When SoftBank chief executive Masayoshi Son said on Tuesday that he saw Nasdaq as the likely destination for an IPO of chip designer Arm following the collapse of its sale to Nvidia, you could almost hear the collective groan across the City of London as yet another exciting deal prospect drifted elsewhere.
Arm, after all, was born in Cambridge and was a UK-listed company (with a secondary listing on Nasdaq) when it was taken private by SoftBank in 2016 for $32 billion.
But the question of what a US listing of Arm tells us about the competitiveness of London in 2022 is complex. Already the commentary is emerging that the move would show that the attempts to make London more appealing for high-growth and tech companies, including Jonathan Hill’s review early last year, have served little purpose.
But a look at the numbers shows that no one should be surprised. Arm will likely not be valued at the $66 billion that the Nvidia trade would have ascribed to it, but even $50 billion would be an awesome figure. Even with changes implemented last year, London listings still need a freefloat of 10%, making a putative IPO minimum of $5 billion.
Yes, there have been waivers to minimum freefloat requirements in the past, but that was when the minimum was higher, at 25%. The idea that regulators are going to start chipping away further to allow a big name to skirt the rules seems far-fetched.
Deals of that size are few and far between in London. In the past 20 years, there have only been a tiny number of IPOs of $5 billion or more in any sector, not just technology. That many more have emerged in the US is hardly startling, given the depth of the market there. After all, daily trading in Apple alone can beat the entire FTSE100.
Young growth stories
The likes of Arm are not what the reforms that Hill examined, and which London subsequently undertook, were targeted at. Those reforms – such as reducing the minimum freefloat requirements, or tinkering with documentation requirements, or easing liability for forward-looking information – were designed to make London a more appealing place for young growth stories.
Arm might have been just such a story once, but it isn’t now. Bankers in London say that they would obviously love it to list here, but they also argue that if it goes elsewhere, it should not be seen as a big cross marked against the UK. And, they add, talk of London’s recent IPO experience as a flopshow ignores the fact that the whole market is trading down. There has, after all, been something of a correction. IPOs are not immune to it – they might, in fact, be rather more vulnerable to it.
Much more relevant to the debate is the kind of commentary that Alex Chesterman, founder and CEO of online car-buying business Cazoo, offered when he took his $7 billion company public in the US via a merger with a special purpose acquisition company (Spac) last year, in a deal that was raising $1 billion of new money.
He said that high-growth IPOs are “just better understood” in the US.
The uncomfortable truth is that the UK – and European – investor base has a problem with supporting loss-making growth stories. Look at Ocado, which this week unveiled heavy losses as the firm spends to roll out tech investments. The stock reaction was ugly, dropping 13%. The UK simply does not like the kind of ‘jam tomorrow’ story that US investors will tolerate.
The difference between UK and European investors and their US cousins, in the words of one banker, is that US buyers are happy with the idea of a break-even that is many years out. Europeans just want to know when they get their money back.
Every trendline you care to look at over the last 20 years – trading volumes, broker coverage of stocks, the range of institutions that buy those stocks – is frequently multiples higher in the US. The depth of the market is simply beyond comparison.
It is hard to see any reforms that will change that cultural divide. That is not to say that there are not process improvements that could be made.
The review that Mark Austin, a lawyer at Freshfields, was commissioned to do in October 2021 in relation to the capital-raising regime in the UK will be important. Austin’s work is part of the UK’s response to Hill’s earlier review, on which he also advised, and UK Chancellor Rishi Sunak has said that this response needs to go much deeper than simply making London an attractive place to list.
Key to that will be examining the way that rights issues function. Companies looking for quick cash during the worst of the pandemic crisis were able to take advantage of a temporary easing of the restrictions on raising capital without pre-emptive rights. But while that was crucial for many, it was controversial and was only seen as acceptable as a stop-gap measure.
Effective reforms
Many bankers hanker after the kind of doc-lite approach seen in jurisdictions such as Australia, with companies under less of a burden to produce reams of deal-specific documentation, much of it enshrined in the belief that retail investors need it, if they are current with their obligations to ensure that all relevant news flow is out in the market.
UK bankers are always going to talk their own book, and they are inevitably reluctant to let Arm be considered a meaningful indicator of the effectiveness of reforms to London. But they also have a point. The effectiveness of reforms that are aimed at early-stage stories will only become truly apparent over years. And London’s Alternative Investment Market (AIM), which targets smaller companies, has shown itself to be more effective than is often credited in supporting adventurous valuations for what are often speculative investment cases in highly niche sub-sectors.
Arm, by virtue of its size and maturity, is different. If it ends up on Nasdaq, it certainly says something about the willingness of the UK investor base to value large-scale growth stories in the way that the US routinely does. But it should not be seen as a condemnation of what London’s listing authorities are trying to achieve.
