shown that investors are willing to ignore past losses. For good reason. An index of tech stocks compiled by the Anglo-Dutch investment bank ABN-AMRO Hoare Govett indicates that the value of investment in Britain's 87 medium- and small-cap technology issues has climbed 145% since 1990, vs. 57% for the overall British market.
CROWDED FIELD. Worried about NASDAQ capturing Continental high-tech IPOs, Europe's stock exchanges are overcoming their distaste for small companies and setting up a second generation of bourses for hot-growth companies. The first was Britain's Alternative Investment Market, launched in June, 1995. By April, its capitalization was more than $3 billion. In February, the Nouveau Marche opened for business--and is seeking listings from abroad. A European equivalent to NASDAQ called EASDAQ will open in September, and Germany, Italy, and Belgium also plan to open small-cap markets. Holland is also becoming a hotbed of tech stock offerings.
Some observers think this new field of small-cap bourses is already becoming crowded and a round of consolidation will be inevitable. EASDAQ and national markets like Nouveau Marche, for example, could merge, the better to pool liquidity for European listings and compete with NASDAQ. And EASDAQ will also encourage dual listings with NASDAQ. Whatever the outcome, some European small-cap bourses are likely to endure. "There's a growing recognition in Europe that institutional changes are required to stay competitive in global financial markets," says Christopher Kwiecinski, chief investment officer for private banking at Banque Indosuez.
Europe's small-cap upsurge could wane if the Continent's economy hits the skids and stock prices sag. "You need a couple years of success," says Trinity Capital's Kraland. "If a bear market arrives, the curtain will fall on EASDAQ and the Nouveau Marche." But right now, bears are nowhere to be found. Europe is embracing high-tech startups like never before, enriching its economy and investors alike. If the winning streak continues, Europe's new markets may finally get used to giving technology startups the backing they need to play in the big leagues.