Selling England by the Pound
There has been a general attitude that selling off the London Stock Exchange is just one of those things – a shrug of the shoulders and a mutter about free and open capitalism and that’s it apparently. However, before we cheerily continue “Selling England by the Pound” (Genesis 1973), can I ask that we consider the vital importance of an efficient stock exchange to a capitalist nation?
The primary role of a stock exchange is, of course, to raise investment monies for business in the most efficient and cost effective manner possible. It is the secondary market however, that tends to get the greater headlines with the amount of trading activity in the already floated shares. For an economy, though, it is vital that we have a flow of new business coming to the markets and especially smaller companies - after all, where does the next generation of the larger companies come from if not from today’s smaller companies? The growth of AIM, despite some recent unpleasant failures, has been a great success and the nurturing and development of smaller markets will be a vital component to the future success of our economy.
However, there is a real issue here relating to stock exchanges for our economy. Stock exchanges are markets, frankly just like fruit and veg markets but with braces on. A good market of any type will not only market itself and attract buyers and sellers, retailers and wholesalers but also draw in new products to be sold and traded. I don’t care whether it is a banana or BT, the same process applies (albeit with rather different regulation). But also with this comes allied services and suppliers all providing and delivering “stuff”. In the financial world this can be anything from legal and accounting issues through to PR and wine merchants. In London all of this is a key multiplier to the value of an exchange - probably by a factor of 10 over time, if you include all those who are involved in some transaction relating to the original flotation of a company on the market. So perhaps the politicians should wake up and consider the possible impact of yet further “unintended consequences” should our major domestic exchange fall into foreign hands?
Now any potential deal for the LSE does of course not mean the end of an effective London Exchange; it just means that its ownership will change. What a new owner could provide to a London market would potentially be more investors, more trading liquidity and, in due course, attract new companies and this will become increasingly important over the next few years, especially as the number of shares in issue seems to continue its rather radical decline.
This process of “de-equitisation” (stock retirement) has continued in the UK from 2003 with buy-outs and takeovers accounting for the removal of some 3.3% of the equity markets total value. However, in addition to this, when all the buyback programmes are taken into account, it seems quite possible that this equity reduction could be up to double the original figure. So with less stocks and more cash the Bulls are pawing their hooves – but perhaps they should also consider that the increased cash levels that companies are using for their buy backs are often coming from cash retained from lower levels of capex (capital expenditure). If, though, you continue to squeeze this capex, then at some stage it will feed though to lower profit growth, thus the reason for buying stocks at these levels may well become more questionable. Buying stocks just because there seems to be less around sounds like the persuasive arguments of the commission driven stock seller. At some stage of course there will come a point when we may then see some re-equitisation, as the private equity houses will want to exit their investments – perhaps a new IPO wave in a few years hence?
Possibly though, the most important issue for any overseas, and especially US purchase of the LSE, could be the potential for regulatory creep. The Sarbanes Oxley Act, introduced in the US in the wake of the huge corporate scandals of a few years ago, was a reaction to try and improve both corporate and corporate officer governance. The effect of this legislation however, has been to push some potential companies away from the US markets and towards the more lightly regulated LSE. Any purchaser of the LSE would thus need to try and provide some assurance that such controls would not creep across into the UK market. Additionally, the overbearing powers of the SEC (Securities and Exchange Commission) in the US are not inconsiderable and, given the US habit of exporting its controls (some tax examples can be given here), the London market needs to be clear that it would not have to take on the increased burden and cost of another level of regulatory control and requirement. To a great extent this can be seen as a difference in approach to regulation in both centres: in London we are regulated on generic principles, whereas the US is driven by specific rules, which to me is the difference between common and precedent law as opposed to strict definitions of statute law. The latter has acted only to encourage evasion, which can be illustrated by the number of scandals and high profile court cases.
Now, of course, these might be just unwarranted scares and worries but equally I do regard these as issues which will require suitable assurances from suitors, although we should bear in mind that any such comfort given probably would only be indicative. Tying down the SEC is about as realistic as putting handcuffs on King Kong.
Still, we must remember that we must not have a xenophobic attitude towards foreign investment and that new investors can provide new blood and add to the confidence that has a country has in its economy – such as Dubai investing into US ports!
And finally………….a riveting read for those in need of an exciting holiday in the US is the recently published “The Stray Shopping Carts of Eastern North America”, which tracks down the place and type of these feral trolleys. Surely this has to be the must buy for supermarket trolley twitchers everywhere. Apparently in the UK some 4877 are turned loose every year to seek out new locations and to “boldly go” where seemingly no trolleys have been before – including attempting to cross canals and hiding in many back gardens.
Have a good week,
Justin A. Urquhart Stewart
Seven Investment Management, a division of Killik & Co
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