Graham Bowley, Reporter, The New York Times, New York, New York, U.S.A.
Reva Medical, a maker of medical devices in San Diego, wanted to go public last year to raise money to satisfy impatient venture capitalists and finance research for its heart stents.
But it found little investor interest in the United States for an
early-stage medical device company that had not yet made a profit.
Reva Medical did what a small but increasing number of young
American companies are doing — it looked abroad for money, in Reva’s case the
Australian Stock Exchange.
After an eight-month road show, meeting investors and pitching the
prospects of a biodegradable stent, the 12-year-old company sold 25% of its
stock for $85 million in an initial public offering in December.
“There are so many companies that require capital like our
company, and they don’t have access to the capital markets in the United
States,” said Robert Stockman, Reva’s chief executive. “People are looking at any option to stay
alive, which is what we did.”
Reva’s example shows that nearly three years since the financial
crisis began, markets in the United States are barely open to many companies,
leading them to turn to investors abroad. Denied a chance to list their stock and go
public here, they are finding ready buyers of their shares on foreign markets.
Nearly one in 10 American companies that went public last year did
so outside the United States. Besides
Australia, they turned to stock markets in Britain, Taiwan, South Korea and
Canada, according to data from the consulting firm Grant Thornton and Dealogic.
The 10 companies that went public abroad in 2010 — and 75 from
2000 to 2009 — compares with only two United States companies choosing foreign
exchanges from 1991 to 1999.
The trend reflects a decidedly global outlook toward stocks, just
as the number of public companies in the United States is shrinking.
From a peak of more than 8,800 American companies at the end of
1997, that number fell to about 5,100 by the end of 2009, a 40% decline,
according to the World Federation of Exchanges.
The drop comes as some companies have merged, or gone out of
business, or been taken private by private equity firms. Other young businesses have chosen to sell
themselves to bigger companies rather than go public.
To be sure, as the economy improves and investors shaken badly by
the financial crisis begin to regain their confidence, American stock markets
may once again open up for companies trying to go public and listings may rise
in the United States.
LinkedIn, the social networking site for business professionals,
had a successful initial public offering last month on the New York Stock
Exchange, and Groupon, the social buying site, has registered its plans to go
public in the United States.
But these are big companies, enjoying the popularity of being
Internet darlings. Executives and analysts
fear that a long-term structural shift in American equity markets means these
markets are now closed to legions of smaller, more ordinary businesses. They could more easily have gone public in the
United States in the past. But they now
remain private or, for the time being, have to market themselves overseas and
rely on foreign investors.
For example, initial public offerings by American companies
totaled only 119 in the United States last year, according to Dealogic — higher
than the depressed rates of the previous two years but a far cry from the 756
companies that went public at the peak in 1996.
As young, fast-growing companies are forced to look overseas for
public status and investors, executives and analysts fear that they may
increasingly shift their geographic focus — and as a result any jobs they
create will be abroad.
“Issuers have to put themselves through a grinder to go overseas,
so any significant percentage of overseas listings is a sign that our markets
have become hostile to innovation and job formation,” said David Weild, a former
vice chairman of the NASDAQ stock exchange and a senior adviser to Grant
Thornton.
A variety of factors explain each company’s decision to list on a
foreign exchange, like the increased regulatory costs of going public in the
United States. Underwriting, legal and
other costs are typically lower in foreign markets, companies say.
The Alternative Investment Market, or AIM, a part of the London
Stock Exchange intended for small company listings, is a popular destination
for some American companies. The cost of
an initial public offering on the London Stock Exchange's AIM is about 10 – 12% of total capital raised,
compared with 13 – 15% on NASDAQ, according to Mark McGowan of AIM Advisers,
which helps U.S. companies list on London's AIM.
In addition, the extra annual cost of maintaining a public
listing, including complying with Sarbanes-Oxley rules, can be typically much
higher in the United States: $2 million to $3 million each year depending on
the size of a company compared with a cost as low as $320,000 on London's AIM or
$100,000 to $300,000 in a market like Taiwan, according to advisers.
