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Roula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.
Craig Coben is a former global head of equity capital markets at Bank of America and now a managing director at Seda Experts.
In the early 19th century, Italian physicist Giovanni Aldini gained public recognition by attempting to revive human and animal corpses using electrical stimulation. He used a battery to induce convulsions that gave the impression of a reanimated living being. The resurrection never happened, of course, but that didn’t stop audiences from flocking to Aldini’s demonstrations.
The spirit of Aldini lives on in the European equity capital markets. A lifeless IPO market is regularly revived, only with the troubling realization that – apart from world-class companies of size and profile – it is still largely broken. Aldini is no Houdini.
Earlier this month, software company Planisware launched what is believed to be France’s biggest IPO in two years. “Planisware is reviving the flagging French IPO market,” was the headline in the trade magazine Global Capital.
The planned €300 million bid included a cornerstone contract from a unit of France’s government-backed CDC. The market response to the company and the proposed valuation appeared to be positive. The underwriters told the market early on that the risk was covered!
Unfortunately, the IPO never really came to life, even if it twitched and convulsed.
The withdrawal of the Planisware float follows the postponement of the Frankfurt IPO of military armored transmission manufacturer Renk Group last week. Again, the company impressed investors and the proposed valuation was at a discount to its peers. Once again the underwriters announced that the offer was oversubscribed. But investors know to treat this news with suspicion, and there wasn’t enough real demand to allocate the shares on offer responsibly.
German sandal maker Birkenstock priced its $1.5 billion IPO in New York high on Tuesday. Things went badly on the first day, but at least it got done.
The lack of IPOs in London has sparked a wave of self-flagellation in the city that even Benedictine monks in the Middle Ages might have found overly masochistic. It has triggered reports, recommendations and reforms; They may take some time to take effect, but it at least shows a sense of urgency, if not panic.
Two disrupted Eurozone IPOs in a week show Britain is not alone. Global stock markets were parched by a two-year IPO drought, and European bourses looked particularly dehydrated. Volumes have plummeted to a 13-year low. Even when deals fluctuate across the finish line, after-market performance mostly ranged from disappointing to poor.
In fact, the Continental exchanges suffer from some of the same problems as the London exchanges, including poor liquidity, small domestic investor pools and the near absence of retail investors. The IPO of a blue-chip asset like German firm Schott Pharma can appeal to a global audience, but investors generally shy away from solid European midcap floats, even if the price is high.
It shouldn’t have been like that. Starting in the 1990s, Western European governments revitalized their sleepy stock markets by listing their looted assets in banking, energy, transportation, telecommunications and other sectors. And the introduction of the euro in 1999 increased global investor interest in these crown jewels. Domestic institutions typically placed large orders in these IPOs, while retail investors also flocked, lured by discounts and bonus shares. While the UK had its simple “Sid” supporting the privatizations of the 1980s, the rest of Europe had the swashbuckling El Cid a decade later.
Unfortunately, Europeans are learning what the UK has learned: that huge privatizations can get the ball rolling, but reforms – in pensions, taxation and regulation – are needed to maintain momentum and develop a culture of justice. Solvency II also prevents insurers from holding shares. And with its hodgepodge of stock exchanges and national pension and insurance capital pools, Europe does not come close to an integrated capital markets union. It is fragmented and disjointed.
The importance of Brexit as a political-economic phenomenon has arguably obscured the fact that, despite the many differences in market structure between the UK and the continent, there are many common challenges.
The declining importance of their respective stock markets has broadly similar causes, such as a lack of size, insufficient liquidity diversification and insufficient capital pools for stocks. The UK and other European countries must halt the decline or see equity raising move to the US – and with it an entire ecosystem of service providers and expertise over their jobs and capital.
In 1094, El Cid won the epic Battle of Valencia by uniting Christian and Muslim soldiers. Ideally, Britain and the EU would also unite around a common cause and pose their own challenge to the Americans. I’m just spitballing here, but one idea might be to form some sort of union.
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