Finance

Lowering the Bar for Stock Listings


Investors are benefiting from the stock market rally, but the major U.S. exchanges still have little reason to celebrate. Trading volumes are way off their highs, and upstarts continue to steal market share. With revenues slipping, the bourses are scrambling to protect an old-fashioned business: listings and the fees companies pay the exchanges to trade their shares. The NYSE Euronext (NYX) has been the most aggressive, going so far as to lower the threshold for listing with it—a move that ultimately could hurt investors.

For years the established exchanges were considered the arbiters of quality. Companies' reputations got a boost when they traded their shares on the NYSE or Nasdaq (NDAQ) OMX, which had the strictest listing standards, including criteria for market value and share price. "They were seen as the gold standard," says Susanne Kloess, a managing director at consultant Accenture (ACN).

But with the market in free fall last year, the NYSE and Nasdaq temporarily waived some listing requirements. For example, both venues allowed companies to continue trading even if their prices fell below $1, typically the level for delisting. The bourses argued such steps were necessary to ensure that investors could buy and sell major stocks during the turmoil. By late spring, hundreds of companies, including American International Group (AIG), Citigroup (C), and Fannie Mae (FNM), didn't meet the price, market cap, or other standards. "We were dealing with extraordinary circumstances," says Scott Cutler, NYSE Euronext's head of listings in the Americas.

The changes may have been financially motivated for the NYSE. While Nasdaq reinstated its standards as the stock market recovered, the Big Board made some permanent. In June the NYSE opted to keep its minimum market value at $15 million, rather than raising it back to $25 million. That move will allow small, struggling companies to keep their listings.

PLAYING CATCH-UPThe U.S. exchanges are wooing new companies, big and small. Historically, New York-based bourses won the lion's share of initial public offerings. But they've been playing catch-up since the recession blackened the reputation of the U.S. financial industry. So far this year the exchanges in Shanghai, Hong Kong, and São Paulo have captured the bulk of the IPO deals worldwide, including China State Construction Engineering and Brazil's VisaNet.

To win back business, U.S. exchanges are lowering the hurdles and offering extra incentives. The NYSE now allows new companies with no revenue a place on the exchange as long as they meet other standards. "The changes help shore up their defenses against competition," says Phillip Silitschanu, senior analyst at advisory Aite Group. To court companies, the exchanges also are providing data, marketing promotions, and other value-added services as part of their deals for listings.

With rivals outmuscling exchanges in their mainstay business, the fees from listings have become increasingly important. New, computerized rivals can siphon off trading activity, but companies can only list their shares with the major exchanges worldwide. During the slump, such fees have been the only steady source of revenue. NYSE listings pulled in $200 million in the first half of 2009—or 17% of revenues. That compares with 12% in the same period last year. Says Axel Pierron, senior vice-president at consultancy Celent: Listings are "very profitable. Exchanges have to hold on to [them] any way they can."

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkWhoa, IPOsUnlike in the U.S., Chinese authorities want to temper the market for IPOs. A Wall Street Journal article reports that the Securities Association of China is making it more difficult for U.S. money managers to buy shares in newly formed Chinese companies that debut on the local exchange.To read the full piece, go to http://bx.businessweek.com/initial-public-offering-ipo/reference/
Scott is a correspondent in Bloomberg Businessweek's London bureau.

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