I think Facebook is a decade-defining listing.
-- Bob McCooey, Senior Vice President, Nasdaq
Eight innocent sounding words uttered in anticipation of 2012's most eagerly awaited initial public offering have proved prophetic, although perhaps not in way Mr. McCooey had in mind. A quick search for the phrase "Facebook (FB) fiasco" on Google (GOOG) -- whose blockbuster IPO in 2004 was a model of efficiency compared with the one that occurred on May 18 -- takes all of 0.21 seconds to bring up about 51,400,000 results.
What should have been Nasdaq’s (^IXIC) finest hour, a $16 billion debut of the world’s most widely used social networking site, instead became a byword for failure after the stock subsequently endured the worst two-week loss of any new issue since 1995. The fallout may define – and not for the better – future battles for lucrative equity offerings between the index and its arch enemy, the New York Stock Exchange.
Indeed, twenty-four hours after the deal,while Mark Zuckerberg was busy getting married, Nasdaq OMX Group (NDAQ) CEO Robert Greifeld found himself furiously trying to forestall a quickie divorce, convening a hastily-arranged board meeting as media reports swirled saying Facebook was considering jumping ship to the home of its longtime rival. For now, that hasn’t happened, but incalculable reputation risk has already occurred amid lawsuits and even a Senate investigation. For an exchange that takes pride in having such a high tech capability, seeing its defining deal beset by half hour trading delays while waiting for orders to be completed by hand is the ultimate ignominy.
The debacle is especially damaging for Nasdaq, which altered its rules specifically to land Facebook’s listing when it abandoned a long-held stipulation that shares be “seasoned”, i.e., publicly traded, for two years before being added to its 100 Index. The regulation was suddenly shortened to only three months in April. While heads of both stock exchanges personally wooed the Palo Alto outfit, Nasdaq’s reputation as a go-to haven for high tech helped sway the deal in its favor. A lower initial listings fee of $250,000, versus the NYSE’s annual cost of $500,000, may have been another factor. (Facebook lacks cash flow, lest we forget, so anything to save a penny.)
What They're Fighting Over
Attention now turns to future food fights between number two US stock exchange operator Nasdaq, a relative upstart founded in February 1971 as the world's first electronic market, and venerable global leader NYSE Euronext (NYX), which began life under a Buttonwood tree way back in 1792. (Third-largest BATS Global Markets won't be encroaching on the top two any time soon after its own IPO from hell in March.)
The lucrative listings business can line the coffers of the exchange operators themselves, and bring both branding and promotional benefits to index constituents. For instance, a factor behind Nasdaq winning the $700 million offering of Groupon (GRPN) was its ability to publicize the daily deals provider at outlets including its 72-foot tall Times Square MarketSite billboard. For its part, the NYSE can counter with a clubby atmosphere that comes complete with hallowed halls and an actual, as opposed to virtual, trading floor from which such traditional bellwethers as General Electric (GE) do business.
Each index plays to its strengths. Only one day before the Facebook launch, in timing that couldn’t have been coincidental, NYSE launched a “Century Club,” emphasizing its trusted relationship with established “companies that have realized success and contributed to economic and social progress for more than 100 years.” For its part, the long time tagline of Nasdaq, which tends to target newer and high growth firms, was “The Stock Market for the Next Hundred Years.” (Even if its 2007 purchase of the Philadelphia Stock Exchange (PHLX), America’s oldest, indicates it isn’t adverse to buying a little history, either.)
Competition between both bourses has become more intense in recent years, now that each must answer to shareholders. Nasdaq first went public in 2000, ironically just as the bursting of the Internet bubble began a long fall from which its most famous index has yet to recover.
The NYSE only abandoned its prior non-profit members only status in 2006, having survived bombs, Black Monday, and the Crash of 1929 over the previous 214 years. Competition for business is cutthroat in an era of anemic trading volumes, and also increasingly global, with London in recent times having emerged as a formidable challenger to New York’s long-standing trading eminence.
It is a world where infinitesimal increments matter – indeed, the fact that matching up initial buy and sell orders took five as opposed to the expected three milliseconds for Facebook was a key factor in early investor anguish.
Listings accounted for 19% of Nasdaq OMX’s revenue last year and 17% at NYSE Euronext, which are big numbers for adversaries whose past squabbles have even extended to the alphabet. The NYSE holds a commanding lead in overall deal value since the turn of the millennium, a trend that continued last year. (In 2011, the NYSE listed 104 IPOs raising $28 billion.Nasdaq’s numbers were 78 and $9.3 billion, respectively.) Interestingly, however, Nasdaq OMX Group’s share price, having held up surprisingly well in the wake of Facebook’s flop, has declined far less than its opponent's this year. Nasdaq’s dealers marketplace represents approximately 3,500 securities, with technology outfits accounting for about 52% of the index’s value, as opposed to only 7.1% for the NYSE. Apple (AAPL) and Amazon (AMZN) are among the new-economy heavyweights that list on Nasdaq. It has long been referred to as “tech heavy,” having snared the likes of eBay Inc. (EBAY), Google, and, more recently, the $1 billion launch of Zynga (ZNGA). The lines between the two exchanges have become increasingly blurred in recent times, however, with Yelp Inc. (YELP), Pandora Media (P), and LinkedIn’s (LNKD) $350 million IPO all occurring on the Big Board.
