Sarbanes-Oxley Brings U.S. Firms IPO Earnings Abroad
Oct. 30 (Bloomberg) -- For all the hand-wringing over the Sarbanes-Oxley Act, the accounting and governance law driving companies away from U.S. stock exchanges, America's biggest securities firms are doing a record overseas business arranging initial public offerings.
The surge in IPOs from London to Hong Kong has enabled New York-based Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., JPMorgan Chase & Co. and Citigroup Inc. to collect $1.33 billion of fees from new share sales outside the U.S. so far in 2006, a third more than in any prior year, data compiled by Bloomberg show.
``It's irrelevant to us where companies list,'' said Nicholas Andrews, the Hong Kong-based head of Asia equities at JPMorgan. ``We're able to help them in whichever market makes sense the most for their business.''
That's because the same chief executive officers who are determined to avoid compliance with Sarbanes-Oxley are turning to American financiers to raise money in Europe and Asia. U.S. investment banks have earned $3.4 billion in IPO fees worldwide, a 17 percent increase from the same period in 2005, making this year the best since they netted a record $4.2 billion in 2000.
While everyone from the Business Roundtable to Treasury Secretary Henry Paulson is lobbying to emasculate Sarbanes-Oxley, the law conceived to protect shareholders is helping America's own securities firms dominate international markets. No country's domestic financial institutions come close to the 31 percent share of international IPOs that U.S. investment banks have managed this year. Switzerland, the home of Zurich-based UBS AG and Credit Suisse Group, would be a distant No. 2 with 15 percent, followed by China with about 10 percent.
`Cry Foul'
``Some might expect Wall Street firms to cry foul for Sarbanes-Oxley pushing business away,'' said Tamar Frankel, a professor at Boston University who has taught corporate law for 38 years. ``But they're all over the world, so if revenue goes down here, it goes up elsewhere. They can even use it as sales pitch: We'll give you the IPO without the Sarbanes-Oxley requirements, wherever you want it.''
Peach Holdings Inc., a Boynton Beach, Florida-based company that buys rights to collect payments from legal settlements, insurance policies and lotteries, is one of 13 U.S. issuers to go public in the U.K. this year. Five years ago, only one did.
Timothy Trankina, Peach's president and founder, said the decision came down largely to costs, much of them a direct result of Sarbanes-Oxley. He hired New York-based Bear Stearns Cos. and Collins Stewart Tullett Plc in London to raise $210 million in March in a stock offering on the Alternative Investment Market, a unit of London Stock Exchange Plc.
Going to London
``The cost of being a public company is lower by more than a third in the U.K.,'' Trankina, said. ``It would cost us as much as $3.5 million a year to comply with the vigorous reporting requirements in the U.S. For a $100 million company, that's 3 to 4 percent of gross revenue.''
Investcom LLC, a Beirut-based telephone company, sold $741 million of stock in an IPO on the London Stock Exchange last year after first considering New York's NASDAQ Stock Market. Chief Executive Officer Azmi Mikati hired Citigroup and London-based HSBC Holdings Plc to manage the offering.
``Capital is becoming more abundant worldwide, so listing in the U.S. isn't as necessary,'' Mikati said. ``The rules, on the other hand, are becoming a detriment.''
Shift in Sales
President George W. Bush signed Sarbanes-Oxley into law in July 2002 after Enron Corp. and WorldCom Inc. collapsed in the two biggest bankruptcies in U.S. history. Enron's decline wiped out $68 billion of market value, 5,000 jobs and at least $1 billion in retirement funds. WorldCom's $11 billion accounting fraud prompted investors in 110 countries to file 450,000 claims.
Senator Paul Sarbanes, a Maryland Democrat, and Republican Representative Michael Oxley of Ohio sponsored the bill that obliges companies to hire auditors to assess their internal controls every year, forces CEOs to certify the accuracy of financial statements and mandates that certain board committees have a majority of independent directors.
The average public company pays $3.8 million a year to comply with the requirements, according to Financial Executives International, an association of 15,000 chief financial officers and other corporate officials.
CEOs are voting with their feet. For the second straight year, more money is being raised from European and Asian IPOs than in the U.S. Companies sold about $72 billion of new stocks in markets stretching from Finland to Spain and another $72 billion on exchanges throughout Asia so far in 2006, compared with $36 billion in the U.S., Bloomberg data show.
The Bookrunners
Wall Street underwriters offer issuers who shun U.S. markets a way to maintain access to American investors. That's why Zug, Switzerland-based Partners Group Global Opportunities Ltd., which invests in private companies, hired Merrill as one of three firms to manage its $445 million IPO in London last month.
``We also wanted Merrill Lynch to be a bookrunner, raising our visibility further,'' said Cyrill Wipfli, Partners Group's head of communications.
Morgan Stanley is the leading IPO underwriter in Europe, with a 15 percent market share, and has earned about $303 million from 20 deals, according to Bloomberg data. JPMorgan ranks third with a 9.5 percent share, just behind UBS, Europe's biggest bank, and Merrill is next.
Henrik Gobel, head of European equity syndicate in London at Morgan Stanley, said Wall Street is harvesting the bounty of more than two decades of overseas expansion. Morgan Stanley, the second-largest U.S. securities firm by market value after Goldman, opened new offices and hired more corporate-finance bankers in Europe and Asia after the technology-stock bubble burst in the U.S. in 2000.
Doubling Bankers
``We can be the local bank to our clients as well as provide the global footprint, advice and distribution advantage,'' Gobel said. ``The strong growth we are seeing in emerging markets and the development of their capital markets mean that new issuance in Europe and Asia is likely to grow at a faster rate than in the U.S. for some time to come.''
