By Nick Stride
Friday 21st March 2003
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"We're too small a market not to have some of the major financial players involved in the equity market in some way," he says.
"It's in the banks' best interests and everybody's for companies to grow."
Mr Weldon thinks the time is right for banks, and perhaps accountancy firms, to get involved in sponsoring growing companies through the equity-raising and listing process.
"What the banks have recognised is that their economics are different from the (share)brokers'. They have different infrastructures, cost bases, and required rates of return," he told The National Business Review.
"They take a very strong relationship view which is, 'let's help this company manage its finances optimally, which should involve some equity and some debt finance'."
Mr Weldon stresses that the exchange's talks with banks have so far only been informal but says reaction has so far been positive. He says banks will benefit from greater equity market involvement in a number of ways.
In general it was simply in banks' best interests to see their clients grow. Growing companies generated, for example, more foreign exchange and cash management business.
But research showed there were significant numbers among New Zealand's 400,000-odd small-to-medium sized enterprises that hit a "growth ceiling" at around $20 million of revenue.
"For companies to really grow beyond that and make the capital expenditure that's required, they'll either get too leveraged and have unhealthy balance sheets, or the banks will want too much personal asset backing," Mr Weldon said.
The exchange faces a tough uphill job selling its ideas to the banks and their customers.
Bruce McLachlan, head of business banking at Westpac New Zealand, recently hosted a meeting between exchange officials and eight companies the bank thought might see raising equity through a listing as attractive.
The reaction was mixed.
"Even though inherently a number of them wanted to pursue that direction they were very sceptical about what listing would mean for them in terms of the cost of the process and the lack of control," he said.
The exchange's intentions were to simplify the process, strip out costs, and enable advisers other than sharebrokers to bring companies to market
"I personally, taking off my bank hat, congratulate them on their direction. But from the bank's perspective we've got to overcome several things."
The key issue, which the exchange had not approached correctly, was that it couldn't be assumed the business model used for larger businesses was going to work for the next layer down.
These businesses had different dynamics and the costs and benefits associated with listing were different.
"While there's an inherent need in these businesses for access to capital they don't naturally see getting it through an exchange listing as the way to go. Their initial perception is it's too expensive, it puts too many controls on their business, they lose control, and it's going to tie them up in activity they don't want to be involved in," Mr McLachlan said.
"Simply setting up the capability is not going to suddenly bring a flood of these companies to market."
Smaller companies were put off listing because of the amount and standard of information they would need to disclose.
"Personally I think that's something a lot of these businesses with 'growth ceilings' are going to have to get through. It's not only an issue of access to capital.
"Typically in New Zealand there's also a time when they saturate the local marketplace and their only growth option is overseas. This completely changes the dynamic of a business in terms of the capability it needs, particularly in the area of marketing and distribution. That's a real challenge and very scary," Mr McLachlan said.
The exchange has already laid the groundwork by abolishing sharebrokers' monopoly on sponsoring companies through the listing process.
Mr Weldon sees the new "AX" secondary board, due to be launched in August, as most obvious home for bank- and accountant-sponsored new listings but says there is no reason larger firms shouldn't go straight on to the main board.
The exchange's role will be to "establish templates and prototypes and be as helpful, communicative, and available as possible."
If that calls to mind the less-than-successful New Capital Market the AX will partly replace, Mr Weldon says there are a number of differences.
The NCM was by design aimed at the speculative end of the market so it was unclear whether NCM businesses would be successful.
On the NCM sharebrokers tended to identify and approach potential listings.
"It's easier and probably a lot cheaper for banks to identify candidates. Banks watch them grow and understand if they've got good management. Brokers don't have the same frequency of contact; in fact often they don't know they exist."
But it was also in brokers' interest that the number of listed companies grew because they'd pick up the commissions from trading in the secondary market.
Banks also had some equities market expertise readily available to them as "quite a few" ex-brokers now worked for banks.
Mr Weldon says greater bank involvement will correct a situation in New Zealand that is "a little bit anomalous" compared to the rest of the world.
In the US, the 1999 amendments to the Depression-era Glass Stegal Act broke down the legislative barriers that separated commercial banks and investment banks.
Citibank is now one of the biggest players in both markets, as is Chase Manhattan and its investment banking affiliate JP Morgan. In Europe, big commercial banks such as Deutsche Bank and Dresdner have stockbroking and investment banking arms.
Westpac's Mr McLachlan doubted the bank needed to get into "an investment bank stance."
The bank's role was to make business owners and managers successful, "and you can't do that just by transactional banking and debt funding."
It had an important advisory role supporting managers' decision-making and needed to build its internal capability "but we don't need to provide all the facilities and services that help managers to be successful. You can deliver that through partnering," he said.
Mr Weldon, who returned last year from New York to take up the exchange's top job, says in the US some of the emphasis has gone off investment-grade corporations in favour of the "middle market."
The story has been much the same here as big companies have migrated to Australia, gone directly to investors for their debt financing through corporate bond issues, or been taken over by foreign corporates with their own banking arrangements.
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