Advent of high-tech cash cow

Date: 01/08/1996

By Tim Jones

A NEW European market is about to be born.

The name EASDAQ - the European Association of Securities Dealers Automated Quotation - may not trip off the tongue but, if all goes according to plan, it could be the answer to a major European problem.

Hardly a day goes by without a senior member of the European Commission or a contributor to one of the EU's endless reflection papers on competitiveness and employment lamenting the lack of seed capital for start-up high-technology companies.

While a specialised Europe-wide quoted market for small and medium-sized enterprises (SMEs) is still some distance away, the EASDAQ hopes to step into the breach and provide market capital for companies worth up to 25 million ecu once it gets up and running on 30 September.

Its model is the US-based National Association of Securities Dealers Automated Quotation (NASDAQ), a market with a long history of raising capital for smaller companies which would normally frighten off big investors because of the speculative nature of their business.

Indeed, the proper name for these shares - over-the-counter stock - says it all.

These kinds of shares were first sold across the counters of American banks more than a century ago and are now formally traded shares on the NASDAQ.

The market provides two-way trading facilities in company securities outside the normal stock market. Its electronic dealing system links market-makers across the US and trades 40,000 equities through 5,000 broker-dealers.

Although the risk can be reduced by the creation of an official market, it does not disappear altogether.

Indeed, when the US stock market collapsed two weeks ago as the fear of a rise in short-term interest rates took hold among investors, it was the NASDAQ which suffered the most.

Investors started getting cold feet over the recent huge gains in the smaller high-tech companies. While the Dow Jones industrial average has lost 7&percent; of its value since the high reached in December, the NASDAQ has lost 13&percent;.

Nevertheless, a European market for these firms was certainly needed.

Finding the capital necessary for high-tech companies in Europe is becoming easier, but still lacks the sophistication the US can bring to the task.

“Getting funds once you are up and running is possible, but going to a merchant bank simply with an idea for a new technology is likely to get you nowhere in Europe,” says Bob Cushing of US networking company 3Com Corporation.

Both Silicon Valley and Boston have venture capitalists which specialise in financing start-ups, while institutional investors are much happier to take a flyer and sink their carefully garnered cash into a risky enterprise.

Without this, small European companies are vulnerable to take-overs by US competitors with easier access to funds and trained employees cross the pond to work in the US.

To cope with this problem, several European firms, such as Madge Networks (see box below), have gone straight to the NASDAQ to raise capital - fuelling one of the major fears of European policy-makers.

Heinrich Von Moltke, the director-general for SMEs and tourism, recently sounded a warning as he welcomed the advent of the EASDAQ.

“NASDAQ listing inevitably leads to increasing Americanisation of companies which come under pressure to invest in the United States to become more visible there,” he said.

In fact, the EASDAQ and the NASDAQ should complement each other. The two markets have an agreement which will enable them to offer a dual trading facility for companies which want their shares listed on both.

Moreover, the US exchange is one of the new market's shareholders. The European Venture Capital Association, Guinness Mahon Holdings plc, Dutch bank ING and Crédit Lyonnais Capital Markets Ltd are among the other 42 participants.

It has taken time to get the market under way because it needed to raise capital itself and win regulatory clearance from the Belgian government since it will be based on rue des Colonies in Brussels.

But in April, the EASDAQ announced that it had raised enough capital, with total commitments from shareholders worth 5.3 million ecu and at the end of May, the Belgian government gave its blessing.

The final piece of the jigsaw was put in place on 15 July when the EASDAQ chose a chairman, Stanislas Yassukovich, the man credited with inventing the Eurobond market.

Yassukovich is a former deputy chairman of the London Stock Exchange, chairman of Merrill Lynch Europe and twice chairman of the International Securities Market Association.

Although the market operations base will be in Brussels, with a staff of up to 20 people, the computer operations will be run from London Docklands with the support of the International Securities Market Association.

At launch, the market will only list about ten companies and all of these will already be quoted on the NASDAQ.

“Any more than that and it might be unmanageable,” says Tony Preece, head of market operations at the EASDAQ.

The Canadian firm Dynamotive Technologies Corporation, which has developed a process for cleaning sheet metal, has already announced that it will be the first firm listed, although this was without the clearance of the EASDAQ itself.

“Our strategy is to launch with companies that are already established with a listing on the NASDAQ,” says Preece. “This is simply because the admission process will be easier and it will be less of a traumatic experience. A large proportion will be high-tech and biotech companies, but this has not been as large as we expected.”

Using the EASDAQ, investors will be able to buy and sell shares across borders without some of the regulatory hurdles involved in doing this in smaller national markets.

Chief Executive Officer Jacques Putzeys expects 20 firms already quoted on the NASDAQ to come over to the EASDAQ, and has hopes of winning over all 79 of the European companies on the US quotation.

The EASDAQ will start admitting non-listed firms within weeks of the launch and hopes to have up to 60 firms by the end of the first 12 months, growing at about the same rate after that.

The NASDAQ's success has been phenomenal, but it has also been around for quite a long time.

If the European market can emulate even a small part of its performance, the men and women present at its creation will be happy.