Commentary: London's Freewheeling Exchange

It's winning the listings war against New York, but investors can get burned

The London Stock Exchange is eating the New York Stock Exchange's lunch. So far this year, the LSE, along with its aim market geared toward smaller companies, has lured dozens of initial public offerings away from the NYSE and NASDAQ, long the most sought-after stock markets in the world. It's done that in part by offering companies easier terms for listing and maintaining their shares. Whereas companies listed in New York are subject to the rigors of the Sarbanes-Oxley Act and other relatively strict standards, the London exchange relies almost exclusively on disclosure.

But just because London's listings are soaring doesn't mean it's doing a better job of raising capital. All major stock markets have weak companies, but the new issues in London these days seem especially so. "This is the worst dreck I've ever seen," the renowned short-seller James Chanos of Kynikos Associates declared recently in a New York speech. Chanos, who has sounded alarms about U.S. companies such as Tyco, (TYC ) Conseco (CNO ), and Enron over a 25-year career, now maintains a London office and research staff to short-sell lse issues.

To be sure, dependable companies like BP, HSBC (HBC ) Holdings, and GlaxoSmithKline (GSK ) still dominate London, one of the oldest and most developed centers of capitalism in the world. But when half a dozen stocks of online gambling companies plummeted recently, London's easier standards were cast in an unflattering light. The biggest loss in stock value came from online casino operator PartyGaming, one of the lse's biggest offerings in five ears when it listed in June, 2005. Investors forked over $1.9 billion, all of which went to PartyGaming's founders instead of the company itself. (In U.S. deals, insiders take only about 15% of an initial public offering's proceeds, if any.) PartyGaming is owned mainly by an American couple who live in Gibraltar. Operating from computers in a Native American territory in Canada, the company was getting nearly 90% of its revenue from U.S. residents, where online gambling was and remains illegal.

PartyGaming noted as much in its prospectus. And it added that its directors "take an apparent unwillingness or inability" of authorities to enforce the law. That changed on Oct. 13, when the U.S. outlawed money transfers to offshore gambling sites, finally giving some teeth to its prohibition on Internet betting. Shares of PartyGaming and several other online casinos, all listed in London during the past two years, plunged. A PartyGaming spokesman says the original owners still hold 70% of the stock and have suffered, too.



Such companies couldn't go public in the U.S., says Jeffrey R. Houle, a lawyer at Greenberg Traurig. The Securities & Exchange Commission wouldn't have been satisfied with the risk disclosure in the prospectus. The threat of class actions would have been another obstacle.

Nevertheless, easier listing practices have helped London snag deals worth 58% of the value of ipos listed by the two financial centers this year, according to Dealogic. That's prompted the New York exchanges, Treasury Secretary Henry M. Paulson Jr., and others to push to make U.S. markets more appealing to companies selling stock--to make them a little more like London.

An LSE spokesman says the exchange is thriving because it uses disclosures to police new issues without complex and costly rules. And he says the risks of gambling stocks were fully disclosed.

But there are other signs that the bloom is off lse IPOs. Of new issues over $100 million this year, LSE-listed stocks are up only 11%, vs. 20% for NYSE stocks, a reversal of 2005 results, according to Dealogic. The share prices of NASDAQ issues of at least $100 million beat those on London's AIM, rising 5.5%, vs. a 0.5% drop this year, and 35.2% vs. 12.3% in 2005. Lots of reasons could account for the differences. One could be that investors are wary of getting burned. Buyers of PartyGaming share offerings are now out about $1.6 billion. Sometimes markets are like casinos--and sometimes they're worse.

By David Henry

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