Irish firms beat a path to US market

One of the more welcome developments on the investment scene over the past five to 10 years has been the emergence of several Irish companies who have taken a listing on the US-based Nasdaq equity market.

The companies which decided to go this route did so for a number of compelling reasons, the most important of which was the high valuations afforded to new high-tech companies on the US market. The sheer scale and depth of the US capital markets has enabled these companies to gain access to capital markets at favourable rates.

The Irish equity market is simply not diverse and deep enough to provide such a ready supply of capital for new companies. Indeed European stock markets in general have been far less successful at creating deep and liquid markets for new companies. However, many of these Irish companies have subsequently moved to a situation where they have a dual listing on Nasdaq and on the Irish Stock Exchange.

In practice, the Nasdaq listing typically remains the more important and the bulk of trading will occur on the US exchange. However, the Irish listing is important in heightening the profile of a company among the domestic investor base.

This has attractions for the companies involved particularly given that Irish investors tend to adopt a buy-and-hold strategy in contrast to US investors who will often be momentum driven. This was evident in the case of CBT late last year, whose share price had been rising rapidly, but then fell precipitously when sales targets were missed. US investors were quick to bail out and move onto the next hot story which meant that there were few natural buyers of the stock once sentiment turned around. Clearly, a wider and more diverse investor base will always be the desired goal of virtually all listed companies.

It may come as a surprise to many as to how significant a number of these companies have become. The pioneering firm in this regard is the pharmaceutical company, Elan, which is now capitalised at $8.9 billion which is equivalent to €7.9 billion. This compares with a market capitalisation for AIB of slightly more than €14 billion. A number of the more recently listed Nasdaq stocks now have quite significant market capitalisation. Iona Technologies, Esat Telecom Group, CBT and ICON have a combined market value of $2.6 billion.

For many private investors the risks associated with investing in the typical Nasdaq stock can seem too great. Also a lack of familiarity with the companies involved will also be a deterrent. However, the overall success of the high-tech sector in the Irish economy has created a new generation of private investor who has benefited from employee share option and profit sharing schemes in companies such as Microsoft, Intel and a host of lesser-known companies.

Furthermore, as the list of these fledgling quoted companies grows it becomes easier to diversify risk by investing in a number of these companies.

For example, a portfolio including the above-mentioned five companies will provide an investor with exposure to the fast growing pharmaceutical, telecoms and computer software sectors. Although the volatility of such a portfolio will almost certainly be high, it is likely to produce attractive long-term returns.