The market-value weighted NYSE boasts a roster of roughly 2,600 companies, including such stable and established blue chips as International Business Machines (IBM). Although its procedures are increasingly automated, and the fabled trading floor is a ghost town compared to the beehive activity of bygone years, its ability to also call upon a human touch for order execution is seen as an potential advantage over Nasdaq as the investor public sours somewhat on machines in a post ”flash crash” era.
How the Indices Are Structured
Looking at index overall structure, each aims for diversification across industry groups and, increasingly, geography. Strict listing requirements must also be met in order to be considered for entry. These include having adequate assets, pre-tax income, liquidity, and market capitalization. Possessing a set amount of shareholders and minimum number of market makers are also key criteria. Billions of dollars often ride on an index inclusion decision, as membership means investment funds that tract the underlying exchange are now required to buy the equity in question. Turnover is typically kept to as low a level as possible but, should a firm fail to remain in compliance, delisting procedures will quickly ensue.
Financial distress or having a low share price both represent common reasons for disqualification, although the biggest factor is invariably more innocent effects of simple mergers and acquisitions. Equities that find themselves removed from the two larger indices are often doomed to trade on the either Over The Counter markets or the Pink Sheets. On rare occasions – as after both the September 11, 2001 terrorist attacks and the late 2008 financial turmoil – listing requirements may be temporarily waived at the sole discretion of the exchange.
Carefully calibrated rebalancing can also occur. In the Nasdaq’s case, the clause is automatically triggered whenever any one single stock exceeds 24% of the overall index. When Apple recently flirted with a $650 share price, it was considered a potential candidate in some circles, but such speculation now seems fanciful.
Poaching between the two exchanges is also quite common. In fact, on Monday, May 21, no doubt to distract from the Facebook fallout 72-hours earlier, Nasdaq proudly announced that Western Digital (WDC) would jump ship from the NYSE. Thirteen corporations with some $82 billion in market cap made the same switch last year, including heavyweights Viacom (VIA) and Texas Instruments (TXN). The latter was the largest ever to decamp, having been with the NYSE for some six decades.
It promptly replaced First Solar (FSLR) on the Nasdaq 100 Index after the alternative energy stock saw its market value slump to below the minimum threshold required. Fighting back, the Big Board enticed 16 companies worth $30 billion to switch in 2011. They included Imax Corp. (IMAX) and Joy Global (JOYG), although long-coveted Microsoft (MSFT) remains maddeningly elusive. The start of 2012 saw Eastman Kodak (EKDKQ) and American Airlines parent AMR Corp. (AAMRQ) both pulled from the NYSE due to Chapter 11 proceedings and a failure to minimum pricing requirements. Note that it is not always an either-or game between the exchanges; Nasdaq has allowed dual listings since January 2004; Hewlett-Packard (HPQ) is prominent among those taking advantage of such a structure.
The Facebook fallout has already adversely impacted the IPO market, with online-travel company Kayak postponing a proposed offering in its wake. Graff Diamonds, a $1 billion deal, and the $3 billion rollout of auto-racing giant Formula One have also crashed and burned in recent weeks -- although in fairness to both Mark Zuckerberg and Nasdaq, the plunge in equities since early May and Europe’s continuing debt woes also deserve ample blame in making this a particularly inauspicious time to come public.
Before the most recent market plunge, the NYSE won a $500 million deal to take Michaels Stores, America’s largest arts-and-crafts retailer, public under stock symbol “MIK.” In April, Nasdaq countered with a $345 million filing for Bloomin' Brands, with the Outback Steakhouse owner eventually scheduled to trade with ticker “BLM." Other possible upcoming offerings include GrowOp Technology, which serves the medical marijuana market, hydraulic fracturing/shale play Platinum Energy Solutions, and Restoration Hardware, a high-end furniture retail company that once traded on Nasdaq. Annie's Inc. (BNNY), which lists on the NYSE and went public in March at $19, was last seen trading above $37. The company is best known for homespun mac and cheese, not high tech Mac computers, proving that old fashioned can still be a path to new found wealth. Nonetheless with technology representing fully 20.5% of the S&P 500 Index (^GSPC), by far the biggest industry weighting, that sector represents the most sought after prize for the exchanges.
Each index would covet blog hosting platform Tumblr, microblogging site Twitter, Groupon competitor LivingSocial, and social media play GlamMedia. Skype, which pledged itself to Nasdaq in 2011 but has since been on hiatus, and in flight WiFi provider Gogo Inc., are potential others on the radar screen.
Morgan Stanley (MS) is the lead underwriter for planned offerings of ServiceNow, an IT cloud-computing company, and the Internet security outfit Palo Alto Networks. Both are still due to proceed as planned, but the brokerage firm can clearly expect to face far greater scrutiny after its lead role in bringing Facebook to market. Investors have been badly burned by the affair and any would-be issuers, especially in the social media arena, will now undergo a much more rigorous vetting process, one that focuses on measurable metrics like income as opposed to esoterics including eyeballs and page views. The epic rivalry between these two indices looks likely to endure, for last year the NYSE rejected an impudent takeover offer from its smaller competitor. Meanwhile, the many "Friends" Nasdaq appears to have lost following its Facebook failure is music to the ears of its enemy over on the NYSE.
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