In Asia, Goldman is No. 3, behind China International Corp. and UBS, even after forgoing a role on Industrial & Commercial Bank of China Ltd.'s record $19.1 billion IPO. Goldman, an ICBC investor, has collected about $135 million of underwriting fees on eight initial stock sales in the region.
JPMorgan, the third-largest U.S. bank by assets, built a 1.8 percent share of Asian IPOs from nothing in 2001 by doubling the number of bankers dedicated to China to 50 in the past two years and increasing its analysts covering Asian companies by 40 percent to about 150 in three years, said Andrews, 43, the Hong Kong-based banker.
Decline in Issuers
Morgan Stanley is No. 1 worldwide, with a 9.5 percent market share, according to Bloomberg data. The firm has managed $17.5 billion of IPOs and earned about $621 million in commissions. Even though Goldman ranks second, it's the top IPO money-maker, collecting $668 million in fees so far this year.
Before Sarbanes-Oxley, completing an IPO in the U.S. used to be worth the hassle for a foreign company. Access to the world's biggest capital pool compensated for tighter securities rules and the risk of shareholder lawsuits, said William Carney, a law professor at Atlanta-based Emory University and author of ``Corporate Finance: Principles and Practice,'' published by Foundation Press in 2004. Now, the law even discourages some U.S. companies from going public, he said.
Alarm Bells
In 2000, the record year for IPOs, $13.2 billion, or 33 percent, of the $40.3 billion raised in initial sales of shares, units and depositary receipts on U.S. exchanges was by foreign companies. Petroleo Brasileiro SA, Brazil's state-controlled oil company, listed on the New York Stock Exchange in a $4.3 billion sale of stock.
This year, foreign issuers account for only $5.24 billion, or 13 percent, of the U.S. IPOs, Bloomberg data show. Of the 25 largest companies to go public outside their home markets this year, six chose U.S. exchanges. That compares with 22 in 2000.
The shift is setting off alarm bells from the New York Stock Exchange to the White House.
Paulson, who was Goldman's CEO for eight years until he became Treasury secretary in July, said in an interview last week that Sarbanes-Oxley ``created an atmosphere that has made it more burdensome for companies to operate'' and he plans to ``address some of these issues.''
U.S. Securities and Exchange Commission Chairman Christopher Cox, who supports Sarbanes-Oxley, said at a Congressional hearing last month that the business-practice audits required by the law are too expensive.
NYSE's `Major Problem'
NYSE Group Inc. CEO John Thain said in September that the stampede of IPOs to foreign markets is a ``major problem.'' The Committee on Capital Markets Regulation, a private-sector lobbying group backed by Paulson, wants to roll back portions of Sarbanes-Oxley because ``U.S. public markets are losing ground.'' The self-formed committee includes John Thornton, who together with Thain was a co-president of Goldman until 2003.
Paulson, Thain and Thornton's group also say U.S. markets suffer from over-zealous litigation and regulatory overlaps. Thain lists the cost of converting from international accounting standards to U.S. methods as another impediment.
``It's a little too easy to blame Sarbanes-Oxley,'' said Robert DeLaMater, a New York-based partner at Sullivan & Cromwell LLP who worked on NTT DoCoMo Inc.'s $18 billion stock sale in 1998, until this year the biggest-ever IPO. ``Global investors are more willing to look at companies that are listed outside of the U.S. They don't look at a U.S. listing as a litmus test for whether or not to invest in a company.''
`Go Abroad'
Thain isn't counting on a quick fix. In May, NYSE Group agreed to buy EuronextNV, Europe's second-largest stock exchange, for about $11 billion. The deal would create the first transatlantic stock exchange. NYSE Group also is discussing a potential alliance with the Tokyo Stock Exchange that may see the two companies swap minority stakes.
NASDAQ, the second-largest stock market in the U.S., owns 25 percent of the London Stock Exchange and is considering an offer for more. Completing a listing on the LSE's alternative market can take 12 months to 18 months less than on a U.S. exchange, according to Steve Schmidt, a London-based banker for Piper Jaffray Cos. who has managed four IPOs on AIM in the past year.
``If the regulatory environment in the U.S. isn't conducive to do certain type of business, they just go abroad,'' said Benn Steil, director of international economics at the Council on Foreign Relations in New York and an expert on exchanges. ``Diversifying internationally is an effective strategy for dealing with problems such as Sarbanes-Oxley.''
Standing Out
AIM also helps small companies stand out better than they might on the NYSE, whose stocks have a combined $21 trillion of market value, or NASDAQ. The average size of 1,590 issuers listed on AIM is $89 million. NASDAQ has 3,200 stocks with an average market value of $1.2 billion.
``We're a bigger fish on AIM,'' said Trankina of Peach Holdings, which has a market value of about $700 million. ``In the U.S., nobody would notice us.''
To be sure, there are downsides to going public outside the U.S. For companies, there's less liquidity on many European and Asian exchanges than on the NYSE or NASDAQ, meaning stocks tend to get traded less frequently and in volumes so small that investors can have trouble selling. Meantime, investors don't get the protections against misconduct that Sarbanes-Oxley offers.
For Wall Street firms, the tradeoff is lower fee rates. IPOs pay underwriting commissions of about 2 percent in Europe and 3 percent in Asia, compared with the seven-year average of 6 percent in the U.S., according to Bloomberg data.
``They might care a little bit about where a company will list because they'd make more money if it was in the U.S.,'' said Jay Ritter, a finance professor at the University of Florida in Gainesville. ``But they're mainly interested in winning the deal. That's their first priority.''