Growing pains for new exchanges

Date: 10/04/1997

By Chris Johnstone

LIKE banks and brothels during a gold rush, stock markets offering small, fast-growing firms a pan-European listing have appeared from nowhere over the last year.

Two starkly different models are now courting companies looking for a European route to quick investment cash in a scenario which has raised hopes that Europe is belatedly following the US and recognising the need for financial markets to fuel small firm growth.

The progress of Brussels-based EASDAQ, the European Association of Securities Dealers Automated Quotation, and Euro NM, a new loose partnership between Paris, Amsterdam, Brussels and Frankfurt stock exchanges with newly created small company markets, is being closely followed by the European Commission.

Officials say there is enough room for the two institutions to coexist and offer stock market listing for thousands of potential European companies seeking cash to expand.

However, EASDAQ and Euro NM have undergone growing pains which have cast doubt on the optimism of some of the early promises.

In spite of that, the new 'small is beautiful' exchanges are not likely to disappear in the same way as some of their national 'small cap' forerunners were wiped out by the 1987 stock market crash.

Observers say tighter rules on the transparency of trading have dispelled some of the suspicions which resulted in these earlier attempts being shunned because they did not get the right mix of appropriate regulation and low cost.

“EASDAQ has had a slow start, but it took 15 years for NASDAQ [its US equivalent] to take off,” said one.

The Commission Directorate-General for enterprise policy, distributive trades, tourism and cooperatives (DGXXIII) helped pave the way for the creation of EASDAQ to fill a gap where small innovative companies had nowhere to go after being turned down or turned off by banks or venture capital investors.

But it is neutral in the competition between the new players. “We are very happy that more exchanges are springing up. It is the more the merrier as far as we are concerned,” said one official.

Nonetheless, a long-delayed communication from DGXXIII, now due out at the end of this month, is expected to highlight the obstacles still hindering the successful operation of EASDAQ and the other new markets.

Part of the problem stems from different national accounting rules and measures which still force pension funds to invest in local currencies or markets. These are issues which Europe's single market has yet to address.

Another problem for small businesses is the fear of stock market listing, trepidation about loss of independence and the ongoing obligations that listing brings.

A rough guide to listing for small businesses could be one of the outcomes from the communication.

Four months on from the first transactions, EASDAQ bosses have cut their estimates for the number of companies listed from early forecasts of around 50 to between 30 and 35 by the end of this year.

“The start of EASDAQ has certainly not been as spectacular as planned and the number of listed companies is below expectations,” admitted chief executive Jacques Putzeys in a recent interview.

Strict entry requirements for company listing, with bosses quizzed on their strategy and management and no business admitted which is capitalised at less than 85 million ecu, mean that some candidates have been turned away, said EASDAQ's Tony Preece.

The French Nouveau Marché, the main pillar of the looser Euro NM network, has 23 businesses listed - compared with just eight for EASDAQ.

However, the performance of its listed companies has been mixed to say the least. Six of them have dropped below their initial offer price, four remain little changed, with the remaining 13 posting varied gains against the backdrop of a world-wide surge in share prices.

Share prices have lurched with some listings showing gains of 300&percent; and others losses of almost 70&percent; against their offer price.

Five of EASDAQ's companies have posted gains since listing, the most spectacular being a 27.2&percent; rise by computer anti-virus company Dr Solomon's Group, with one unchanged and two recording losses.

Share movements generally have been less spectacular than on the Paris rival.

The key test for any market is liquidity - the amount of trading that takes place. High liquidity promises investors and traders optimum conditions to get the best price for their shares and boost earnings.

EASDAQ has averaged volumes of about 1.28 million ecu a day, while the head of the Paris bourse recently spoke of a daily volume of about 4.6 million ecu on its new market.

The figures compare with an average daily volume last year of around 55 million ecu on the Bel-20, Belgium's market for its main blue-chip stocks - a relatively small player in the European league.

Both EASDAQ and Euro NM are promising better volume figures to come as more firms are listed, with EASDAQ's Putzeys claiming around ten new companies should be listed in May and June.

The involvement of a series of new US market makers is also likely to boost market liquidity and add to the three companies already listed on both EASDAQ and NASDAQ.

Euro NM forecasts 500 firms listed within five years as its network develops. A new Belgian market for small companies should be launched this month and will join its Dutch, German and French counterparts in Euro NM. The markets are connected electronically so that transactions can be carried out between them.

Euro NM can be more attractive to firms than EASDAQ because national requirements are used by the former when assessing membership requests whereas the latter has US-style requirements modelled on NASDAQ, said a spokeswoman for the Brussels bourse.

“There is a lot of demand out there for this type of exchange. One Belgian company is already listed on the French new market because it could not wait and two companies are listed on NASDAQ,” she added. The new Belgian market expects between five and ten listings by the end of the year. Candidates for this market should have own funds of at least 1.5 million ecu.

Such widely differing cash requirements lend some credence to EASDAQ's argument that it is after bigger companies and is in a different ball game to Euro NM.

But whoever triumphs in the numbers game, small business still looks like being the eventual winner.