In recent years, Europe has made great strides towards achieving a genuine single capital market. A harmonised legislative framework has been developed, and market consolidation is ongoing.
In this regard, the merger of NYSE and Euronext and the resumption of talks between the London Stock Exchange and Deutsche Börse are noteworthy. Thus, it appears that both the legislative framework and the necessary macro-economic conditions are finally in place.
Nevertheless, in 2014, Materialise (€87 million) became the first Belgian company in 14 years to be listed on NASDAQ. Many others followed suit, including Galapagos (over €200 million) and Celyad (€88 million), to name but two. Indeed, more and more companies from the Benelux and, by extension, Europe, often in the IT and biotech sectors, are opting for a NASDAQ listing, and a number of other issuers are eager to cross the pond this year.
Despite all of Europe's efforts, the pull of NASDAQ appears stronger than ever, like a siren song which listeners are unable to resist. However, all of this has little to do with mythology, and there are obvious reasons why NASDAQ will continue to win the battle going forward.
- Money, money, money
In the words of Abba, "all the things I could do, if I had a little money". Innovative growth companies have a high cash burn rate and, consequently, continuously need funds to finance their further development and implement their business plan.
And if there's one place where large amounts of capital are available, it's the US. Together with the New York Stock Exchange, NASDAQ is one of the world's largest sources of capital. Consequently, larger amounts can be raised in the US than in Europe. Obviously, however, this is only possible when the issuer has the right equity story and its management team inspires trust.
"NASDAQ is simply the place for us to be", according to Celyad CEO Christian Homsy. "There are more investors with deep pockets in the US."
- High-risk investors
There is a very good reason why biotech companies in particular choose NASDAQ: institutional investors in the US are less inhibited when it comes to investing in innovative growth businesses. American investors have unparalleled interest in high-risk businesses developing medicines. Hence, this is where the greatest potential for growth can be found.
When the share price of Belgo-Dutch company Galapagos shot up 20% on its first NASDAQ trading day thanks to a promising rheumatism drug, CEO Onno van de Stolpe was both euphoric and realistic: "Obviously some [research] programmes will not be successful. That will not be pleasant. Neither for us nor for the shareholders. But that's the way medical research works."
More so than their European counterparts, American investors are prepared to back innovative technologies and life science companies. Moreover, they tend to invest larger amounts. Setting aside the recent difficulties experienced by stock exchanges worldwide, the NASDAQ biotech index has doubled in value over the past two years. All of this has had a positive effect on the valuation of companies in US IPOs (initial public offerings), SPOs (secondary public offerings) and private placements.
The result of this success is that the appetite of American investors for innovative companies continues to grow.
- Investor confidence
American investors may be prepared to take risks but they can rely, to a certain extent, on the efficient functioning of NASDAQ. Indeed, the shares listed on NASDAQ tend to be more liquid than those traded on most continental European markets.
This contributes to correct pricing at all times, which in turn has a positive effect on post-IPO investor confidence and allows reference or initial shareholders to cash in some of their shares without causing strong fluctuations in the share price.
- Reputational advantage
Due to the concentration of IT and life sciences companies on NASDAQ, its analysts and market makers are extremely specialised, which makes it easier to achieve sufficient visibility when it comes to new research developments. "I didn't need to explain to potential investors what Duchenne muscular dystrophy was", is how Luc Dochez, who with Prosensa is developing a drug to treat this rare disease, sums up the situation.
Ever since its creation, NASDAQ has been characterised by a high percentage of tech companies. This is due, in part, to the fact that when NASDAQ was founded in 1971, it opted for a fully electronic trading platform. This progressive image attracted tech companies from Silicon Valley and, in their wake, innovative companies from the life sciences, media, retail and other industrial sectors. By now, everyone knows Apple, Microsoft, Intel, etc. These companies and others made NASDAQ hipper than any other stock exchange.
Moreover, since the abovementioned companies also pay dividends, it's no longer solely a growth market but also a more mature "growth with yield" market. For many issuers, the reputational advantage of this type of market is sufficient to justify a NASDAQ listing. It can indeed serve as a key to gain access to the US (consumer) market and can only be beneficial for the company's relationship with its suppliers and employees.
In some cases, a NASDAQ listing makes it easier to obtain a credit rating and gain access to US commercial paper.
- US stock as a means of payment
In addition to a direct listing of shares on NASDAQ, a European company can opt for a dual listing, meaning its shares are still listed in Europe while American Depository Shares (ADS) are listed on NASDAQ. ADS are not shares; rather they represent beneficial ownership of the issuer's shares listed on an EU market.
In both cases, direct listing or indirect listing via ADS, the NASDAQ-listed instruments are freely transferable between American investors. It's also easy to use them as a means of payment in takeovers of other companies in the US (so the issuer can avoid having to pay cash) and in stock option programmes for the issuer's American management and personnel.
In conclusion, there are many reasons why successful European companies are eying NASDAQ. Of course there are also quite a few obstacles. Preparing an IPO in the US is a costly and lengthy process: a minimum of three months and, in practice, often up to a year. In addition, European issuers need to take into account higher transaction costs and a different legislative framework and supervisory authority as well as the specificities of the American adversarial system. These and other issues will be addressed in the second part of this post.
As many recent examples prove, the call of NASDAQ is simply too strong to resist.