April 20, 2006
Money and the Path of Least Resistance (or Compliance)
The biggest culprit according to many commentators are the U.S. compliance rules (i.e. - Sarbanes-Oxley Act of 2002) which are driving the IPOs "overseas".
This is simplistic and not particularly accurate (Note to Readers: please give me your comments and criticisms on this topic to help improve the understanding of "cause and effect" and quality of discussion).
Other reasons that IPOs may be going "overseas" include:
- The economic cycle and market cap increases over the last two years have been heaviliy weighted to resource companies (mining. oil and gas, etc). U.S. exchanges have not typically represented these same sectors to the extent of the FTSE or the TSX for instance. All you have to do is take a look at gains on the FTSE and TSX indices (35%+ and 40%+ respectively) over the last two years versus the NASDAQ and DOW (roughly 20% each) to understand an important market dynamic and attractor.
- So based on 1. above it follows that many of the IPOs going overseas have been resource based. Nothing succeeds like success for a market (I.e. TSX-V or AIM) when you have domain expertise in a hot sector.
- U.S. exchange rate values over the last two years versus other currencies coupled with the change in U.S. market indices versus non-U.S. indices. If you spend a few minutes on the currency issue versus market gains you will also understand why money has often gravitated to non-U.S. markets. A U.S. dollar just isn't worth what it used to be.
- Cheaper money offshore. My guess is that other markets such as AIM are awash in petrodollars or "trading surplus dollars"that in many cases would not be invested in U.S. markets in any event (i.e. - politics, privacy, etc etc). These dollars have to go somewhere and these overseas markets are taking advantage of the situation. A market "awash" in money is going to attract new companies.
Now, are any of 1. through 4. really driven by the the Sarbanes-Oxley Act of 2002?
No.
These are critical components to the growth of overseas markets and central to the increase of IPOs in these same markets.
Which leaves us with the cost of compliance issue and Sarbanes-Oxley driving away IPOs that "should rightfully be happening on U.S. markets".
So, is compliance expensive? Certainly there is a cost to implementing financial and accounting standards, but the standards exist to protect investors. Current dissatisfaction with the cost of SOX (particularly Section 404) is very related to initial implementation, deferred procedural maintenance, excessive auditor attestation, and let's face it, management whining and procrastination. After a generation of focusing on productivity/growth, looking at controls is somehow seen as an unrelated, non-value added management exercise. All you have to do is take a look at the number of financial restatements to understand that there are some problems that need to get solved and quick!
Investors such as Calpers have made it clear that strong controls and compliance environments are a key evaluation factor in their investment portfolios. Investors want to have confidence in a company's financial statements and management's claim about the direction/stability of the business.
This discussion about compliance (i.e. - processes to ensure timely and accurate information)being expensive reminds me of the discussion in North America about how expensive quality was in the 1970s and 1980s when Made in Japan went from being a joke to being an industry destroyer. It turns out that getting things right the first time (quality and its close cousin, financial compliance) is actually cheaper. Stay tuned for this them in the coming weeks.
Some IPOs are going overseas because the compliance is more "flexible" and thus cheaper. Some IPOs are going overseas because those markets are more focused on those sectors and the stage of the economic cycle.
Hopefully the discussion above can help to initiate new perspectives in terms of the "IPO flight" and compliance debate.
