| Other Photos |
 |
|
 |
IPO Breakthrough
// Western Traders Begin Jockeying for Russian Issuers
Russian companies are beginning to have a serious influence on the competition among international stock exchanges for issuers. In the last year alone, they have floated almost two dozen IPOs worth $17 billion, which has given them the lead position in distribution volume in Europe. In order to outmaneuver the competition for Russian issuers, foreign stock exchanges are beginning to come to the Russian market.
Swapping Places
The preference of Russian issuers for their trading house of choice when distributing shares has changed sharply over the last few years. In the 1990s, many of the securities issued by Russian companies were traded on the Frankfurt Stock Exchange. Unlike the NYSE or LSE, Frankfurt provided Russian issuers with a listing on the exchange with sufficiently liberal regulatory demands. Companies eager to attract capital, however, often opted for American stock exchanges. In 2002 the bankruptcy of several American companies such as Enron and WorldCom led to a tightening of legislation on securities trading, including the passage of the restrictive Sarbanes-Oxley Act. The introduction of new legislative norms demanded that issuers put systems of internal control in place. Experts estimate that the initial implementation of such a system costs several million dollars and that yearly maintenance can cost up to $500,000. Such systems are necessary, however, because companies that release incorrect financial information are liable to face criminal prosecution under the new laws. The high costs associated with such systems are forcing large companies to leave American stock exchanges. Last year the Russian company Tatneft left the listing of the NYSE, and this year has already seen the departure of Danone, British Airways, and Telenor. At the beginning of this week, the Russian company Rostelekom hinted that it might soon follow suit, despite the fact that US stock exchanges are the world leaders in trading: circulation on the NYSE is almost three times higher than on the LSE. According to data from the World Federation of Exchanges, the volume of trading on the NYSE last year was $21.79 trillion, while on the LSE it was $7.57 trillion.
Under the circumstances, companies entering the international market are increasingly opting to distribute their shares on European stock exchanges, primarily the London Stock Exchange. Ernst & Young Trade Consulting Department director Galina Shilina notes, "London is the acknowledged world leader for developing markets, because it gives access to the pool of international capital and high liquidity." According to Ms. Shilina, the reasons that London leads the pack among foreign trading houses in number of Russian IPOs include the wide promotion of the LSE in Russia, its effective cooperation with the Moscow Interbank Currency Exchange (MICEX), and the active participation of managers from London in Russian enterprises. Rustem Teregulov, a senior manager at PricewaterhouseCoopers for international capital markets, said that "the LSE has ample potential for attracting capital and even for distributions worth several billion dollars: they have a wide investor base."
Nevertheless, some analysts believe that growing competition among stock exchanges around the world could cost the LSE its plum position. The main reason for this is the intention of British regulators to tighten the rules for foreign companies floating an IPO, including companies from Russia and the countries of the CIS. Britain is concerned by the low quality of corporate management in these companies, their lack of transparency, and the poor quality of audits (see Kommersant from April 6).
Competitive Selection
In the meantime, Russian companies are becoming a hot item for foreign trading houses. Last year Russian companies floated almost two dozen IPOs worth a record $17 billion, and it was Russian companies that made up the bulk of trading on the LSE last year: Rosneft, Severstal, and Komstar all made the list of the top five largest international IPOs in London. Rosneft's $11 billion IPO was the largest offering in Europe in 2006. Since the beginning of this year, Russian companies have already floated offerings worth more than $11.5 billion, and by the end of 2007, analysts estimate that this number will exceed $35 billion.
As a sign of the trend of the times, the second-largest European stock exchange, Deutsche Boerse, has opened an office in Russia. "In order to compete with the LSE, the Frankfurt Stock Exchange should provide Russian issuers with a broad, diversified investor base and high liquidity on a secondary market," said Elena Khisamova of Deutsche Bank Russia.
In addition, the NASDAQ may soon turn up indirectly in the Russian market: last week the American trading house announced a merger with the Scandinavian bourse OMX, which is currently working with the St. Petersburg stock exchange to create a new exchange, the IXSP.
