What’s the must-have accessory in global finance right now? Easy. A listing in the Far East.
Manchester United has just announced that the upcoming float of the football club will not be in London, or indeed anywhere in Europe, but several thousand miles away in Singapore. It is one of a growing number of companies staging their IPOs a long way from their home market. In the last few months, the Italian luxury goods manufacturer Prada listed in Hong Kong. So did the American luggage manufacturer Samsonite. The Italian motorbike maker Ducati has said it will join them.
True, we live in a far more globalised economy every day. Capital is more mobile than it has ever been before. There is no reason why companies shouldn’t go where the money is. Even so, there is something very odd about a company choosing to list on a small, distant exchange when there is a big one close by. In truth, investors should be wary.
A long time ago Man United could have listed in Manchester itself (not that football clubs did list until recently). The London Stock Exchange used to run regional bourses in both Liverpool and Manchester for the city’s brokers and companies. The days when capital markets were that local might be long gone. Still, it is noticeable how international the market has become. Companies now list just about anywhere, regardless of where they come from.
London, of course, has been one of the big beneficiaries of that. Around 600 foreign companies are listed in London. Some of the biggest names on the FTSE – companies such as Xstrata or Eurasian Natural Resources, or indeed this year’s biggest IPO Glencore – only have the most tenuous of connections with the UK. They list in London because it is one of the biggest exchanges in the world, one of the most liquid, one of the better regulated, and because London has an endless supply of the skilled bankers and lawyers and the other advisers needed to create a functioning market in a company’s equity.
It isn’t that hard to understand why companies from emerging markets should come to London, or indeed to New York, for their IPO. Both offer them a range of skills they can’t find in their home market. And they get access to a far wider range of investors. What is less easy to understand is why companies are going in the other direction.
Manchester United could have easily listed in London. Prada could have perfectly well listed in Milan, and so could Ducati. Likewise, Samsonite could have staged its IPO in New York. There are four big problems with the trend towards listing a long way from where the business actually comes from.
Firstly, the people investing in the shares won’t know the business that well. Manchester United argues that it has a lot of fans in the Far East, and they are likely to buy the shares. Prada makes the point that the Far East is its fastest-growing market. Both are valid points. But the fact remains that Man Utd has more fans in Manchester than it does in Singapore, and the smart handbag business is better understood in Milan than Hong Kong. An IPO should not just be about selling shares quickly. It is also about building a long-term investor base that will support you in good times and bad – and that is easier to do closer to home.
Next, the valuation will almost certainly be excessive. That is why they are going there – the bankers think they can spin a better price in some distant market than they can at home. Of course, a firm is entitled to get the best price. But it is usually a mistake to be too greedy. An over-valued IPO can dog a company for years. Every article will point out how it has lost money for its backers. The smell of failure will surround it even if the company is otherwise doing quite well. It is far better in the medium-term to go for a more modest price, and then see the shares appreciate.
Thirdly, management is going to have to spend most of its time in planes rather than managing the firm. A company needs to have a relationship with its shareholders. It has to keep them informed about the state of the business. Occasionally, it will have to meet with them. It is hard to imagine that it is really very productive for the most senior executives in the business to spend half their lives sitting in airplanes.
Lastly, there must be a suspicion that companies are trying to avoid the hard questions. It is would be unfair to characterise Hong Kong or Singapore as easy-touches. Regulation in London and New York has been pretty rubbish at times. Still, it is hard not to imagine that companies hope regulation in lower profile markes will be lighter and analysts will ask fewer challenging questions.
For all those reasons, investors should be wary of any company that decides to ignore a perfectly adequate local bourse and list a few thousand miles away. Indeed, if United didn’t want to list in London maybe someone could re-open the old Manchester Stock Exchange building for the local team’s IPO. And given that it is now an Italian restaurant, they could list Prada’s shares there as well.