There are concerns that some foreign exchanges attract companies
because their oversight may be less stringent. But companies insist standards are high.
A more important factor than cost, said Sanjay Subhedar, managing
director of Storm Ventures, a California venture capital firm, is that
investors in the United States who traditionally participate in I.P.O.’s and
the banks that underwrite the offerings are no longer interested in share sales
by small companies.
Institutional investors like mutual funds want the liquidity of
larger offerings with abundant buyers and sellers, he said; bank underwriters
want to focus on the more lucrative fees that bigger deals generate.
One of the companies he invests in, Integrated Memory Logic (IML),
of Campbell, Calif., last year became one of the first non-Taiwanese companies
to list on the Taiwan Stock Exchange. A
supplier of semiconductor chips for LCD screens, it raised $40 million with a
10% sale of the company after the exchange changed its rules to allow foreign
companies to join.
Integrated Memory Logic, which had a work force of 60 when it went
public, has since added a handful of engineers in the United States but also
another 40 employees in Shanghai, Taipei and Seoul, South Korea.
“Because of the nature of the industry, large mutual fund companies
and investment banks don’t want to do an offering of less than $100 million,”
said Mr. Subhedar. “This means unless
the company has a market size of $500 million, you can’t really go public in
the United States. We were in the $250
million to $350 million range.”
Another reason to go abroad, some American businesses like
HaloSource of Seattle are discovering, is that investors in the United States
may not be as interested as foreign investors in companies whose growth potential
is strongest overseas.
HaloSource makes water purification devices for use in American
pools and spas but also for drinking water in countries like India, China and
Brazil. Last year, it had an $80 million
IPO on London's AIM. One
reason it chose London AIM, according to James Thompson, chief financial officer,
was that London AIM investors were more sympathetic to growth opportunities in
emerging markets. ”Though London's AIM is a
smaller capital market than New York, London's AIM is much more globally focused.”
For some London AIM-listed companies like HaloSource, the move to a foreign exchange
may make longer term strategic sense as their growth shifts away from America
to markets like China and India. Integrated
Memory Logic’s biggest suppliers of the wafers for its semiconductor chips and
its biggest customers are in Asia — so a listing in Taiwan raises its profile
in a region that is already home to most of its corporate partners.
Another company, Samsonite, the luggage company that was founded
in Denver in 1910 but shifted its corporate location to Luxembourg in 2009, now
sees most of its growth coming from Asia. It plans a $1.5 billion offering in Hong Kong
next week.
The attraction of an Asian listing will be underlined further this
month when Prada, the Italian fashion house, lists its shares in an offering
that could generate $2.5 billion, also in Hong Kong.
But while some companies see their foreign I.P.O. as a long-term
move, others see it as an interim step, one that after further expansion could
lead them to seek investor interest back home and a dual listing in the United
States.
One reason Reva Medical chose Australia was that country’s system
of research hospitals that it intends to use for its clinical trials.
Mr. Stockman, the chief executive, also sits on the board of
another company, HeartWare International, based in Massachusetts and Florida,
that carried out an Australian I.P.O. in 2005, and then listed on NASDAQ in the
United States in 2008.
In its Australian I.P.O., Reva sold stock to investors from
Britain, Australia and Hong Kong, as well as America.
Mr. Stockman said two Wall Street investment banks told him there
was no interest in an offering of the company in the United States. Instead, he found an underwriter, Inteq, in
Australia. In the end, the cost of the
Australian listing was $7 million, roughly what it would have cost Reva to list
in the United States, he said.
One of the biggest costs was travel time and flights. He concedes that he would have preferred to
list in the United States in the first place — after all the traveling back and
forth to Australia, and the long road show in Asia, the United States and
Europe.
“All things being equal, it would have been easier,” he said. “It is a long way.”
