Europe As High Tech Heaven?
It was the kind of IPO executives fantasize about. Gerhard Schmid, the founder of five-year-old MobilCom, needed a war chest to fund his cellular phone service company's next onslaught on the German telecom market. Heady growth in that market had already helped MobilCom top $182 million in sales, but full competition will begin on Jan. 1, 1997. So Schmid took MobilCom public on Mar. 10, raising $17.5 million--the first initial public offering on Germany's Neuer Markt, or New Market. MobilCom's stock rocketed 52%, to $56, on its first day of trading. It's now up to $72.
Until recently, such high-tech shooting stars as MobilCom were unheard of on the Continent and rare even in Britain. Now, banks and bourses are hustling to make up for a generation of lost opportunities. During the past 24 months, Europe has created six secondary markets, including the Brussels-based EASDAQ, London's AIM, and four Euro "New Market" (NM) member exchanges (table). Some 178 companies have gone public on these exchanges, raising nearly $2.8 billion in equity. Another 170 IPOs are expected this year. And unlike U.S. tech stocks, which have been whipsawed recently, Europe's new tech issues have mostly outperformed market averages.
The money raised in Europe may be a drop in the bucket compared with the $25 billion NASDAQ raised in 1996, but the trend marks a dramatic shift in Europe's equity culture. For the first time ever, young tech companies can turn to local bourses to fuel growth. And like a patient getting a transfusion, Europe's tech startups are responding, showing signs of competitive vigor and global reach. However imperfect, fledgling markets are granting them the element for global success they always lacked: capital to match the speed at which U.S. rivals grow. "We are finally seeing the infrastructure to support high-growth technology companies," says Robert Hook, managing director of Prelude, an investment company based in Cambridge, England.
R&D RALLY. Meanwhile, investors, who used to search for go-go tech stocks mainly in the U.S. or Asia, are turning to Europe. Already, Europe's money managers are calling its tech stocks the next "emerging market." Until now, there weren't enough listed tech companies to consider them as a group, but that is changing. For example, at LGT Asset Management in London, which oversees $4 billion, less than 10% of the $200 million small-cap fund is invested in technology stocks. But as more European startups go public, that amount will rise, and new funds dedicated entirely to technology will be launched.
Startups in software, computer peripherals, Internet security, networking, and biotech are all using their newfound access to capital to expand in the U.S. and Asia while they rev up research and development at home. Take Belgium's Innogenetics, a 10-year-old, $27 million diagnostics company that went public on EASDAQ in November, raising $80 million. Management aims to invest $25 million in a factory to produce items for export to the U.S., including DNA probes for the AIDS virus. More important, the company will be able to make the expensive shift into drug development. Innogenetics already has two therapeutic compounds in the pipeline.
It's not just the cold cash that makes listing so helpful to such startups. Going public is also improving their credibility in global markets, where public trading makes a company far more visible to investors and customers alike. For instance, ActivCard, an $8.3 million French company making smart-card systems for the Internet and corporate intranets, raised $11 million on EASDAQ in December. Management plans to use the proceeds to fund expansion in the U.S. and Asia, but founder Yves Audebert says the real boost from the listing has been increased confidence among potential buyers of his systems. "It is much easier to sell now," he says.
Who finally sounded the alarm that Europe's markets were missing the high-tech boat? Not surprisingly, it was U.S. investment banks that spotted the first Continental highfliers and helped take them public on NASDAQ. Now, the second phase of the revolution has begun. U.S. small-cap specialists such as Cowen, Hambrecht & Quist, Robertson Stephens, and Goldman Sachs are supporting EASDAQ and screening European tech startups for IPOs. "We see incredible opportunities for investing here," says Jerrold B. Newman, managing director of investment banking at Cowen & Co.
Predictably, Europe's new secondary markets have had their growing pains. And new issues can be just as volatile as those on NASDAQ. Shares of online service company Infonie, the first listing on France's Nouveau Marche, plummeted 66% over the past 12 months, a typical case of a company ill-prepared to go public, U.S. bankers say. Both AIM and the Nouveau Marche, hit by a handful of shaky offerings, recently tightened their listing criteria. Lack of liquidity is a major drawback for many issues. EASDAQ companies with dual listings on NASDAQ find their bankers tend to do most of the trading in the U.S., where the big institutional money is, leaving EASDAQ with minimal turnover.
Price volatility is another dilemma, especially for companies that float as little as 10% of total equity. Finally, European banks still lack in-depth research expertise in technology, whereas a U.S. investment bank may have an entire team of analysts covering software alone. That makes it hard to lure institutional investors after an IPO.
Despite those drawbacks, Europe's new exchanges overall have chalked up healthy gains in their first months of operation. The total value of shares listed on France's Nouveau Marche rose 59% during its first 13 months of operation, outperforming France's CAC index of top 40 companies. Already, more than 50% of the trading on France's Nouveau Marche comes from non-French investors, mainly from Britain, the U.S., and Switzerland. EASDAQ is up 10.6% since Jan 1. AIM, by contrast, has underperformed the London Stock Exchange, dragged down by a number of wobbly companies. Yet even AIM has its share of highfliers, such as PolyDoc PLC, whose shares have soared by 253% since it was listed in September, 1996.
NASDAQ may continue to draw some of the best European startups because it still offers better liquidity and higher valuations. Yet small companies in need of capital balk at the time and expense needed to list on NASDAQ. "All these markets will be in competition. Let the best man win," says Raynier Van Outryve, chairman of the European Venture Capital Assn., an industry group.
The new exchanges may even provide a fresh venue for non-European companies seeking capital. More than two dozen U.S. and Israeli companies already are considering listing on Europe's new bourses, in part because the U.S. IPO market has soured. "The European community now has more interest in biotech stocks than the other side of the ocean," says Ray R. Rogers, chairman of Portland (Ore.)-based Oxis International Inc., a $5 million bio-pharmaceuticals company listed on NASDAQ that will join the Nouveau Marche on May 6. If Europe's new exchanges can sidestep the land mines and exploit that rich vein of global opportunity, they may evolve faster than anyone imagines.
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