Markets & Finance

New York: No Longer the IPO King


In 2006, U.S. bourses fell to third in public-offering rankings. With London and China luring sweet deals, the top slot will be hard to win back

Investors had lots to like in the U.S. stock market this year. The highlights included a new all-time high for the Dow Jones Industrial average and a solid performance from the Standard & Poor's 500-stock index. The year will also be remembered as a time when initial public offerings finally recovered from the tech bubble's pop. Debuts by Riverbed Technology (RVBD) and better known outfits such as MasterCard (MA) have paid off handsomely. And many market watchers see the sizzle continuing into 2007 (see BusinessWeek.com, 12/19/06, "IPOs: More Market Mojo in '07").

But U.S. investors who like to flavor their gains with a pinch of patriotism have less reason to be enthusiastic. More than any particular deal, the most important IPO news of 2006 may be that this was the year when the U.S. lost its claim as the premier location for companies looking to go public. With emerging markets booming and major exchanges such as Hong Kong and London luring the biggest deals, it will be a difficult title for New York to recover.

According to Thomson Financial, for the year through Dec. 21, the value of U.S. listed IPOs lagged behind the totals of the Britain and China. Meanwhile, the number and value of deals on smaller exchanges soared as well. The deal value of China's three largest exchanges—Shenzhen, Shanghai, and Hong Kong (the latter was the champ for 2006 IPO value)—amounted to almost $53 billion in 2006. This beat out Britain's $48.3 billion and the $45.8 billion chalked up by the combined NYSE and Nasdaq.

Equitable Split

A more telling indicator of how rapidly global exchanges are growing is that in 2006, the two primary U.S. exchanges had a 17.6% market share in IPOs—a steep drop from 23.9% in 2005 and 48.5% in 2000.

"The NYSE (NYX) just isn't the de facto choice anymore," says Alec Young, global equity market strategist at Standard & Poor's. "The biggest driver is that companies inherently want to list where they live." And increasingly, he adds, London offers the same high profile and liquidity that were once the preserve of New York.

Going into 2007, investors may not see the sort of mega-deals that boosted Britain and China IPOs past those in the U.S. Globally, the two biggest offerings were by International & Commercial Bank of China and Bank of China. The third largest came from Russian energy giant Rosneft, which listed in London. Still, the indicators point to a more equitable split between the largest exchanges, as emerging markets take a larger share.

Melting Market Caps?

While the U.S. has lost ground to British and Chinese exchanges, 2006 was also a year when smaller bourses clamored for a growing share of deal flow. According to Thomson, the value of yearly IPO activity more than doubled in São Paulo, Brazil, and climbed more than 90% on India's main exchange. On the Moscow exchange, IPO value shot up to $11.7 billion, from just $135 million in 2005.

In addition to new listings, the market capitalizations of various exchanges worldwide also support the view that the equities universe is rippling further away from New York toward a more multi-polar climate. U.S. exchanges still outpace the rest by a long stretch, with the largest total market cap, but the competition is tightening.

According to a recent report from the World Federation of Exchanges, the NYSE's market cap increased about 13% in the 12 months ended November. Not a bad year, all told, but the double-digit rise leaves the Big Board squarely in the bottom quarter of global exchanges, one rung below Colombo, Sri Lanka. The NYSE's market cap growth outperformed Tokyo and the Nasdaq, but came in well below London (which had about 26% growth) among the worst performers in Europe. With a jump of about 158% in 2006, Shanghai topped the list.

Euro Bandage

These days, the world's largest stock markets are unlikely to witness the jaw-dropping gains (and stomach-churning losses) sometimes seen in smaller outfits. But as they grow, S&P's Young thinks London markets have some important advantages over those in New York for attracting new companies looking for a global debut. The markets in Britain's capital benefit from a geographic proximity to regional IPO engines in Eastern Europe, Russia, and the Middle East. Chilly or worse relations between the U.S. and those countries can't help either. Conventional wisdom has it that New York also suffers from Sarbanes-Oxley regulations instituted after the corporate scandals of earlier in the decade, but Young says that damage is mainly over.

For its part, the NYSE appears able to adapt. It plans to acquire Euronext, an umbrella group that includes several European exchanges. The purchase signals a recognition of the new global reality, and a way to "stem the bleeding," Young says.

The lost allure of going public on U.S. exchanges doesn't undercut the fact that it was a banner year for U.S. IPOs and market performance in general. Despite the complaints of foreign companies keeping their distance, the deal value of non-U.S. companies debuting on U.S. markets actually rose, topping $8.6 billion, the highest figure since 1997. It certainly was a strong year for the U.S. market, but as worldwide IPOs reached record highs, it might not have been strong enough for Wall Street.

Halperin is a reporter for BusinessWeek.com in New York.

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