Taking Their Business Elsewhere

Foreign companies are spurning U.S. exchanges. Regulation isn't the only reason

If the state-owned Russian giant OAO Rosneft Oil Co. had been going public a decade ago, it would have jumped through hoops to list its shares on a U.S. stock exchange. Back then a U.S. listing was viewed as a rite of passage for up-and-coming global companies, offering not only direct access to the world's largest capital market but also a certain cachet.

This is 2006, though, and Rosneft plans to list its shares on the London Stock Exchange. Its initial public offering, which could happen as soon as July, is expected to raise up to $10 billion, one of the biggest takes ever. Rosneft isn't alone. Companies are increasingly forsaking the U.S. for friendlier overseas environs.

The New York Stock Exchange (NYX ) and NASDAQ pin much of the blame on the Sarbanes-Oxley Act (SarbOx), the controversial 2002 corporate governance rules, for their recent woes in attracting new listings. But there's another potent threat to their businesses they don't talk much about: the rise of stronger, more competitive markets overseas that are quickly becoming major capital hubs. SarbOx isn't helping, but the forces driving the shift overseas have been gathering for years. Indeed, they're a key reason why NASDAQ is maneuvering to buy the LSE and why the NYSE, too, wants to acquire a European exchange.

The numbers show just how dramatic the move has been. Of the top 25 global IPOs in 2005, only one took place in the U.S.; back in 2000, 9 of the top 10 were listed on American soil. Equally telling, between 1996 and 2001 the NYSE averaged 50 non-U.S. listings annually; in 2005, it gained just eight. Meanwhile, the London Stock Exchange drew 139 new foreign companies in 2005.

There's more at stake than global bragging rights. If U.S. exchanges can't attract new overseas listings, they'll lose out on the trading that follows -- their lifeblood. They warn that if more trading moves overseas, jobs and economic growth will go, too.


The exchanges say the expense and difficulty of dealing with SarbOx could transform the U.S. from one of the most attractive markets in the world to one of the least. But beyond SarbOx lies a troubling trend that's far less easily remedied -- companies simply don't need to list in New York anymore. Globalization and electronic trading have made U.S. investors mobile as never before. While some argue that the higher governance standards in the U.S. boost investor confidence, lead to higher valuations, and could prevent fraud, many companies no longer want to put up with the regulatory nuisances given the availability of money abroad. "U.S. exchanges are losing their primacy in the world," says Doug Atkin, CEO of Majestic Research Corp. "It's a natural evolution as capital markets expand overseas."

Europe's three main exchanges -- the London Stock Exchange, the Deutsche Börse, and Euronext, which runs the Paris, Amsterdam, and Brussels exchanges -- are ready for the business. They spent years investing in technology and modernizing their back office and regulatory structures. Now they're reaping the rewards: bigger, more liquid and more sought-after capital markets. Much the same is true in Hong Kong, where a flood of foreign money has boosted the capital available locally. That's a key reason why Hong Kong's exchange was able to pull off last October's $9.23 billion offering for China Construction Bank, the world's largest IPO in five years. It would have been unthinkable a decade ago.

London has been especially aggressive in wooing big Russian companies, which raised some $4.8 billion on the LSE last year. Gergely Voros, a managing director of Morgan Stanley (MS ) in London, points out that a whole community of traders and analysts has sprung up who are more sophisticated about Russian stocks. "It's a self-reinforcing process whereby most of the trading that isn't in Moscow is in London," he says.

London is attracting wee companies, too. Its fast-growing Alternative Investment Market (AIM) is rapidly becoming the location of choice for startups from Europe, Israel, and across the globe. AIM has even attracted 35 U.S. companies, including 19 last year. Here, too, London's traders are sometimes more astute, says Thomas H. Stoner, CEO of Econergy International Corp., a Boulder (Colo.) developer of clean energy projects that raised $107 million in February. Londoners "have more experience investing in the technologies we're involved in," he says.

Charlotte Croswell, who oversees NASDAQ's international efforts, dismisses AIM as a direct rival. AIM's companies are far smaller, she says, and many aren't yet ready to meet NASDAQ's higher listing standards. But if AIM picks off startups at an earlier stage and provides ready access to capital, they may see little reason to turn to NASDAQ as they mature.


It's not only new listings that are going overseas. The NYSE has seen a sharp drop in listings of big European blue chips as well. In the '90s companies flocked to the NYSE in hopes of attracting a broader investor base, only to find that most trading remained in their home markets. Now, some are reconsidering.

Foreign bourses have become so attractive to corporate chiefs that the NASDAQ and the NYSE, eager to compete, are trying to buy them. Since mid-April, NASDAQ has acquired a 24.1% stake in the LSE, and will likely take it higher. The NYSE has held talks with both the LSE and Euronext -- which is itself in merger negotiations with the Deutsche Börse. For the NYSE or NASDAQ, a successful deal would go a long way toward reversing the impact of foreign companies shunning the U.S. -- and, ultimately, could do more to bolster their global competitiveness than any tweaking of SarbOx. Says Jamie Selway, managing director of institutional broker White Cap Trading: "If you can't beat 'em, buy 'em."

Corrections and Clarifications In "Taking their business elsewhere" (News: Analysis & Commentary, May 22), the numbers of new non-U.S. listings in 2005 for the New York Stock Exchange and the London Stock Exchange were misstated. The totals should have been 19, not 8, for the NYSE, and 139, not 93, for the LSE.

By Jane Sasseen and Joseph Weber, with Kerry Capell in London, Jason Bush in Moscow, and Frederik Balfour in Hong Kong

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