Europe's Markets: Liberty! Equality! Liquidity!

New high-growth markets alter Europe's investment scene

NetVision, an Internet-security company based in Leuven, Belgium, didn't expect much fanfare when it went public on Feb. 10. The three-year-old startup needed expansion capital, but with just $12 million in sales, it was too small for the NASDAQ. Instead, NetVision chose the two-year-old EASDAQ in Brussels. But a modest debut it was not. Within seconds of the opening, European investors sent the stock price soaring from its initial $13.50 a share to $113. It closed for the day at a still extraordinary $56. Said NetVision Chief Executive Stijn Bijnens, still stunned by the torrent of demand: "If we'd gone public in the U.S., no one would know us."

DROP IN THE BUCKET. Companies such as NetVision don't have to worry about that anymore. Though the oldest of them opened only three years ago, Europe's new stock exchanges are getting noticed. Technology companies from Amsterdam to Tel Aviv are suddenly finding them the hot place to list. France's Nouveau Marche, which now trades 86 small-cap stocks, expects to add 50 more this year. In Frankfurt, the Neuer Markt, with 67 companies listed, thinks it will add 100 new issues in 1999.

The combined market capitalization of the six new markets was still only $67 billion at the beginning of February--a drop in the bucket when compared with NASDAQ's market cap of $2.95 trillion. Still, says Robert Pierce, vice-president at BancBoston Robertson Stephens in London: "Europe's new markets are coming of age." And as they continue to strengthen, the new secondary exchanges will play a key role in propelling homegrown technology companies into the global market and bolstering European muscle in information technology, telecoms, and biotech.

Indeed, the fledgling markets unleashed a virtuous circle by spurring greater venture-capital investments, which in turn boosted the number of high-tech companies funded. Another key accelerator is the launch of the euro, which has encouraged cross-border investing and trading links among the exchanges. These market officials have also bolstered their credibility by tightening regulations and raising listing requirements.

As important as anything else, though, is demand. European investors have been starved for the kind of growth stocks Americans take for granted. "There has been a scarcity factor," says Josh Rafner, managing director at Hambrecht & Quist in London. "European investors haven't had the access to equity opportunities in technology in the home markets until recently. The public market has stimulated the whole food chain."

HIGHER BY 40%. The new exchanges are already eroding NASDAQ's image as the technology industry's stamp of financial credibility. Valuations on these markets--which also include exchanges in Holland and Italy and a second bourse in Brussels--are currently up to 40% higher than in the U.S., where small European companies often command less attention among investors unfamiliar with them. For larger companies that are already listed in the U.S., dual listings would both boost liquidity and reduce trading volatility. Bernard Liautaud, chief executive at Business Objects, a French software star listed on the NASDAQ, is now considering a second listing on the Paris market to broaden its investment base, which is 80% American. And when Ilog, another French software maker, listed on the Nouveau Marche in December, two years after its initial public offering in the U.S., trading volume in New York increased dramatically. Reason: The U.S. stock price was on average 60 cents lower. "A dual listing," says Ilog Chief Financial Officer Roger Friedberger, "is an ideal scenario."

U.S. investment bankers, skeptics only a year ago, are now recommending these markets to European growth companies as preferable to NASDAQ. For example, biotech companies, which have repeatedly disappointed U.S. investors, are still highly valued in Europe, where the industry is younger and tech stocks rarer. Strasbourg-based Transgene raised $72 million last year in a listing that valued the company at $267 million. Four more biotech companies are expected to list on the Nouveau Marche this year, including Biovector Therapeutics, which aims to raise $35 million in a Feb. 22 offering.

Also among the potential newcomers: more than a dozen Israeli companies that could go public on European exchanges this year. While roughly the same number are likely to list in the U.S., it's a fourfold increase over the IPOs Israelis launched in Europe in 1998. One negative is NASDAQ's size: It's increasingly difficult to gain visibility among its 6,000 listings. It's also easier and less expensive to list in Europe. "NASDAQ is suitable only for the largest Israeli high-tech companies," says Edouard Cukierman, chairman of Cukierman, Singer, Barnea & Co., a Tel Aviv-based investment bank. Cukierman believes most Israeli companies should list first in Europe and consider a U.S. debut later.

The euro's launch is also driving the trend, since stocks are now quoted in a single currency. The five-member Euro New Market (Euro NM) system, with 180 listed companies, launched cross-border trading this month between bourses in Brussels, Paris, and Amsterdam. Milan's Nuovo Mercato, which has just joined the NM system, and the Frankfurt market, which recently upgraded its computer hardware, will tie into the cross-border trading system by yearend.

Germany's Neuer Markt is now the hottest NM exchange. New media, entertainment, telecom, and information-technology listings have boosted its index by 36% since Jan. 1--after a 170% rise in 1998. Shares in EMTV, a cartoon producer, are up some 3,400%, chiefly because the German TV market is opening to greater competition. A rush of individual investors has also made Germany the most liquid of the NM exchanges, with an average daily turnover of more than half a billion dollars.

Some of the initial skepticism about Europe's new exchanges was justified. Spurred by a few early and messy flops, the French market and the Euro NM system have tightened up listing and reporting requirements since their launches three years ago. Companies must now report revenues quarterly instead of annually, and profits semi-annually. To alleviate earlier liquidity problems, minimum flotations are now $5.6 million, up from $1.8 million initially, and offerings must comprise at least 20% of the listing company's shares.

But depth is still a problem in Europe. On the Nouveau Marche, which has a market capitalization of $5 billion, average daily turnover is $6.6 million--still minute when compared with NASDAQ. Says Yannick Petit, deputy general manager at the Nouveau Marche in Paris: "We need 300 companies to reach critical mass." That is more than triple the Nouveau Marche's current listings.

RESEARCH GAP. Europe's biggest challenge lies in the quality of its share analysis. "Research is still way behind in Europe," says Todd Cozzens, CEO at Paris-based Picis, a medical-technology software company that may list in Europe this spring. "They are just starting to do U.S.-style analysis." As a result, most European companies seek a combination of U.S. and local banks to underwrite their offerings. That ensures a steady flow of accurate research and access to a broad base of local investors. "The combination of the two working together is good," says Cozzens.

Long-term, more fast-growth technology companies are likely to list both in Europe and in the U.S., investment bankers say. For companies large enough, the U.S. listing still offers market visibility and credibility, however fast Europe's new secondary markets are coming on. At the same time, U.S. companies are likely to be drawn to European exchanges to broaden their investment bases. That's good news for Europe's markets, which now look poised to nurture their own high-flying technology industry.