Sink or swim for stock exchange as flotations dry up

THE BOTTOM LINE:THE DECISION of some of the country's biggest companies to move their primary listings off the Irish Stock Exchange to bigger markets or to depart the Dublin bourse altogether points to a deeper malaise in corporate Ireland.

Growing Irish companies no longer see a stock market flotation as a means to raise funding to grow their businesses. Instead the chosen route is most often a trade sale where companies find greater certainty and potential in the arms of a larger suitor. This raises two questions – where will the next CRH or Kerry Group emerge if Irish companies are only willing to sell out to bigger rivals and what future is there for the Irish Stock Exchange?

Building materials group CRH, food company Greencore and pharmaceutical group Elan have all moved their main listings off the exchange, while United Drug will delist from the Irish market next Wednesday.

In the case of CRH, taking its main listing on the London Stock Exchange made sense. About 70 per cent of trades in the company’s shares were in the UK and entry to the FTSE 100 puts the company on the radar of far more investors buying into the UK index.

From a risk perspective, fund managers would face tough questions if they make big investments in a company that held a disproportionately large share of one market.

Listing on a sterling or US dollar exchange also gives public companies access to greater liquidity, and a deeper pool of investors who are mandated to spread their risks across different currencies, particularly when there is so much uncertainty about the euro.

As for the Iseq, there is something clearly wrong with a stock market where the biggest company on the exchange, CRH, accounts for almost a quarter of the market and it doesn’t even have its primary listing on that market.

Traders consistently describe “thin” or “light” volumes in daily reports on trading, even when there is plenty of activity in markets across Europe, and yet a spike in the Iseq can be down to big-picture development concerning an international stock like CRH.

In this context, it’s hard to see why companies would consider listing on an exchange that has clearly lost relevance among domestic and international investors.

The sharp fall in the stock exchange’s turnover, from €195 billion in 2007 to €35 billion last year, reflects not just the sorry story of the share losses of the crash years but the lost appetite among investors for equities.

Today, the Irish Stock Exchange and Enterprise Ireland host a conference in Dublin, the intention of which is to try to encourage a pipeline of companies that could use stock market flotations to raise funding as a springboard to bigger and better things.

Companies tend to start looking at flotations five or six years after starting up. This is a critical stage when hard-worked and often underpaid managers can either cash out by selling out or moving to the next stage of graft by running their business under the constant gaze of public shareholders.

But the latter route isn’t being followed in Ireland. There were just two new entrants to the Irish exchange last year and both were on the junior Dublin market. The last significant flotations were Aer Lingus in 2006 and packaging company Smurfit Kappa in 2007.

The Irish Stock Exchange and Enterprise Ireland should nurture small or medium-sized businesses to go public with a more dynamic market supported by Enterprise Ireland. This could encourage companies to be buyers of businesses, and not simply takeover targets. Enterprise Ireland should take a longer-term approach to its investments and exit strategies should be weighted against trade sales where the circumstances and conditions allow.

Absent a takeover of the Irish exchange by a bigger rival, a dual-listing arrangement with another market, in London or New York, could also tempt more companies to float.

Going public shouldn’t be so scary or uncertain, and while the climate may seem far from ideal to move into that space now, there should be a strategy to create the next wave of Irish-raised companies with global reach.

From 1982 to 1989, the period of the last cash drought in Ireland, 51 companies came to the Irish stock market. This was at a time, however, when Irish pension funds had to link the currency of assets (the punt) to those of liabilities and they were significant buyers of Irish shares. Since then, the wider euro zone has become the local market for Irish buyers.

Still, that statistic still points to the potential in the stock exchange to raise cash, even in the toughest of economic times.