Ongoing developments in America are also leading several experts to assert that the market may soon shift back in favor of American stock exchanges. Unlike Great Britain, America is now considering streamlining the legislation dealing with listing IPOs, and if Britain moves ahead with changes to its regulations, the US could take advantage of the situation to attract Russian companies. According to Mr. Teregulov, "when talking, for example, about high-tech companies, US markets, particularly the NASDAQ, shouldn't be overlooked." He emphasizes that "it is usually easier and significantly cheaper for companies in that sector to hit the standards set by the US regulators than it is for manufacturing companies, for example." Moreover, the demand in the US for shares in high-tech companies is higher than in the UK. Elena Khisamova notes that "American investors understand the IT sector very well, so companies in that field can get a better appraisal from investors in the American market than they could in, say, London or Russia, where investors are more wary of evaluating companies in the high-tech sector." In the US, the NASDAQ specializes in offering IPOs: according to Deutsche UFG, last year 69% of all IPOs floated in the US were on the NASDAQ.
Russian Accent
Western stock exchanges do have competition, however: Russia's MICEX and the RTS have recently been strengthening their position in the market. According to many analysts, more and more Russian companies preparing for their IPOs want to offer them on Russian markets. Galina Shilina notes that "this is particularly characteristic of companies with midrange capitalization."
Until now, most of the companies that have made public offerings were leaders in their fields, so their choice to look to Western markets was self-explanatory. Over the next few years, however, an increasing number of midsize companies will be looking to go public, and experts point out that it makes sense for them to launch their IPOs on a local market. According to Ms. Shilina, shares floated on Russian exchanges could very well perform admirably on international trading floors. In addition, the quality of the shares offered to Russian and foreign investors on MICEX and the RTS will not lag significantly behind those on international public markets.
"If you compare us with Western trading floors, foreign stock exchanges can offer Western investors access to shares in Russian companies, but they cannot ensure demand from Russian retailers," said MICEX deputy general director Gennady Margolit. He maintains that "issuers [on MICEX] are primarily interested in liquidity" and that 70% of shares from Russian issuers are on MICEX.
The RTS also has many competitive advantages that attract both issuers and investors. Players in the market note that the Russian Stock Exchange has the biggest toolbox of investment instruments in Russia. "In particular, these are a classic assets market, work with big lots, the opportunity to choose the transaction currency, and a market of futures and options, in which the RTS is the undisputed leader," believes RTS managing chairman Oleg Safonov. Additionally, more than 95% of the derivatives market in Russia is concentrated in FORTS at the RTS, where 25 futures and 9 options are traded.
The lower cost of an IPOs on a Russian market is another reason why Russian companies may choose to float their shares closer to home. During an IPO, the costs to the issuer can be divided into two groups: the cost of a listing on a stock exchange and the cost of paying consultants. According to Ms. Khisamova, "it costs around $200,000-250,000 to get a listing in the US or the UK, while in Russia that figure is around $5,000." She also said that payment for consultants abroad exceeds what a company would pay to hire a consultant in Russia by 30-50%.
Analysts say that in the long term, the globalization of stock exchanges and increasing competition between large trading houses for issuers will undoubtedly lead to a natural equilibrium of the regulatory demands made in London and the US. Ms. Shilina believes that, taking this fact into account, "many companies with a year or two to go before their IPO are taking a 'wait and see' position in their choice of trading house."
The World's Largest Stock Exchanges in 2006
Name Trading Volume (billions of USD) Number of Issuers
1. NYSE 21789.4 2281
2. NASDAQ 11807.5 3133
3. LSE 7583.8 3256
4. Tokyo SE 5824.9 2416
5. Euronext 3805.3 1210
6. Deutsche Boerse 2741.6 760
7. Hong Kong Exchange 832.4 1173
8. Shanghai SE 738.9 842
9. MICEX 550.2 190
10. Singapore Exchange 180.4 708
Data from MICEX
Nailya Asker-zade
All the Article in Russian as of June 01, 2007
|
|
|
