SoftBank’s decision to float Britain’s technology giant Arm in only New York – rather than a dual listing of its shares on the London Stock Exchange (LSE) – is profoundly depressing.
It is particularly disturbing because, for once, Rishi Sunak, along with previous prime ministers and officials have been pulling strings behind the scenes for the Cambridge-based semiconductor to be floated in London as well as New York.
Ministers and regulators have even been open to adapting London’s listing rules which are immensely complex and burdensome for companies seeking a dual float.
Yet we shouldn’t be surprised that SoftBank boss Masayoshi Son chose not to heed them but to opt for either the New York Stock Exchange (NYSE) or the hi-tech Nasdaq when Arm is floated this year.
Snub: We shouldn’t be surprised that SoftBank’s Masayoshi Son (pictured) chose to opt for either the New York Stock Exchange or the Nasdaq when Arm is floated later this year
It’s not surprising, because London’s public markets can’t compete with the US.
If you are a thrusting chip designer like Arm, with global customers and ambition, you want to go where liquidity is deep and you get a higher valuation than elsewhere.
US exchanges also have a long history of innovation, which is attractive – particularly to tech companies.
Take the difference in size: firms on the NYSE are worth around $25trillion. Those on the Nasdaq exchange are worth $27trillion, so about seven times the value of London’s public markets, which are worth in total £3.2trillion. Shanghai is now the world’s third largest exchange.
Adding to the blow from Arm was the news that CRH, the Irish buildings company, is switching its listing from the City to Wall Street. While the move by CRH, which makes three-quarters of its earnings in the US, is logical, it is nevertheless concerning.
More worrying was the leak this week that Shell was considering moving its headquarters and listing to the US two years ago before opting for London.
It’s easy to see why: Shell’s shares have been depressed compared to its US oil giant peers because they were shunned by so many UK funds over environmental, social and governance (ESG) concerns.
Yet until the last decade or so, London was still one of the top markets for overseas companies to list on, precisely because of its international reach, broad spread of foreign investors and deep cash markets.
What’s gone so wrong?
Poor liquidity – and low valuations – are still the biggest problems facing the City’s capital markets, according to Panmure Gordon’s Simon French.
The former is a function of regulation as well as the inevitable Brexit factor, which has hit valuations.
As a result UK companies are cheaper than their peers elsewhere. Over the last few years private equity companies flush with cash, mainly from the US, have been allowed to gobble up listed UK companies on the cheap. It’s now more attractive to be a private company than a public one.
Investor appetite among the UK’s big funds for new issues has shrunk. Most have shifted a huge proportion of assets into low-risk, low-yielding bonds rather than equities – mainly at the behest of regulators.
They now hold between 5 per cent and 10 per cent in equities, an enormous and retrograde switch. Yet pensions and insurance funds are sitting on billions which could be unleashed into equities, and new IPOs such as Arm, but this shift will depend on regulatory changes which have to go through.
You do also have to wonder just how energetic the LSE has been in wooing Arm: have the exchange bosses, David Schwimmer and Julia Hoggett, even been to Tokyo to persuade Son to come back to London, where the chip designer first started life?
You can bet your socks that the NYSE and Nasdaq salesmen have been camping out in Tokyo for months, sweet-talking SoftBank’s executives. Have the LSE’s salesmen been doing the same or have they relied on No 10 to do the lobbying? Looks like it.
Whatever Sunak says about ensuring London stays one of the world’s top capital markets, something is not working: several semiconductor firms opted for Amsterdam. One of Arm’s co-founders, Jamie Urquhart, this week warned that the Government’s long-term technology strategy couldn’t be any worse than it is now.
Which is why the loss of Arm and CRH to the Americans is a wake-up call for the politicians, the regulators and indeed the LSE bosses who have sleepwalked into this situation.
It’s not yet a mass exodus but the warning shots have been fired.
Time to get a grip and be bold.