Developing Irish companies, particularly technology, Internet-based or biotechnology businesses, are using overseas stock markets for their flotation debuts. The Nasdaq in the US and the Neuer Markt in Germany have become popular listing choices with Irish entrepreneurs.
Some companies float on more than one market at the same time, often listing in Dublin or London as well as the Nasdaq or Neuer markets.
Baltimore and Riverdeep, for example, floated on the Nasdaq in the US, although the companies also took listings in London and Dublin respectively.
Trintech is listed on the Nasdaq and Neuer markets. Trinity Biotech, Icon and Iona Technologies are listed in Dublin and on the Nasdaq, while Elan has listings on the Dublin, London and New York stock exchanges. Parthus is quoted in London and on the Nasdaq.
But some companies are floating on just one market - the market they see as the most appropriate to their needs. Smartforce and Hibernia Foods have listed on the Nasdaq, while Conduit has taken a listing on the Neuer Markt.
Why are Irish companies floating on overseas markets? What are the advantages and disadvantages and how complicated is it to organise a listing overseas?
Why float on markets other than Dublin? Mr Pat Landy of Merrion Stockbrokers advised Conduit in the run up to its flotation on the Neuer Markt. He described the Neuer Markt as Europe's "premier market" for technology companies. Set up less than three years ago, the market has been successful because it was developed specifically for new technology companies, with rules designed to facilitate the listing of these companies. It has achieved significant support from investing institutions, he explained.
Mr Tom Byrne from Davy Stockbrokers said that, where the US is the main market for a company, it makes sound business sense to take a listing on the Nasdaq to ensure recognition amongst its peers. Where a company's main business focus is in Europe, a listing on the Neuer Markt makes more sense.
Company advisers suggest that some companies decide against a Dublin listing because trading in technology stocks is not liquid enough in Dublin where there is no specialist technology market. In addition, they say that the listing rules on more traditional markets such as the Official List or the Developing Companies Market (DCM) in Dublin and in London are too rigid for rapidly developing companies in dynamic sectors.
Market sources cited the series of calculations set out in Chapter 10 of the Yellow Book (London Stock Exchange rule book) to determine whether a acquisition had to be put to shareholders as very onerous. One market source said: "These companies generally have limited but increasing sales and no profits, many are still loss-making. Under the rules in existing markets they will have problems with transactions. "Market rules will restrict them from acting swiftly and could cause them to lose the all-important first-mover advantage. "For example, relatively small technology companies could find themselves in situations where they would have to get shareholder approval or derogations for a takeover because they were loss-making and the company they were taking over was profitable. "The relative market capitalisations of the companies involved is not taken into account," the source added.
Markets like the Neuer and Nasdaq address the peculiarities of rapidly developing technology companies. The launch of a new technology company market in Dublin with rules mirroring the Nasdaq is imminent.
The Nasdaq and Neuer markets are liquid because listing companies are required to float higher proportions of their equity than on more traditional markets and because big institutions are prepared to build up an understanding of the companies and to set up specialist funds to invest in these markets.
Typically on the Neuer Markt companies have to issue about 20 per cent of their shares, compared with levels of about 10 per cent or less on the DCM or London's Alternative Investment Market. On making a choice between the Nasdaq and Neuer Markt, market sources say that there is no point in companies going on the Nasdaq unless they have some business in the US.
Typical Neuer Markt candidates would be companies with European growth plans which want to raise significant funds and raise their profile among potential investors and customers. It can be significantly more expensive to float on an overseas market than on the Irish market, but a company has to weigh up the extra cost against getting access to a wider range of investors with an interest in their specific sector and easier access to the funds it requires. Costs will be pushed up when a company has to produce two sets of accounts - for a listing on Nasdaq and Dublin/London, a company would have to produce accounts in accordance with Irish and British accounting standards and a set in accordance with the different US accounting standards. Underwriting and placing commissions and legal costs tend to be higher in most overseas markets, particularly in the US, according to brokers. In addition a company has to find a local sponsor.
One company adviser suggested that on the Irish market a listing would cost a company about 4 per cent of the funds raised. On the Neuer Markt this would be about 6 to 7 per cent, while on the Nasdaq the costs would be around 9 per cent or more. But costs will vary and be influenced by the perception of the company among its investment banking advisers and underwriters.
Another adviser said a typical small Neuer Markt listing project would cost a company about €2.5 to €3 million in corporate finance fees, underwriting and placing commissions.
"A company must pay the market price for the services in the market where it wants to list," he said. The disadvantages of taking a listing on an overseas market revolve around producing and co-ordinating documentation in accordance with the legal and market rules in other jurisdictions and sometimes in another language. But companies say the time and cost involved are minor disadvantages compared with the advantages.
For companies considering an overseas flotation, Mr Byrne said they need to examine their structures, management, plans and products. They need to decide what their story is - what is unique about their operation. Then they should ask is it appropriate to float - for example, are their management, and product suite, strong enough. Only then should they consider which stock market would be most suitable to meet their funding and shareholder base needs.
Next week: Irish retail investors are buying shares through overseas markets. Why is this and what are the advantages and disadvantages?
