Is it time to start looking West again?
Not so long ago – up until about 11 or 12 years ago – it was not unusual for young British companies with good growth potential to go to the US to raise capital on the public markets there, writes Gary Hanson, the liaison partner for the US at BDO.
They found that the US investor base was more knowledgeable – about technology companies in particular – and was prepared to take bigger risks on speculative investments in early stage companies.
Of course the bursting of the dotcom bubble and the subsequent stock market wobbles caused by Enron, Worldcom et al changed everyone’s perceptions of the US markets and – perhaps more importantly – changed the risk attitude of investors all over the world. However, while the appetite for early stage companies on public markets has never truly returned, the fact is that the US markets remain an interesting potential source of capital for UK companies with the right credentials. So why is it that UK companies seem to remain reluctant to look to the US markets for growth capital?
Regulation The Sarbanes-Oxley Act (SOX) was a direct regulatory response to the big corporate failures that hit the headlines and caused worldwide stock indices to plummet in 2001.
It placed much greater emphasis on corporate governance, and required management to take personal responsibility for implementing and maintaining appropriate control frameworks within public companies. The view taken by the US regulators was that if companies had behaved in a responsible manner and operated appropriate controls over their key risks, then the disasters of 2001 could have been avoided.
It would be fair to say that the initial implementation of the requirements of SOX – back in around 2004/5 – was a horrific and costly experience for many companies.
It is possible that here in the UK many companies will not now countenance the thought of making themselves subject to SOX by listing on a US market because of all the horror stories they have heard about it.
But the truth is that once US companies had bought into the idea that since they had to comply with the SOX rules, they may as well do the thing properly, many have found that the ongoing compliance costs are not significant. Most also found that the benefits of having a properly controlled company actually outweigh any administrative costs that are incurred.
In any event the full impact of the SOX rules only applies to companies with a market value of over $75 million, so for companies considering an IPO this will often be some way further down the track.
Accounting standards There has been much in the press over the last couple of years regarding a move towards international standards – IFRS – in the US. It is true that the US and International standard setters have been pursuing a convergence agenda over recent years, and that the SEC has stated its intention to allow IFRS as a reporting framework for US public companies.
However it is also fair to say that it is currently unclear where this will all end up, and when. This lack of clarity is likely to be a source of disquiet to companies considering whether to look at a US listing.
There are numerous differences between UK accounting practice, IFRS and US accounting practice, but a company seeking a listing on a UK market already needs to report under IFRS so any company considering an IPO will most likely need to go through a conversion from UK GAAP in any case.
Non-US companies on US markets are already allowed to file their accounts under IFRS, rather than under US GAAP. The version of IFRS that is permitted on US public markets is not identical to the one we use in the UK, but the differences are few and should not affect too many companies.
So is it worth it? The volume of capital available to companies on US markets, and the quality of the US investor base, means that any company considering a public listing should certainly be thinking about whether the US markets offer the best prospects, and should not be put off by some of the preconceptions around regulation and accounting requirements.
There is, of course, a whole raft of other matters to consider, such as the practicalities of managing investor relations, and the perception of increased litigation risk, but the potential benefits should not be dismissed out of hand. • Gary Hanson is the liaison partner for the US at BDO and can be contacted via email at gary.hanson [at] bdo.co.uk or Tel 01223 535050.