NZX must break the IPO drought
Exchange needs to spend money to encourage more Kiwi firms to offer shares
The large number of highprofile Wall Street initial public offers (IPOs) raises the well-worn question: why hasn’t the NZX had an IPO since May 2017 when Oceania Healthcare listed?
By contrast, the ASX has had 163 IPOs since Oceania Healthcare joined the NZX nearly two years ago.
The obvious answer is that we don’t have IPOs because we aren’t producing exciting global companies in the manner of Lyft, Pinterest and Uber.
However, the latest Wall Street IPOs have several interesting characteristics, particularly the competition between the New York Stock Exchange (NYSE) and Nasdaq to attract new listings.
As part of this contest the two New York exchanges use pitchbooks, incentives and high-powered marketing to entice companies to list on their platforms.
By contrast, the NZX has traditionally had a low-profile approach towards new listings as it has relied on brokers and investment bankers to promote its platform. Former NZX chief executive Mark Weldon adopted a more aggressive internal marketing approach but the domestic bourse seems to have slipped back into its more traditional passive style.
This is in total contrast to what is happening on Wall Street at present.
The Wall Street Journal recently reported: “When BJ’s Wholesale Club Holdings was planning its IPO last year, a team from Nasdaq Inc. descended on its headquarters in Westborough, Massachusetts, to try to persuade it to list on the exchange.
“In a conference room
overlooking the freeway, Nasdaq’s representatives pulled out a pitchbook thick with incentives, including a Black Friday holiday advertising spread in Times Square and a general manager gala.
“That same day, the New York Stock Exchange arrived to present its own pitch to the warehouse club operator. It offered, among other goodies, ads at minor league baseball games and a lavish party with commemorative gold engraved badges for some employees”.
BJ’s must have been attracted by the baseball ads and gold badges because it listed on the NYSE in mid2018 after issuing shares to the public at US$17 each.
The company’s latest share price is $27.85, representing a sharemarket value of US$3.7 billion.
The bold message at the top of the NYSE’s website is “Why Companies pick the New York Stock Exchange”. Underneath is the commentary “An Insider’s View of Why Companies Pick the New York Stock Exchange” by NYSE president Stacey Cunningham.
Cunningham writes: “IPOs once again have become a red-hot topic, generating enormous discussion and speculation about which deals are coming, where they will list, and why they choose their listing exchange. I’d like to share an insider’s view of why companies choose the New York Stock Exchange.”
She goes on to promote many positive NYSE features, including: The NYSE works hard to provide the IPO experience and ongoing support required by each company, whether large or small;
The unrivalled visibility and marketing benefits of listing on the NYSE;
The services and advocacy provided to support life as a public company;
The NYSE spends a great deal of time managing and expanding its relationship with the Government in Washington and speaks up for its listed companies.
Cunningham highlights the listing of Levi Strauss & Co on March 21, when the NYSE suspended its traditional trading floor dress code and “the world saw a sea of denim” on their TV screens.
Nasdaq also highlights the merits of listing on its platform although in a less aggressive way than the NYSE. It opens with the assertion: “Nasdaq is a trusted market leader and has built a financial community of worldrenowned industry innovators and visionaries — Apple, Facebook, Amazon, Amgen, eBay and Google”.
Its website has a Listing Centre, which has a comprehensive list of information to assist companies looking to list. It doesn’t have the hard-sell approach of the NYSE, but its website contains a huge amount of information on IPOs and new listings.
The NZX’s website highlights a video by NZ King Salmon CEO Grant Rosehorne, explaining how its NZX listing has helped fuel his company’s ambitions. The domestic bourse’s website also has a reasonably large section on listings, but it doesn’t contain any great success stories.
It misses the opportunity to highlight the listing success of Mainfreight, Ryman Healthcare, Port of Tauranga, Auckland International Airport, Infratil, Trustpower and many more companies.
The NZX is losing out to the ASX, which has adopted the aggressive marketing approach embraced by the NYSE and Nasdaq. Consequently, the NZ exchange has lost to the ASX on several IPOs, including Straker Translations and Volpara Health Technologies.
Straker Translations, the Auckland cloud-based language translation company, listed on the ASX in October last year following the issue of shares to the public at A$1.51 each. Sydney-based Bell Potter was Straker Translations’ IPO lead manager.
The company’s share price was A$1.40 in mid-week, giving it a sharemarket value of A$73.6m ($78m). This would rank it around 85th by value on the NZX, close to Rakon’s market value.
Volpara Health Technologies, the Wellington-based breast cancer screening company, listed on the ASX in April 2016 following the issue of shares to the public at A$0.50 each. Brisbane-based Morgans was Volpara Health’s IPO lead manager.
The company’s share price is now A$1.84, giving it a sharemarket value of A$331.8m ($353m). This would place it around 54th in terms of value on the NZX, ironically just behind NZ King Salmon.
The ASX’s aggressive approach has been successful as it had 94 IPOs in 2018 and 163 IPOs since the NZX’s last IPO in May 2017.
This column believes there are many companies that could list on the NZX, but our market structure is flawed, with too few small brokers and investment bankers. The NZ market is dominated by three brokers while there are far more brokers and investment bankers in Australia.
New Zealand has only eight brokers, with First NZ, Craigs and Forsyth Barr having a combined 78.2 per cent market share. This is even more concentrated than the domestic banking sector.
This has a negative impact on NZX new listing activity because markets need small and mid-sized brokers and investment bankers to bring smaller
companies to the market.
For example, Australia has more than 70 broking firms, with UBS at the top with a 14.2 per cent market share. The three largest ASX brokers have a
31.9 per cent market share compared with 78.2 per cent for the three largest NZX brokers.
UBS won’t lead manage a $100m IPO in Australia because this is too small for it and none of the smaller brokers will be given the opportunity to lead manage a $2b-plus IPO.
Markets need big and small brokers to represent big and small companies respectively.
Bell Potter, Straker Translations’ IPO lead manager, is the 22nd largest ASX broker by market share, while Morgans, Volpara Health’s IPO lead manager, is the 19th largest.
The NZX doesn’t have 19th and
22nd ranked brokers that can bring smaller companies to the market and provide supportive research reports once these companies list.
The NZX is caught in no man’s land because activist shareholders want it to reduce costs while the exchange needs to take a more aggressive marketing approach towards new listing. That will require resources and capital with no immediate material payback.
If the NZX can establish and purchase fund management businesses, why can’t it establish and fund small brokers and investment banks with the primary objective of bringing companies to the market and supporting them for a sustained period after listing?
The exchange could sell its fund management businesses to finance these IPO initiatives.
The simple issue is that the NZX can’t stand still any longer; it must solve its prolonged and massive IPO drought.
Brian Gaynor is a director of Milford
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Asset Management which owns shares in Straker Translations on behalf of clients.