How the Eurocrisis is changing European IPOs

Author: Gemma Varriale | Published: 5 Mar 2012
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Continuing uncertainty in the Eurozone is leading European companies to adopt US initial public offering (IPO) structures.

Under the European IPO model, companies must make their prospectus available for at least six trading days. But the US IPO model allows for smaller offerings and a shorter marketing period, both factors that appeal to companies in times of macroeconomic instability.

“If companies opt for a smaller IPO with a shorter marketing period, the macro market volatility in that period tends to be more predictable and therefore the chance of getting it away is increased,” said Derk Lemstra, head of Stibbe’s equity capital markets practice in Amsterdam.

Lemstra also noted an increasing desire among European issuers to use anchor investors. “This gives companies a guarantee that a couple of investors will step in, before they go public,” he said.

Chris Horton of Simmons & Simmons in London said fragile markets had led to pilot fishing taking place earlier too, enabling firms to establish whether the IPO will be successful before moving into the full execution phase.

European companies are also showing an increasing preference to list in the US.

White & Case’s London-based US securities partner, Doron Loewinger, said in the past eight months a significantly larger number of European and Russian companies, largely from the technology industry, had been approaching the firm wanting to do an IPO in New York.

Companies in London need to have at least 25% of their shares in the free float; but there is no percentage requirement under Nasdaq. Firms just need at least 1.1 million shares and a market value of $18 million (£11 million).

In previous years specialist issuers would routinely choose the US over Europe. This preference fell away a couple of years ago because of increased regulation in the US.

“Accounting firms are much more prepared for all the investigations and procedures needed to assist companies in their Sarbanes Oxley requirements,” said Loewinger. “The whole process is much shorter and less expensive than it was ten years ago.”

The shift in preference has been further bolstered by a more advanced recovery in the US capital markets post global financial crisis than their European counterparts.

But Loewinger warned firms looking to tap the US markets needed to be aware of liability issues.

“In some sense there is more risk, he said. “The liability under securities laws in the US is stricter.”

Companies listing in the US need to comply with more defined periodical filing requirements, he said. And for local deals, a higher level of diligence is required in the US. Additionally, while European corporate governance rules typically take the form of ‘comply or explain’, allowing for some deviation from the regime, the US framework is significantly less discretionary.