Down And Out In Frankfurt
Oct. 9 was a bad day for tech shares around the world. But it was particularly grim on Frankfurt's Neuer Markt. The high-tech market's benchmark, the Nemax All-Share index, closed down almost 5% that day, as investors dumped the Internet, biotech, and software stocks that make up the lion's share of the young exchange's 321 listed companies. At one point, the All-Share was down nearly 7%, as retail investors, who account for just over half the volume, panicked. "Everyone wanted out," recalls an official at ConSors Discount Broker, Germany's largest online broker. "Sell orders were flooding through our computers." The previous trading session, Oct. 6, had also been a rout.
After the Oct. 9 pounding, the All-Share Index was less than half its peak value of around 9800, reached in late March. The fall was part of a worldwide decline in tech stocks--the Nasdaq Composite Index is down 36% since its Mar. 10 peak--but that is just one of the problems facing the Neuer Markt.
EXODUS. Just a year ago, the young market, a part of Frankfurt's Deutsche Borse (DB), was the darling of Europe's growing high-tech community. Founded in March, 1997, it had outrun other European exchanges for the hottest listings and boasted a huge market cap of almost $300 billion. Since then, the exchange's prestige has been hammered by one blow after another. It has suffered not just from the tech meltdown but also from the departure of its top manager. Suddenly, hot companies such as telecom operator Mobilcom are clamoring to get out of the Neuer Markt rather than in.
One of the first shocks to hit the Neuer Markt was the collapse of the proposed merger between DB and the London Stock Exchange. On Sept. 13, Neuer Markt executives watched helplessly as LSE Chief Executive Don Cruickshank called off the deal in the face of opposition among LSE shareholders and an aggressive counteroffer from Sweden's OM Gruppen. The London tie-up would have given the Neuer Markt direct access to London's large pool of capital and would have confirmed its position as Europe's premier market for growth stocks.
Rubbing salt in the wound, the LSE made a bold bid on Oct. 7 to snare some of the Neuer Markt's high-tech listing franchise by combining TechMARK, its own telecommunications, technology, and media section, and its Alternative Investment Market, which lists young, fast-growing companies, into a pan-European exchange for growth stocks. Marketing, management, and tech problems have bedeviled other LSE ventures. If it can surmount them this time, the hot new companies might well snub Frankfurt for London.
The TechMARK news couldn't have come at a worse time. The day before, two high-profile companies--Leica Microsystems Inc., an optical tools maker, and Steinberg Media Technologies, a music software company--canceled initial public offerings slated for later in the month. The move was predictable, since about half the Neuer Markt's 115 new listings this year now trade below their offering prices. Exchange officials point out that seven of the nine that listed in September have done well. Shares of Linos, an optical technology company, have almost tripled in price since the IPO, while those of SAP SI, the systems integration arm of Siemens and SAP, have almost doubled. But analysts say that's because their offering prices were low.
TEMPORARY. More serious, it is clear by now that companies no longer see a listing on the Neuer Markt as a long-term relationship. That's because retail investors dominate the market, they say. Not only do such investors' short-term strategies make the market volatile, but after reaching a certain size, tech companies prefer institutional investors as their main shareholders.
Mobilcom, which boasts one of the largest market caps on the Neuer Markt, has said it plans to defect to the blue-chip Xetra DAX Index on the DB. Mobilcom says it would attract more interest from big investors if it were listed alongside blue chips. Neuer Markt officials say they doubt that the company can pull it off any time soon.
Losing Mobilcom would be a big blow, especially since other large companies may follow it out the door. EM.TV, which makes and distributes television programs, has considered doing so. If the trend takes hold, the Neuer Markt could end up as a small-cap repository--a bad position to be in, especially in a bear market.
Amid all these woes, bad publicity about two listed companies has hardly helped the Neuer Markt's reputation. Last month, the two banks that make a market in the software company Infomatec--its required sponsors--quit after the company made overly optimistic claims about pending contracts. The company got new sponsors, but not before a shareholder-rights group urged authorities to bring criminal charges against two Infomatec managers.
Soon after that, Gigabell, a telecommunications and Internet services group, moved to the brink of insolvency before being rescued. Angry investors charge that the banks that brought Gigabell and other companies to the Neuer Markt failed to vet them properly or provide adequate information. The banks counter by blaming the companies for inflating market expectations.
Also, investors complain that a German regulatory loophole that lets company founders sell their shares after six months without notifying the market distorts trading in Neuer Markt stocks with small share floats.
At a time like this, Neuer Markt needs a strong leader. Alas, shortly after the Gigabell incident, Josef Naegel, who had headed the market since January, 1998, quit with no explanation. Both he and DB officials claim that his departure was amicable. But the suddenness of his resignation inevitably led to speculation that his relationship with DB had deteriorated. "It's all the more mysterious and unsettling because it follows several other high-level departures at the Borse," says a Frankfurt investment banker.
Rainer Riess, Naegel's 34-year-old deputy, replaced him but has yet to say how he plans to revitalize the exchange. "I very much respect [Riess], but [Naegel's] departure still came as a blow," says the investment banker.
No one is writing the Neuer Markt off. Many European growth companies still reflexively want to list there. Dresdner Bank's Deutscher Investment-Trust just launched its Neue Markte Europa fund to invest mainly in Neuer Markt stocks. "It's not a case of going elsewhere," says a Leica Microsystems official. "It's a case of waiting until the time is right."
SALVATION? Still, the Neuer Markt faces real challenges--notably the sharper competition from London and mounting unease about the recent problems. Riess will need to press regulators to change the rules governing founders' share dealings. He must push banks to improve information about companies they bring to market and make sure their clients respect their obligations to shareholders. And he needs to attract more institutional investors. If he can persuade Mobilcom to stay, the day might yet be saved.
Also, DB chief Werner G. Seifert needs to speed up discussions with the Nasdaq, which was to join the London-Frankfurt partnership. Now that the merger has been scrapped, the huge U.S. exchange could go with London or Frankfurt. Whichever it opts for will get an enormous boost.
Riess declined to be interviewed for this article. But people who know him say he has the skills and personality to pull off a Neuer Markt recovery. If he can't, the market could end up a loser as exchanges in Europe and elsewhere struggle to create powerful international alliances. If that happens, it would kill its founders' ambition of becoming the place in Europe where young high-tech companies can grow into powerhouses.