Listing in the US - is it all it's cracked up to be?

For many European companies, a listing on the New York Stock Market is seen as the best route to higher share prices and increased interest from investors. However, recent analysis published this week by the Financial Times indicates that there is no real basis for this assumption, with valuations decreasing for half of the companies analysed.

Many company executives assume that because of the greater size of the US capital markets, companies will automatically increase liquidity, attracting more investors which, ultimately, leads to a boost in the share price. 

However, the likelihood of that happening is greatly influenced both by the size of the Company in question and recognition of its brand within the US. American investors like big companies – the American market doesn’t do small cap very well and isn’t used to it – and they like familiarity with whatever it is they’re investing in. 

An example success story is Flutter Entertainment, which, as a multi-billion-pound business with a substantial and fast-growing US consumer business, is a perfect fit with the above profile. Flutter’s share price on the London Stock Exchange, where it maintained a secondary listing, rose significantly after moving its primary listing to the US. 

Conversely, small companies with brands confined mainly to their home markets in Europe, fare less well. Head of research at think-tank the European Capital Markets Institute, commented that “For smaller or mid-cap European companies, a secondary listing in the US may not generate interest among US investors.”

It’s also important to note that listing in the US is expensive relative to Europe, with legal fees, compliance costs, and additional reporting obligations, leading companies to spend over £1 million on the IPO process before any potential benefits can be realised. With the ongoing high costs of maintaining that listing taking a substantial bite out of the finances of a smaller companies it is clear why the US market is better suited to large businesses. 

One thing European companies did get right was that liquidity increased across the board on listing in the US. However, higher liquidity doesn’t necessarily translate to a higher share price. It may introduce more potential buyers, but it also brings in more potential sellers. Ultimately higher liquidity facilitates trade and likely gets you a share price that is closer to fair valuation, but fair valuation isn’t necessarily a higher valuation. 

At the end of the day, if you’re a small cap company you’re probably much better off being listed in the UK.