Yesterday's announcement that Nasdaq beat out other bourses in acquiring a 15% stake in the London Stock Exchange is a bold sign of the increasing attractiveness of European capital markets relative to the US. I wish this were mainly due to improving investment conditions in Europe, but I think the truth is rather more negative. The reality is that US over-regulation, in the form of Sarbanes-Oxley (SOX), is stunting the growth of US capital markets and pushing companies to explore overseas alternatives.
The numbers tell the story. We recently analysed IPO activity among technology companies to gauge the climate for listings in the US and Europe. To our surprise the number of European listings increased by 56% in 2005 over 2004, while the number of US listings was flat. This is in spite of continuing optimism (and increased venture investment) in the technology industry as a whole. What's more - in 2002 and 2003 80%+ of tech IPOs were in the US; in 2005 the split was 50:50!
The real irony here--as software blogger Jeff Clavier, and Bill Gurley of Benchmark point out in their blogs--is that a piece of regulation that was supposed to increase transparency and hence the attractiveness of US capital markets appears to be having the opposite effect. We're all for more transparency and accountability, but the costs of complying with SOX are simply too high. Every private equity investor I speak to says they are thinking hard about how to avoid a US listing if they can get access to capital markets in Europe.
On the positive side, SOX is leading to increased activity on a number of European capital markets, from London to Frankfurt to Paris, and this means more exit options for European companies. So from a European investors' perspective, we have more choice today thanks to Messrs Sarbanes and Oxley.... And Nasdaq is clearly hedging its bets on this trend.