The news was just what Frankfurt's battered Neuer Markt didn't need. On July 2, e-consulting firm Kabel New Media zapped a terse statement to the Frankfurt stock exchange's news ticker: "The company lacks the liquidity to meet its future obligations." Hamburg-based Kabel added that it had applied for the German equivalent of protection from creditors. The cast of characters in this tale of wealth destruction fit a familiar pattern: A "visionary" founder, Peter Kabel, turned New Economy goat; analysts who rated the stock "outperform" until the day of collapse; and stockholders left with shares worth pennies, down from a high of $68 in early 2000.
Sure, similar scenarios have played out on stock markets from Hong Kong to New York. Disasters such as Kabel Media, though, have so pummeled the Neuer Markt that the German press has begun speculating about its demise. That's overblown. But it's an indication of how deep a crisis afflicts Europe's biggest exchange for so-called growth stocks. The four-year-old Neuer Markt is down 73% from the end of 1999, compared with a 50% plunge at New York's Nasdaq. A series of scandals, including alleged insider trading by executives of Neuer Markt-traded companies such as EM.TV & Merchandising, has undermined investor trust in the viability of the market. "The whole market has been tainted," says Cyril P. McGuire, executive chairman of Trintech Group PLC, a Dublin maker of software for electronic-payment systems that is listed on the Neuer Markt and the Nasdaq in New York.
The damage will make the task of resurrecting this market all the more daunting. Companies such as Singulus Technologies, a profitable maker of machinery for producing CD-ROMs and DVD discs, have threatened to bolt to other exchanges. Already, competitors such as Brussels-based Nasdaq Europe are trying to lure away Neuer Markt companies. So far, Nasdaq Europe has only a fifth as many listings as the Neuer Markt's 342. But that could change if the Frankfurt exchange doesn't win back credibility. One that has been approached by Nasdaq Europe is Dublin's Trintech Group. Executive Chairman McGuire says he's not planning to move, but adds: "If the situation continues, we would consider our options."
That kind of talk is putting intense pressure on Deutsche Borse, Neuer Markt's parent. As part of a plan to restore credibility, the Borse is planning to require all listed companies, including DAX Index blue chips, to adhere to tougher reporting standards. For example, companies will be required to give detailed information about stock options, research and development expenditures, and investments. And the Borse will start removing companies from the Neuer Markt if their shares or market capitalization fall below a certain level. Borse managers are still working out details of the new rule, leading to complaints that they're dithering. "I'm waiting for a statement from Deutsche Borse," says Peter Thilo Hasler, an analyst at HypoVereinsbank in Munich. "All they've done is react."
At the Borse's new headquarters outside Frankfurt, managers feel unfairly blamed for plunging stock prices. In fact, there's plenty of blame to go around: Banks brought companies to market before they were ready, company executives inflated investor expectations, and investors bought blindly. Still, fairly or not, the exchange is the focal point for investor ire. Deutsche Borse Chief Executive Werner Seifert must find a response to the criticism, or negotiate from a weaker position when Europe's numerous stock exchanges inevitably consolidate.
Seifert is not the only exchange executive who needs to act. The crash in tech shares has exposed the lack of regulation and shareholder protection that still prevails in Europe's other stock markets. Italy's Nuovo Mercato is down some 59% in the past year as one dotcom after another has imploded and managers of companies such as Freedomland-ITN have been accused of misleading investors. Now, institutional investors eschew all but a few top performers, such as Internet provider Tiscali.
TOOTHLESS TIGER? Such risk avoidance is understandable. The problem is that investors may take years to return, starving new companies of the capital that they need to grow. With limited policing powers, exchanges can only do so much. And regulators such as the German Federal Securities Supervisory Office lack the money, legal tools, and--some say--the will to crack down on insider trading and other sins. "It's a toothless tiger," says a Frankfurt fund manager.
In Germany, signs of investor malaise are already cropping up. The percentage of Germans who own shares dipped slightly in the second half of 2000, to 9.7% from 9.8%, according to the German Share Institute. So far this year, money flowing into stock funds is down 80% from a year ago, at $5.6 billion, according to the Association of German Investment Funds.
What to do? Better oversight would help. Tougher regulation by the U.S. Securities & Exchange Commission in the early 1970s helped pull the fledgling Nasdaq exchange out of a similar trough. German Chancellor Gerhard Schroder wants to make it easier for shareholders to sue managers who make misleading statements, and there are indications the government is prepared to give regulators more resources to go after securities fraud. In March, the Deutsche Borse began requiring executives to report their own dealings in company shares.
The exchange is determined not to be the only institution taking the heat. It's putting pressure on investment banks to be more selective about clients. At least some say they've learned a lesson. Frankfurt's DG Bank led the league in Neuer Markt initial public offerings last year, with 19. This year's total: one. The bank says it is scrutinizing companies more closely, making sure they have real customers and sales, not just groovy business plans. And DG is taking a closer look at whether the chief financial officer knows what he or she is doing. "It doesn't hurt to have someone who is over 30," says Rolf M. Betz, DG's head of investment banking.
BIG CHANGES. Could the Neuer Markt fail? That's unlikely, at least right now. Germany is Europe's biggest economy and desperately needs a venue for risk capital. "The Neuer Markt is very important for the German economy," says Deutsche Borse management board member Volker Potthoff. And the Neuer Markt's $48 billion market capitalization dwarfs the $11.4 billion of its main continental competitor, Nasdaq Europe.
But the markets could look a lot different in a year, especially now that Deutsche Borse, Euronext, and the London Stock Exchange are themselves listed companies. This trend simplifies merger deals and increases the likelihood that the exchanges will consolidate. The Neuer Markt could be a tempting prize, provided that it cleans up its reputation and generates some excitement. If not, this once-hot exchange could end up as moribund as one of last year's dot-coms.
By Jack Ewing in Frankfurt, with Gail Edmondson in Rome, Kerry Capell in London, and bureau reports