Stop bashing London for losing Arm, start answering the difficult questions
The UK market is no lost cause, but it must stop procrastinating and get a grip on its investor problem
The London Stock Exchange is once more the piñata of the capital markets pity party. Companies are fleeing the UK, newspapers say. They are chasing higher valuations in the US.
Every day, Softbank edges further towards listing chip maker Arm in New York instead of London. Building materials provider CRH plans to move its UK listing overseas. Flutter shareholders will decide in April whether the Irish gambling group should do the same. Plumbing product seller Ferguson already left last year.
For those with a vested interest in ensuring London remains a premium listing destination, it really doesn’t make for pleasant viewing. Especially when London’s only noteworthy IPO in over a year was Ithaca Energy, which is trading a painful 31% below its offer price.
But — in London’s defence — each of these companies has very good and specific reasons to leave.
Flutter made £2.6bn of revenue in the US in 2022, up 67% from the previous year and more than a third of the company’s total sales of £7.69bn. The UK and Ireland contributed £2.14bn, an increase of only 4% from 2021.
CRH too reports more sales and higher growth in the US than in Europe.
Similarly, Ferguson generated 90% of its revenue in North America before US activist investor Trian Partners pushed the company to sell its UK branch to a private equity firm and move the listing.
It makes sense for a company to be listed where their customers and shareholders are. If this focus shifts as the business evolves and grows and buys some rivals in the years after an IPO, it is logical to move the listing.
Of course, Flutter, CRH and Arm also have reason to hope for higher trading multiples in New York than in London, which shareholders like. US investors tend to be more open to growth companies and savvier when it comes to investing in the tech sector compared with UK funds (or European buyers in general).
What the New York Stock Exchange is not, however, is a magic money printing machine for any UK company willing to take the leap. Simply doing so is no guarantee of anything, in fact those who opted for a US listing during the height of the IPO market boom have often underperformed not only the US market, but also their peers who stayed in Europe.
One of the most infamous examples of this is Cazoo. The UK online car retailer went public in New York through a merger with a US special purpose acquisition company at a valuation of more than $5bn in August 2021.
Its market capitalisation has since plunged to $81m.
It would appear that in order to be successful in the US, a company should be big, in the “right” sector, and as “American” as possible. Inclusion in the S&P 500 requires a market cap of at last $8.2bn and a highly liquid stock. While it is possible to list as a foreign private issuer and continue to comply with UK reporting and governance requirements, switching to US standards will help analysts and investors understand the business better.
The grass is not always greener
For most UK companies the opportunity to close the valuation gap will not justify this effort. Even some tech-y growth companies, like online bank Monzo, are still aiming for a home turf listing.
And sometimes it even works the other way round. Alphawave, a North American semiconductor company with a market capitalisation of around £750m, listed in London in May 2021. A month later, Canadian gold producer Endeavour Mining, which is valued at £1.4bn, also began trading on the LSE.
Companies abandoning their listings are not just a UK phenomenon, either. Frankfurt just lost Linde, its biggest listed company with a market cap of €58bn, to New York. Italian yacht maker Ferretti decided to list in Hong Kong instead of Milan last year.
But these instances can really be seen as the exception that proves the rule. Since Brexit, the UK has lost its title as the financial capital of the EU, and is now instead a lone standing country with under 70m consumers and a gross domestic product (GDP) of $3.2tn, according to the IMF. The US on the other hand has a population of more than 330m and a GDP of $25tn. When it comes to attracting major listings of growth companies, expecting London to compete with New York seems somewhat inconsiderate.
Of course, the loss of Arm’s IPO still hurts. A lot of people will have felt the pain, but perhaps none more than UK prime minister Rishi Sunak, who personally tried to woo Softbank into a London listing in January. And to make matters worse, unlike Flutter and the other movers the Japanese parent company seriously considered both options for months before publicly rejecting London.
On a surface level, as Sunak’s pleading has proven, Westminster and the UK’s financial regulators are very concerned about preserving the competitiveness of London. In the last few years there have been a litany of attempts to work out what is wrong and how best fix it: Lord Hill’s review of the IPO process, Mark Austin’s consultation about capital increases, the Edinburgh Reforms and the Financial Services and Markets Bill were all commissioned to correct some detail that makes tapping UK equity capital markets more cumbersome than it ought to be for prospective users.
So when Softbank, despite these last gap attempts, still decided to take their business elsewhere, the London Stock Exchange doubled down, urging regulators to hurry up with the reforms.
But Arm isn’t leaving because Softbank was displeased with the division between the standard and premium segment on the London Stock Exchange, and it wasn’t wooed by the (newly allowed) prospect of being able to list on both exchanges simultaneously. Instead, it is choosing the deeper capital markets coffers of the US, where it will list among peers like Intel and Nvidia.
Just like it is unfair to beat London up just because Ferguson decides to go where 90% of its revenues are, it is unreasonable to insist that any amount of tinkering with free float requirements could have had any influence over Arm’s decision.
Instead, the UK needs to start answering some very difficult questions. Why do pension funds shun domestic stocks and what can be done to remedy that without creating unreasonable risks for future retirees? How do we build a vibrant US-style retail investor culture in a population that is laser-focused on getting on the property ladder? How can we create a friendlier environment for start-ups ready to go public?
Tackling the problem itself will be more difficult than launching yet another regulatory review. It will take time. There will be setbacks, contradictory results and market backlash. It will very likely be an altogether frustrating process.
But if the UK is serious about staying relevant as an international listing hub, it is likely its only option.