Companies with low market value and insolvent companies are not growth stocks,” said Volker Potthoff, executive board member of Deutsche Brse, citing the main reason for the new delisting rules, which came into effect October 1, 2001. The amendments have caused controversy amid the German financial community, particularly when Nasdaq, a few weeks earlier, suspended its own delisting rules until 2002 to provide relief for struggling companies in the current climate.
Before the amendment, the delisting rules for the Neuer Markt stated: “Deutsche Brse may terminate admission to the Neuer Markt if the issuer breaches any of its obligations contained in these Rules and Regulations; or if orderly trading on the Neuer Markt does not appear to be ensured any more; or if such appears to be necessary for the protection of the public.”
This discretionary right has now been supplemented by a Deutsche Brse statement which terminates admission to the Neuer Markt if insolvency proceedings have been commenced against the issuer, or such proceedings have been dismissed on the grounds of insufficient assets. This rule shall apply mutatis mutandis to issuers having their registered office overseas.
Regarding pennystocks, a company will be delisted if the average price for the admitted shares on exchange days is less than E1 per share for a period of 30 consecutive exchange days and the relevant company’s market capitalisation is less than E20 million. The company will however remain listed if the average price for the admitted shares on exchange days reaches at least E1 on at least 15 consecutive exchange days within the next 90 exchange days, and the relevant company’s market capitalisation is at least E20 million.
Delisting from the Neuer Markt leads automatically to a listing in the Regulated Market (Geregelter Markt), which is a market segment with less stringent requirements and which is perceived as less attractive to the companies as fewer analysts look at this segment.
While any company on the Regulated Market can legally qualify to list on the Neuer Markt, provided that it fulfils the Neuer Markt admission criteria, a company delisted from the Neuer Markt segment is generally unlikely to be re-admitted to this segment by the Admission Committee. According to Michael Roos and Christian Cornett of law firm SJ Berwin Knopf Tulloch Steininger this would seem reasonable given the general aim of the Committee of raising the overall quality of the Neuer Markt companies. The reasoning being that if Neuer Markt investors were not willing to give the company a decent valuation in the past, it will be difficult for the company to convince them that its activities can be expected to generate a higher turnover and greater profits in the future.
The first company to delist as a result of the new rules was Hamburg-based multi-media agency Kabel New Media following the commencement of insolvency proceedings against the company. The termination will take effect as of November 2. This does not affect admission of the shares to the Regulated Market. And more companies are delisting at an alarming rate. Management Data Media Systems, Infomatec Integrated Information Systems and mb Software are all to be thrown off the Neuer Markt this month.
The pennystocks rule is considered highly controversial because there are many potentially good companies listed on the Neuer Markt, quoted below E1 per share that may be forced to delist if their share price shows no sign of increasing. Michael Roos of SJ Berwin says: “Some of the companies which fall under the new rule might not really deserve it. Many of these companies are basically good companies who will be punished.” He added: “Some have paid great costs to get a listing only to lose it. It is pretty tough if you drop from the Neuer Markt to the Regulated Market. Many companies will have difficulty raising new capital.”
The last year saw the first major downturn in the Neuer Markt’s three years of existence. IPOs on the Neuer Markt for all stocks have fallen from 83 in the first half of 2000 to just ten in the first half of 2001. Investors are no longer investing in stocks according to hype or ideas, but are basing their investment decisions on “old economy markers” such as earnings and revenues, something that has inspired the change in regulations.
Looking to the long term, Rainer Riess, head of primary markets at Deutsche Brse said: “Obviously no one can predict the future. However, given the high standards of the Neuer Markt in the past, it should keep its position as a premier listing platform for growth stocks in Europe. We know that the IPO pipeline is full and we are confident that companies will return to a financing through equity capital once the general market conditions have stabilised.”
However, certain professionals argue that no amendment of regulations will help to stabilise the market in the current climate. Nasdaq, in reaction to poor market conditions, has suspended its delisting rules until 2002 and in view of this it may be considered the wrong time to bring in these regulations. Said Roos: “Nasdaq has had those rules for some time and has suspended them at a time when Deutsche Brse introduced them. Maybe someone is wrong here or maybe both will succeed. We shall see.”
Riess says of the new rules: “With the introduction of the delisting rules, Deutsche Brse aims to maintain the profile of the Neuer Markt as the leading listed segment for growth stocks in Europe and to ensure investor confidence in the segment. It is not the role of an exchange to guarantee the performance of listed companies, it is up to the investors to decide if a company has a convincing equity story. It is the role of the exchange to ensure a fair and efficient trading environment.”
The VC’s standpoint
As evcj went to press, there were 340 companies listed on the Neuer Markt. Of this total around 50 per cent are venture-backed. John Chapman, investment manager at Munich-based Techno Venture Management agrees that under the new regulations it will be tougher to maintain a listing, but it will undoubtedly lead to a better quality of company on the market. “It is not a question of whether the Neuer Markt will return, it is an issue of when there will be businesses which are suitable to be listed,” he says. “What a company will have to show investors to be listed is much more than in the past it must have the ability to sustain growth and profitability.”
Waldemar Jantz of German firm Target Partners is confident the Neuer Markt will recover. “It will come back, but only when we have seen some really good companies that are ready to IPO, really turning around and delivering a growth story. There is still interest and money around, but it will take a while and we will have to be patient.”
However, Jantz is unsure whether the new rules will make a difference. He says: “The hurdles that each company now has to face such as the share price being above E1 does this really tell you whether this is a good company or not?” The main issue, he says, is the state of the market.
“If the whole market crashes, I am not sure whether this threshold tells you what the company is worth.”
He adds that Neuer Markt’s original proposal of attracting companies with a “growth story” does not fit in with these regulations. There might be companies valued, for example, at E5 per share which are over-valued and on the other hand there might be perfectly good companies which have been undervalued and so are kicked out. “Just looking at the share price does not tell you the whole story,” says Jantz.
Rolf Mathies of venture capital firm, Earlybird sees the positive side of the new regulations. “A lot of people say it’s too little, too late, but I am of a different opinion. It is a good move to enforce regulations to improve the quality of companies on the Neuer Markt. Regulations come hand in hand with companies on the market maturing.” Mathies adds that he is looking forward to a high quality Nasdaq-driven market in Europe. “These companies have to be competitive on a global rather than a German or European scale. But this will take time.”
As for the long-term effects of the amended regulations, Michael Roos says: “It is easy to understand that companies who might be hit by this new rule are opposing it. But it will remain for the long-term and it will become tougher to get listed on the Neuer Markt.” He adds that the new regulations will certainly filter out the insolvent companies. Whether this improves the credibility of the Neuer Markt remains to be seen.