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London's calling, but nobody's listening

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If Softbank relists Arm in London, it will be due to politics, not economics

The UK government has reportedly renewed its efforts to beg SoftBank to relist Arm, the Cambridge-based semiconductor company, on the London Stock Exchange in a dual listing alongside New York, which has long been the preferred destination for growth companies. The move smacks of desperation, given the UK equity market’s growing backwater status.

Long seen as one of the UK’s world leading companies, Arm has been a re-IPO candidate ever since its proposed merger with California-based Nvidia collapsed in February 2022. The company used to be listed in London before it was acquired by SoftBank in June 2016, just after the UK voted to leave the European Union. At the time, the Arm takeover was paraded by the UK government as a sign that international investors still had confidence in the UK following Brexit.

In recent weeks, UK prime minister Rishi Sunak has restarted talks with SoftBank and Arm’s senior leadership to try and persuade them to relist the company in London as well as New York, which SoftBank reportedly favours.

Despite the show of strength from Westminster, SoftBank has not publicly committed to relisting Arm in London. The UK government and regulators have made efforts to overhaul the competitiveness of London’s listing rules to attract more growth companies in recent months, such as allowing dual class shareholder structures on the main market and waiving minimum freefloat requirements. A similar effort was made to try and woo Saudi Aramco to the London stockmarket before the Saudi state eventually opted to rebuff several international exchanges and pursue a domestic listing in Riyadh.

Given the dramatic selloff of growth stocks over the past year due to rising borrowing costs, inflation, and the war in Ukraine, SoftBank is unlikely to launch an IPO of Arm anytime soon. It will wait until market conditions improve. But when the time comes, although it will be embarrassing for the UK, you could forgive the Japanese conglomerate for shunning London’s equity market, which increasingly looks like a regional exchange at best rather than the global powerhouse that the UK government wishes it was.

New York is not the only problem, last year Paris overtook London as Europe’s most valuable equity market, aided by the strong performance of luxury stocks such as Kering and LVMH, the most valuable European company. Amsterdam has also emerged within the region in recent years as a serious rival, both as a listing venue and a centre for equities trading.

UK equities have traded at a hefty discount to peers ever since the Brexit vote in 2016, and global investors have also been underweight UK ever since the result of the referendum.

The row over the mini-budget last year, which toppled Liz Truss’ government, spooked markets and led to a collapse in the value of the pound, leaving UK companies more vulnerable to foreign takeovers. Once confidence in the UK’s fiscal credibility has been eroded it is very difficult to rebuild.

London can also no longer rely on a steady stream of foreign companies from Africa, the Middle East and Asia to bolster its IPO market flows. Foreign Russian listings have disappeared since the start of the war in Ukraine and the UAE and Saudi Arabia have made significant progress in building out the liquidity and sophistication of their local exchanges, which have experienced an IPO boom at a time when the market has been shuttered throughout the rest of the world.

The recent track record of technology IPOs in London is poor. Deliveroo, one of the UK’s most valuable internet companies before its IPO, crashed in trading, while THG, the Manchester-based e-commerce firm, became embroiled in a series of corporate governance rows that sent its stock tumbling.

Worst of all is Made.com, the UK online furniture retailer, which fell into administration in November just over a year after ts £200m IPO in June 2021.

New York has long been the go-to destination for technology companies to list, including UK firms, as the pools of capital available to these companies in the US is much deeper on the other side of the Atlantic. This is unlikely to change any time soon. The UK government faces an uphill struggle to persuade Arm and other home growth companies of the future to stay at home.