Is America really the promised land for UK listed companies in search of higher valuations?
23rd March 2023
With ARM choosing to list in the US, Flutter and CRH eyeing a primary or secondary listing in the US, does America really offer UK listed companies the promise of higher valuations?
This talk of companies switching has led to some rather alarming headlines in the past few days that London is losing its status as a pre-eminent financial centre and that this recent exodus may turn into a flood. Many reasons have been cited such as the more relaxed attitude in the US towards executive pay and the perceived ability to compete for talent internationally. In addition, many have cited the risk averse nature of UK investors who prize reliable, stable dividend paying companies over growth (in contrast to the US), lack of liquidity, pensions funds lack of investment in UK stocks, and the growing amount of reporting requirements facing UK companies.
Whilst it is right to be concerned over these potential moves and it is certainly a wakeup call, it is important not to overstate the significance of these developments either. Setting sail to the US is no easy feat, it most certainly doesn’t suit all UK companies and is not the silver bullet for executives frustrated by their languishing valuations and scrutiny over high pay.
These specific companies mulling a switch have most of their operations and earnings based in the US, so it is understandable why they are considering moving there. Companies need to meet strict criteria to appeal to American investors. Membership of the most prized index, the S&P 500, depends on a number of factors, including being of a certain size, having substantial assets and revenues in the US, as well as an annual liquidity test to make sure enough share trading is taking place in America.
A year after switching its primary listing to the US, Ferguson still hasn’t been included in the S&P 500. In the higher interest rate environment other UK companies that went to New York in search of better valuations haven’t performed so well – Cazoo, the online used car retailer, Wejo, the automotive data specialist and Vertical Aerospace, the flying taxi start-up, have all seen sharp falls in their share prices in this recent downturn.
Data from The London Stock Exchange has pointed out that international IPOs, excluding SPACs, on US markets that raised more than $100m since 2018 are down 37% versus domestic listings up four per cent. According to analysis from the Financial Times, following the global tech sell off, of the 91 recently listed tech companies in New York that have reported results this year, only 17 reported a net profit and their shares have declined by an average of 35% since listing. Meanwhile, the FTSE 100 which is heavily dominated by old economy companies, is up by more than six per cent so far this year and it struck a record high in February.
Further, companies have to comply with the US Sarbanes-Oxley Act which requires companies to report quarterly earnings. Not only is this burdensome but encourages short termism. The UK scrapped this reporting requirement back in 2014 in favour of less frequent reporting.
The reality is we can’t win them all and it does make sense for some companies to look across the pond. Nonetheless, the LSE, FCA, government and the City are do everything they can to attract world class companies to list here. Following the publication of the Lord Hill review in 2021, a number of the recommendations relating to free float, dual class share structures and SPACs have been implemented. There is a string of further promising reforms coming down the line. The FCA is proposing merging the premium and standard into one segment. There is also the Edinburgh Reform package and the government has accepted in full the recommendations of the UK Secondary Capital Raising Review.
There is more reason to be optimistic at the moment too. This month a Saudi luxury property developer, Dar Global, made its £600 million debut with a primary listing in London and there has been a notable uptick in business confidence in recent weeks. Fears of a deep recession are waning and many bankers we speak with are talking to companies about listing in the second half.
The government is trying to strengthen our global standing in tech – witness the government plan launched earlier this week to cement the UK’s place as a science and technology superpower by 2030 by investing £250 million in artificial intelligence and other transformational technologies. Let’s also not forget that the UK currently boasts the highest number of unicorns outside the US and China and according to Atomico’s State of European Tech 2022 report, the UK continues to be a magnet for investment and London proved to be the most attractive European tech location for capital.
Rather than falling into despair and talking down the UK’s prospects of attracting the companies of the future, we should be encouraged by the fact that the regulators, government, the LSE and the City aren’t sitting still. As the world around us continues to evolve at a rapid pace there is much reason to be confident that when markets reopen for IPOs, London will be a large beneficiary of the backlog of companies who have been waiting to list.